Has the Coffee Market Changed for Good?

The past five years have not been easy: the pandemic, container shortages, a couple of Brazil frosts, record-high global temperatures, too much rain, not enough rain, inflation, war, blocked shipping routes, port strikes, EUDR implementation, EUDR delay… We’ve had the greatest hits of 'everything that can go wrong in a coffee supply chain' all packed into a short period of time.

On one side, young coffee professionals should be happy. Normally, it would take someone an entire career to face these challenges and obtain the key learnings of ‘How to Navigate Crisis’. Yet, here in just five years, everyone has earned a PhD in coffee supply chain management that should offer valuable lessons that will last a lifetime.

However, the big questions are:

Will things actually go back to ‘normal’, or have we reached a paradigm shift that will change the coffee industry forever? And what actions can we take to ensure we adapt to the ‘new normal’?

CLIMATE CHANGE

Let’s start with our heating planet. 

In 2022, a study from the Zurich University of Applied Sciences predicted that climate change would cut the availability of prime coffee producing acreage by 50% by 2050. When reading the headline, Dave’s first reaction was, “oh, that is horrible”, quickly followed by a smile while telling the young trader sitting nearby that it was his generation’s problem to deal with (jokingly, of course).

However, just two years later, we witnessed firsthand the hottest year on record. Coffee yields deteriorated across Brazil, Vietnam and Honduras as high temperatures impacted the tree’s ability to produce. Yes, we did have rain a bit later than desired, but this only exacerbated the initial driver of heat. This is the first time that we can remember temperature being a determining factor of crop size on a global basis.

Is this a one-off or a regularly expected, repeating pattern? It currently looks like 2025 will be cooler; however, the hotter trendline is clear and already troubling today, and this year will still be a top-10 year for global air temperatures.

Many of us have been investing in efforts to develop heat-resistant coffee varieties and other mitigation activities over the last years, but it’s clear that we need to pick up the pace.

INCREASED VOLATILITY

At the start of 2024, it felt like the market was more likely to finish at $1.50 than reach all-time high prices by December. However, the aforementioned crop cuts have provided a fundamental backdrop for a historical rally that surpasses even 1977. While history never repeats itself but often rhymes, the behavior of hedge lifting and concerns of defaults feel eerily similar to both 2014 and 2011.

In today’s world of social media and instant messaging, the speed at which news and rumor alike spread is unprecedented. Any single person with an idea can go viral and influence coffee prices in a way we have never experienced before. Videos of beautiful or destroyed farms are used as evidence supporting agendas and views. These videos don’t need to be verified, accurate or even connected to the idea/event under discussion. Sometimes videos aren’t even from the current crop and were taken years prior.  

Additionally, many trade houses have moved away from pure merchanting and have become active stoppers and deliverers to the ICE exchange. This was witnessed just last month as at least five participants stood to take delivery of the ICE certified stocks at a significant loss vs the cost to carry the coffee. This threw jet fuel on spreads (the difference between two futures months) and helped kickstart the latest rally.

We could write a whole separate article on the new, larger financial elements within our marketplace, the complication of cross-commodity investing, the meme-ification of markets ('coffee is the new cocoa') and so on. All told, it seems that volatility is not going anywhere in the short term.

What does that mean for those who lack access to research or don’t have the financial muscle to pay margin calls or manage bank line liquidity? We think we have partially seen the answer already through the bankruptcies of several multinational traders, exporters, and roasters during these past five years.

All actors need to 'right-size' the volumes that they are capable of trading. Start with total available bank lines, assume a market significantly higher (this is called 'stress testing') and then divide by future volumes of coffee that could be accommodated with some margin for error. For most players, this calculation will lead them to trading less than before. However, surviving this era of high prices is better than over-trading and finding yourself without money to operate. Smaller groups, or those that have farmers dependent on them purchasing the same volumes, might need to consider aligning themselves or partnering with larger groups to survive. It’s a jungle out there; be sure to pack mosquito spray.

