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Peter Goodman: Coffee prices soar to 50-year high as climate change drives costs up
These should be wonderful times at Finca El Puente, a coffee plantation carved into the mountains of southwestern Honduras. On world markets, the price of ordinary coffee has more than doubled over the past year. The specialty varieties of coffee harvested at the farm have long commanded a hefty premium, reflecting their status as the source of aromatic brews savored like fine wine from Seattle to Seoul. The costs of production have swelled. Producers must pay extra wages to attract scarce workers; fertilizer has gotten more expensive. Their crop has been ravaged by ill-timed rains and volatile temperatures. Even after the surge in prices, they are likely to earn less this year than last.
The further into the future they contemplate, the greater their concern. More than anything, they worry about what is propelling prices higher: climate change, which has diminished the supply of coffee around the globe via rising temperatures, droughts and excessive rains — most recently in Brazil and Vietnam, the world’s two largest coffee producers.
Sixty per cent of the world’s coffee is produced by an estimated 12.5 million people working on farms no larger than 50 acres — and most far smaller than that — according to World Coffee Research, a nonprofit organization that promotes sustainable farming practices. Some 44 per cent of these so-called smallholders are living below the World Bank’s measure of poverty. Much in the way that the pandemic disrupted global commerce, prompting scrutiny of supply chains for crucial items like pharmaceuticals and computer chips, high coffee prices have sharpened focus on the conditions shaping the production of coffee.
Around the world, traders who buy coffee beans from farmers and export them to roasters typically lock up their supply months and even years in advance using so-called futures contracts.
If the world price goes down, they may receive less from their customers than the amount they are obligated to pay farmers for coffee beans. To hedge against that, they purchase so-called short positions on futures markets — essentially, bets that prices will fall.
If prices drop, their gains on these short positions offset some of the losses on their sales.
But in recent months, the price of coffee has been rising so steeply that short positions have become major losers. The financial brokers who handle such trades have demanded that exporters hand over more cash toward settling up their losses — a margin call, in financial parlance.
This article is written by WWSG exclusive thought leader, Peter Goodman.
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