As a shockingly volatile C market, local labor shortages, climate change, and high costs of business from the farm level up combine to roil global coffee markets, forward booking has never been more complex than it is in 2022. Our top priority is as it always has been: to deliver coffee exactly as promised in terms of quality, timing, customer experience, and consistency in the value our work at origin will deliver lot-over-lot and season-over-season. In 2022, how we do that has had to change substantially. This shift has been most dramatic in how we think of forward booking, a process already complex in itself because it necessitates matching projected acquisitions during harvest with real-world coffee supplies post-harvest. What’s making the process so complex, and how has our strategy changed to ensure we’re delivering what we promise?
What’s going on with the C market?
On top of the global logistics crisis sending costs on a continuing upward climb since 2021, an array of climactic and geopolitical factors have set the C market on a wild ride since the summer.
First, as we reported in our 2021 Q4 report, a slew of climate factors led to a melee for available coffee supplies in South America, driving the C market to levels not seen in over a decade. Devastating frosts in Brazil led the C market on a rapid climb, while heavy unseasonable rains in Colombia (coming on the heels of mass protests that halted the harvest and transport of coffee) drastically reduced supply there as well, compounding the issue. Coffee stocks in the global north continued to dwindle, and it looked as if nothing would interrupt the trend (as we reported on in our Q1 report) as forecasting for coffee availability remained (and remains) decimated.
A rapid disruption occurred directly following the Russian invasion of Ukraine, creating a host of additional complexities (detailed in last quarter’s report). On the day of the Ukraine invasion, the market dropped nearly 10c and continued to drop from around $2.50/lb to $2.10/lb over the course of two weeks. Institutional investors became bearish overnight, fearing a further stressed global logistics crisis and a derailed global economy. Analysts feared that consumer spending would shrink even though supply side economics suggested coffee prices should continue to strengthen.
At time of writing, coffee remains above $2.00 ($2.18 specifically), but below the $3.00 we and analysts expected going into Q1—however, that disparity comes with its own complexity. As all of the factors that would underpin a bullish C market in producing regions have continued or intensified (supply constraints coming from labor shortages, climate events, increased cost of production/transit, etc.), the lower C market price is out of sync with the prices local markets in producing regions are paying and the baselines that producers can expect for their actual coffee. So—as usual—the C market price both affects coffee prices holistically and is out of sync with their actuality.
What is forward booking & why has it been so complex?
Forward booking, or forward contracting, can mean different things for different companies or industries. For us, forward booking is the process of allowing clients to enter into contracts on projected future coffee supplies, then matching them with a lot that meets their specifications at the agreed-upon price when the coffees come in. We typically do this at a reduced price compared to spot coffee (coffee we have on hand in the warehouse) since it allows us to buy coffee more accurately throughout the season, having a large portion of total coffee already matched with prospective buyers. For us, it’s a risk mitigation strategy that allows us to more fully support our supplier relationships. The more forward booked volume we have, the more coffee we can buy from producers without being concerned about having too much uncommitted inventory late into the sales cycle of any given origin
Where the process gets complicated is when coffee acquisitions become particularly competitive (due to elevated local prices from the largest actors for coffee at undifferentiated quality tiers) and prices make large jumps that cause uncertainty for both producers and consumers. If we’re buying coffees as they arrive into the cupping lab at origin and the prices change dramatically from week to week, how can we design contracts to account for that level of fluctuation? If we think prices might jump dramatically and producers may rush to strip-pick, depleting the supply in a given region, how can we sell coffee we aren’t sure we’ll have?
How has our forward booking strategy changed?
If we aren’t sure we’re going to have a particular coffee quality tier, region, or quantity, or if we can’t project pricing accurately, we won’t forward book the coffee. In some minds, it’s better to sell the coffee first, then worry about delivery later. For us, we aren’t going to make promises we aren’t sure we can deliver on. This year, that’s meant that in some cases, origins or regions we’ve opened forward booking on in past years aren’t available to forward book because we’re making sure the details are worked out first, rather than simply prioritizing sales.
In general, depending on calibration and relationships with roasters, we’re conservative in our estimation of costs, leaving room for us to reduce pricing if costs end up lower than expected—but, unfortunately, the reverse also needs to be true. With so much uncertainty, our goal is to craft relationships and contracts built on trust in our ability to source a specific quality and deliver against a specific timeline. Pricing, while critical to both roasters and us, is still secondary to that and requires the ability to have some variation based on market fluctuations and unpredictable freight cost.
There are some things we can’t project. We don’t know when the markets, both C and global, will stabilize. The climate is always an X factor we can’t control or predict. What we can say for sure is that we’ll always communicate with you and set clear, honest expectations rather than simply working to make a sale. If we aren’t forward booking a particular coffee at a particular time, it’s because we need to make sure we can deliver exactly as we promise. If you ever have a question or just want to talk, we’re always here, so get in touch.
|Interested in sourcing coffee with us? Reach out at firstname.lastname@example.org. To learn more about our work, check out our journal and follow us on Instagram @redfoxcoffeemerchants, Twitter @redfoxcoffee, Spotify, and YouTube.|