A supply shock is an unexpected event that suddenly changes the supply of a product or raw material, resulting in an unforeseen change in price. Supply shocks can be negative, resulting in a decrease in supply; or positive, which produces an increase in supply; however, they are often negative. Assuming that aggregate demand does not change, a negative supply shock causes the price of a product to rise, while a positive supply shock reduces it.
Coffee has reached record prices since 2014 this week. But how does this price increase affect coffee farmers and roasters?
What is the "C" price of coffee?
The coffee commodities market, also known as the "C" Market, is where brokers at the New York Stock Exchange determine the future price of coffee contracts globally every day. By buying or selling these futures contracts, brokers place bets on the expected future value of a certain commodity. Therefore, projections about the future supply and demand of coffee will make possible multiple variations in its price in the present.
Information is power, as they say. Long long long time ago, the purchase decision in any transaction was based on the comparison of the final price of a product (commodity) offered by several suppliers (competitors). These competitors were very reluctant to share their price lists, and clients spent long hours collecting those lists in order to have all the necessary information to make the right choice. But the world has changed, today with a single click we can compare prices of an unlimited number of products and suppliers, so price lists have become old and public, rather than a secret element of strategic negotiation. Today what is most important is the value of the product, not its price.
We work hard to add value in coffee. If your product does not make any difference from the rest of the coffees in the market, it becomes a commodity. The price of a commodity is established as the point of equilibrium of supply and demand of future contracts. Price fluctuation (that is, the movement of the supply and demand curves) is affected by such a large number of variables that they are uncontrollable. For example, if there is a frost in Brazil, Sumatran coffees rise in price; And if there is an excess of production in Brazil, Sumatran coffees will lower their price; In both cases, without the Sumatran coffee farmer having moved a single finger.
1.- The birth of a new reality.
With this article, we begin a new series of educational content, this time focusing on one of the biggest and probably most controversial topic in the coffee industry: PRICE.
All of us who work here know that our industry is in an unprecedented crisis in various fields; Ethical, Environmental, Genetics and Socioeconomic. We know that the prices we pay to coffee growers (with only few exceptions) is well below their production costs. And when we pay excellent prices for quality, for example in Kenya; we know that most of this revenue does not reach farmers, because there are so many hands, so much corruption and so much bureaucracy in the industry, that most of the benefit is lost in the darkness of a network of connections that we do not fully understand.