Most coffee aficionados understand the ‘macro’ steps of coffee (a farmer grows coffee, then that coffee must be roasted before brewing according to your chosen method), minus the technical details (e.g., processing methods, roasting curves, extraction yields,..). But when it comes to the role of the C-Market and how green coffee is bought, it’s not as simple. Luckily we found Michel Germanès, our inhouse seasoned coffee trader, ready to explain and illustrate the mechanics of this C-Market.

Michel, what are the mechanisms of this coffee ‘C-Market’ ?

“If you’ve ever purchased green arabica coffee beans, the price you paid will have been determined, at least in part, by what’s known as the ‘C-Market’“, Michel starts off. “What the ‘C-Market’ is based on is not what the cost is ‘Per Pound’, but your cost calculation is linked to the market changes.” Michel explains: “The price of coffee changes every minute like stock- or any other commodity- does. It’s defined by commodities exchanges, including the Intercontinental Exchange (ICE) in New York, which is the most important for Arabica coffee and which sets what’s called a ‘C–Price’. And, like any other exchange-traded commodity, stock, bond, currency, etc., this C-Price is defined by supply and demand. If there’s little coffee available, the cost goes up to the point at which supply exactly equals demand. Some people that had wanted coffee will decide not to buy as the price goes too high for them. The price will then stop increasing when the remaining people who are willing to pay want the precise quantity offered. This tendency for demand to change as price changes is called ‘price elasticity of demand’, and it’s the market’s unique price sensitivity.”

“To understand the C-Market fully”, Michel continues, “you need to understand its contracts. Most of the activity in the C-Market revolves around ‘futures contracts’. A futures contract is a legal agreement in which the buyer agrees to purchase a commodity at a predetermined price at a specified time in the future when the contract expires. The seller of the contract agrees to provide the specified commodity at the expiration of the contract. The basic unit of a coffee futures contract is 37,500 pounds of coffee. Pricing for futures contracts is based on the commodity market price, so futures are an important way for coffee roasters and importers to hedge and protect their business; locking in contracts when prices are low to protect against inevitable spikes in coffee price is a common strategy. It’s important to note that when a roaster or importer buys a futures contract, the physical asset being delivered (i.e., the coffee itself) often does not exist yet. It is thus quite common for roasters to book contracts several months in advance if prices are favourable, thus making coffee futures as much about playing the market as they are about actual product.”

“Sounds easy, no?”, Michel laughs, “but it is  about to get a bit more confusing… So the agreed-upon price is based on the predicted price (which in turn is based on supply and demand) at the delivery date when the contract expires. For example, if people think the C-Price will increase in the future due to supply and demand conditions, such as a weak harvest in Brazil, they’ll start buying futures contracts today to sell for a profit when and if the price increases as the delivery date approaches. That increased demand for coffee contracts will cause the current price to go up. The reverse is also true.  If there is speculation that the price will drop, people will start selling their coffee and futures contracts or take short positions. This decreased demand will cause the current price to drop based on future speculation. If there’s a lot of coffee available, however, the price will fall to the point at which it’s all sold.  So there’s more available than people want that day but, as the price drops, they decide to buy more to take advantage of a good deal. The price stops dropping at the moment that people agree to purchase precisely the quantity offered.” “These futures contracts”, Michel continues, “are standardised in terms of the quality and quantity of a given commodity. Because of this, the futures price is representative of a typical range of qualities of commodities, and therefore is an average price.”

“Now you may be thinking ‘Not all coffee tastes the same so surely it’s not all priced the same?’. That is where the differential comes in to play”, Michel clarifies. “The price specific to origin and quality (of any product) is indeed not always the same; it may be higher or lower. The premium or discount of the physical product, the differential, represents the value the market attaches to the product, plus or minus, depending on price/quality. Basically it is important to understand that the C-Price acts as a reference; it is the exchange price, which is determined in real time by the execution of transactions. These transactions are simply people buying and selling contracts from each other, with the exchange facilitating the deal.” “But,” Michel emphasizes once again, “it is not the final price paid for a coffee, but rather a portion of it. Various differentials can be added based on a particular country’s system, physical coffee quality and certification such as Organic or Rainforest Alliance.”

“As said before”, Michel continues, “the C-price is affected by a range of factors, including speculation, quality of harvests and farmers abilities to get their coffee to the market.  But it is also important to know what is happening in a country on a social, economic, political, monetory,.. level. Sometimes, intel that is relating to 3, 6, or 12 months down the line is also being factored into the price“. He continues: “Several times a day we review the state of affairs with our sourcing offices and trading team. Not only are we up-to-date every moment of the day, but thanks to our local representatives we can also know what to expect 3, 6 or even 12 months ahead of time.”

“Precisely because there are so many different influential factors, it can happen that the market changes 20% within a week. This always depends on harvest expectations and global demand. The C-price is known to be volatile by nature and historically it has remained below $2/lb, and on some occasions dropped down to $1/lb. The fluctuations and low prices make it difficult for producers to sustain their livelihoods and extremely hard to plan ahead or make investments on their farms.”

Michel, do you have some final advice for the roasters ?

“Think of the futures price as a barometer for your decision making. Is the market down? Well, it probably means there is a decent amount of supply in the market. Does the market look like it’s heading up? Maybe think about booking coffee forward to protect your costs.”

Michel adds: “It’s also advisable for roasters to be open to other coffee origins as substitutes should any supply issues arise. This will help to mitigate some of the market constraints.” “But the most important thing I can say now”, he concludes,” is to be ready to make decisions.” “If the market hits a certain level that works in your budget, make a decision in a day, because the market may not stay there. If the price is right for you* and it is the right quality, don’t hesitate, decide right away. Buy even more, just to be sure.”

When looking at recent consumption trends, Michel says that demand for coffee is still on the rise. “According to International Coffee Organization, global coffee consumption is likely to climb by 1% to 2% a year through the end of the decade, estimated about 25 million more 60-kilo bags will be needed over the next eight years.

Michel ends with a little rethorical question: “The ‘C’ in ‘C-Market’, you probably think it stands for ‘coffee’ or ‘commodity’ but actually it refers to ‘centrals’. The modern C-market we know today was established in 1968-1969 by Central American producers who wanted to differentiate their prices, mostly from Brazilian beans. Before the C-market, Arabica coffee was traded under the Universal or ‘U’ contract. Today, coffee-producing countries around the world trade their Arabica beans on the C-market, not just those from Central America.’

“Ultimately”, Michel states “having a clear understanding of your business model and needs, coupled with the curiosity to continuously seek out new knowledge and info, can help guide roasters to make strategic decisions in these unprecedented times. Forecasting markets involves so much analysis and interpretation, your sources and intel matter.”

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“It is also crucial for roasters to communicate expectations to producers or importers when procuring coffee, so that both parties can figure out the best way to move forward in these times of uncertainty. For instance, ask yourself whether you need the coffee to add acidity, body, or to lower the cost of a blend”, Michel concludes. “Please remember that when it comes to how the market impacts your business and buying options, we’re always here to answer any question you may have.”

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