Is 100 the new 50?
Arabica futures recently dropped below the 100 cents/lb mark for the first time since September 2006. The price drop prompted a joint statement from producers in Brazil and Colombia, as well as the creation of an emergency assistance fund in Colombia.
This could be a short-lived downturn, forgotten a couple months from now. Or it could be the start of a prolonged period of low prices that creates hardship for coffee producers around the world.
The infamous coffee crisis occurred in the early 2000s. Prices fell below 50 c/lb in August 2001 and remained at historic lows for another three years.
To see if a price of 100 c/lb in September 2018 feels the same as a price of 50 c/lb in August 2001, we need to adjust for inflation. We can do this by applying a simple inflation adjustment (derived from the US Consumer Price Index), which translates historical nominal prices into “today’s prices.”
After making this adjustment, we see that 50 c/lb in 2001 is equivalent to around 71 c/lb in today’s dollars. If we stopped our analysis there, we might conclude that the market would need to drop another 30% for it to be at crisis levels again.
Our adjustment, however, was made from the US perspective, not a producing country’s. For producers, coffee is sold in dollars and then converted into local currency. Exchange rates vary over time. Levels of inflation also vary.
For Brazil, the real to dollar exchange rate averaged 3.9 over the past month, versus 2.6 in 2001. It has devalued by 50% over this time period. We also need to look at Brazil’s cumulative inflation: in 2001, the real could buy nearly three times as much as today. The implication for a Brazilian producer is that selling for 50 c/lb in 2001 (i.e., 1.3 BRL) would feel the same as selling for 88 c/lb today (i.e., 3.4 BRL).
Colombia fares somewhat better: 50 cents in 2001 is similar to 79 cents today. During the price spike of 2010–2012, Colombia’s strong currency kept producers from benefiting as much as other countries. (Brazil also missed out due to a strong currency at that time.)
In Vietnam, the world’s largest Robusta producer, 50 US cents in 2001 is worth 109 cents in today’s economy. The comparative advantage of producing an export crop like coffee is also less compelling than it was in 2001, as inflation increases have averaged 7% year-over-year but exchange rates only 2.6% .
In Indonesia, 50 US cents in 2001 is worth 82 cents today. After the early 2000s, Indonesia’s adjusted prices actually track fairly close to the nominal C market.
Guatemala’s quetzal is the only currency in our series that has strengthened relative to the dollar since 2001. The stronger currency, combined with modest inflation, means that 50 c/lb in 2001 is worth 121 today. Guatemalan producers are experiencing the lowest prices in real terms since December 2001 — when the C market was at 44 c/lb.
Ethiopia experienced the highest levels of inflation (and devaluation) among the origins considered here. A price of 50 c/lb in 2001 is equivalent to a price of 131 today.
You can compare all six countries’ real price trends on the chart below. (It’s possible to hide individual countries by clicking on them in the legend box.)
To conclude, 100 may not be the new 50 for all producers. For many though, today’s 100 c/lb is reminiscent of the 60 or 70 c/lb levels of the early 2000s. It is not surprising that producers see smoke on the horizon.
A more thorough analysis would account for production costs, particularly, wages for coffee farm workers. For some, the cost of growing coffee has increased faster than the rate of inflation — in which case, 100 cents will feel a lot more like 50 cents.
