How do rising coffee prices affect cooperatives?

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From early 2021 to mid-2022, coffee prices rose steadily – with arabica futures hitting a 10-year high of 258.95 US cents/lb in February 2022. How do rising coffee prices affect cooperatives?

These price increases are attributed to various factors, including weather (such as a sudden frost that hit some of Brazil’s top coffee-growing regions in July 2021), container shipping prices, and others, and the global coffee surplus fell to a 22-year low.

However, in recent weeks, global coffee prices (also known as C prices) have fallen to an 18-month low of 174.20 US cents/lb. Considering these significant price movements, it raises an important question: do producers make more money when the price of C increases? And for members of coffee cooperatives – could higher prices give them greater access to different resources and markets?

Find out how rising coffee prices are affecting cooperatives.

How does a cooperative work?

Before understanding how rising prices affect cooperatives, we should review how coffee cooperatives operate.

Essentially, a coffee cooperative is a group of producers that come together to improve access to several resources – including fertilizers, farm tools, seeds, and credit loans. At the same time, farmers also have greater access to formal training programs. They can take advantage of better marketing and business opportunities – ultimately increasing their likelihood of receiving higher coffee prices.

In essence, cooperatives operate similarly to non-profit organizations. Manufacturers have better access to certain services and resources by becoming a member.

Some cooperatives even buy members’ coffee and help sell it. It can be especially beneficial for manufacturers, as it can give them better access to several different markets that they may not otherwise be able to enter on their own.

Partnerships can give firms additional stability in the face of inflation and market instability. Farmers, for example, can purchase fertilizer at a discount, ensuring better access to needed resources and allowing them to reinvest in their farms.

How are cooperatives affected by coffee price fluctuations?

Although there are some benefits to joining a cooperative, the cooperative model has problems in operation and operation.

In Kenya, for example, up to 50% of coffee farmers across the country choose to work with large businesses or cooperatives. However, the number of cooperative members has gradually decreased over the past decades. It is primarily attributed to low coffee prices and the perception that producers lack the autonomy to make the necessary decisions.

Furthermore, recent market volatility raises an essential question of how profitable cooperatives are.

An industry expert said, “Coffee farming is risky for several reasons. In a volatile market, cooperatives can greatly help farmers reduce their risk.”

By becoming a cooperative member, producers are more likely to anticipate input costs and gain a better understanding of potential profits and losses.

Industry experts use forward buying as an example. In theory, this model allows cooperative members to sell coffee at current prices but have to deliver the agricultural coffee at a future date.

For the producer, this can help reduce the risk of future market volatility by ensuring high enough coffee prices are received. However, if the price of coffee increases a few months later, the farmer will lose.

However, by 2021 and 2022, the market will see that some producers who once agreed to sell coffee at a lower price have abandoned the old agreement and are fortunate to sell at a higher price at the current market rate school. It is called the strategic default.

While some benefits exist, a strategic default can have several negative consequences. For example, producers may be blacklisted by cooperatives, traders or roasters.

According to an industry expert: “In Brazil, where farms generate higher yields than in other countries, some farmers sell up to 80% of their harvest and preserve the remaining 20% as a hedge against market changes. Meanwhile, in Colombia, where there are many small-scale coffee growers, producers will sell all of the coffee grown on the property.”

Ultimately, this means that cooperative members in Colombia have less protection against market fluctuations – exposing them to more risk. It is particularly relevant because the Federation of Coffee Growers of Colombia (FNC) buys about a third of the country’s coffee, which means that a large portion of Colombian cooperative members can get low prices.

Because coffee market price regulation operates differently in African countries, market volatility is also slightly different. In Ethiopia and Burundi, for example, coffee prices are set by the government on a monthly or weekly basis and do not change daily as in Colombia or Brazil. In addition, since most Burundi, Kenya and Ethiopia farmers cannot carry out their post-harvest processing, they are also less affected by market fluctuations. However, by doing minimal post-harvest processing, they can often get lower-than-expected coffee prices.

Is there a risk of bankruptcy?

With the recent increase in contract defaults, the relevant question is, are cooperatives at risk of bankruptcy?

An industry expert said Colombia experienced this, especially in mid-2022. Four of the 38 cooperatives in Colombia are being liquidated, while some are following Superintendencia’s watch. Solidaria – a regulator of cooperatives, banks and financial institutions in the country.

In Colombia, profit and loss reports are sent to Superintendencia Solidaria continuously, and if the monthly report of any cooperative shows negative signs, the regulator will initiate an investigation. Once cooperatives are investigated, they are usually under the regulator’s control. It usually involves appointing someone with limited coffee knowledge to run the cooperative. It can sometimes lead to the dissolution of the cooperative, as the appointed officer may need to be more knowledgeable to support the operation of the cooperative.

What can we do to support cooperatives?

The dissolution of cooperatives in any coffee-growing country will inevitably adversely affect producers, especially members. It can be a significant barrier to market access.

According to an industry expert, price insurance can help farmers protect themselves from market volatility, but it involves an upfront charge.

Farmers are refusing to pay the price, and others cannot. The cooperative must refrain from compelling the producer to pay the premium; otherwise, they risk losing their membership.

Finally, cooperative producers will only be paid for their coffee after they have delivered the contract. They may be paid at lower rates or after a long time, leaving them economically vulnerable.

Swaps, for example, allow farmers to get the commodities and services they require without trading money. Farmers will often supply their coffee on an agreed-upon date, allowing them to utilize their coffee as a negotiating chip to acquire access to the resources needed to invest in their farm.

More centralized processing centers for Latin American cooperatives might allow farmers to focus more on cultivating and harvesting coffee while outsourcing post-harvest processing to other farmers and other stakeholders in the supply chain. It might enhance coffee quality while also assisting in price increases.

Despite the recent decline in coffee prices, it remains to be seen how coffee cooperatives and their members will be affected by long-term price movements.

But one thing is sure- transparency and price stability are crucial to create a truly sustainable coffee industry. Without strength over an extended period, higher prices and market volatility can be disruptive – and potentially with some unintended consequences.