COUNTERPARTY RISK

If we can agree that volatility is here to stay for the coming years, then it is necessary to address the risks inherent in trading. Massive volumes of Vietnamese defaults plagued most trade houses in early 2024 and then have continued through Brazil, Peru, Colombia and many other countries as the markets rallied.

Why does this matter? When a trade house buys coffee for future delivery, the supplier has the option to fix the price at the time of their choosing. When this happens, the trade sells a futures contract so as the market rallies they have a financial loss that is offset by the ability to purchase the coffee at the agreed cheaper price. When defaults happen, the trade is left with only the financial loss of the hedge.

What do we see as the ramifications? Two things principally:

First, we saw this crop that if Vietnam exporters wanted to sell volume in advance, they had to deposit money with the trade at the time of contracting to prepay at least part of the potential margin calls. This greatly reduced the volume that traded.

Second, the trade is forced to reduce their futures fixation and trading windows. Instead of making markets for six months to a year forward, they are being forced to trade for a shorter duration. Some have gone so extreme as to trade outright prices and bypass hedging on the exchanges altogether.

REGULATORY UNCERTAINTY

Will it stay or will it go? EUDR was a four-letter 'word' in 2024. The intention behind the European Union’s deforestation regulation is to be applauded. Their roll-out, on the other hand, gets a solid thumbs-down.

The coffee industry is full of passionate people who want to protect the environment and be responsible stewards of the planet. However, regulation without clarity or design without function simply doesn’t work. It took until the very last minute, but finally common sense prevailed and a one-year delay was announced. This will allow the industry to properly train and prepare to ensure a smooth enactment starting in January 2026.

And this is not the last regulatory change in the pipeline. From Australia to Europe, politicians are passing well-intentioned bills that will only drive complexity and costs higher. Some might argue that it is necessary. Voluntary action moves too slowly, and nothing drives change like brute force. However, too much force causes ruptures across supply chains. Lawmakers need to be mindful of their actions and the consequences of them. The same goes for tariff wars, which loom dangerously ahead.

THE NEW NORMAL

What does all of this mean for the coffee industry going forward?

For one thing, climate change’s effect on production is still in its early chapters and difficult (or impossible) to model, and the concentration of coffee production in just a few countries only increases the likelihood of the type of year that we have lived in 2024. Farmer income levels have spiked as a result of the high prices.   We are pleased that our farming communities are thriving and hope that this extra income provides them with the means of improved livelihoods, as well as investing in their farms AND diversified activities, knowing that coffee prices rarely maintain such high levels long-term. New market elements, like merchants-turned-exchange-players and recently arrived speculative entities, add more risk and range potential. Weakened counterparties, fearful banks and regulatory uncertainty are icing on the metaphorical cake.

We think this means that consolidation is here to stay and will continue. Smaller players that lack global sophistication will struggle with bank lines, increased market volatility and regulatory demands. This will shrink an already reduced supplier base for roasters to choose from; and more risk and regulatory requirements from fewer supply chain managers will undoubtedly change the trading dynamic.

Yesterday’s tranquil environment meant max efficiency, large transactions and predictable delivery. Tomorrow’s trading environment is costlier per transaction, smaller in size and more frequent – and likely more difficult to execute smoothly. It’s vital that we all understand this evolution and build the right relationships, monitoring tools and flexibility into our strategies. As Donald Rumsfeld brilliantly stated once:

Reports that say that something hasn't happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don't know we don't know. And if one looks throughout the history of [the United States] and other free countries, it is the latter category that tends to be the difficult ones.

Future success is a shared burden and one that requires the entire supply chain to partner together in an unprecedented way.

Stay tuned.

_{David Behrends has over twenty years of experience in the coffee industry, working for several multinational corporations before joining Sucafina in 2015 as Managing Partner and Head of Trading and founding farmer connect in 2019. Prior to working in coffee, he served as a Small Business Development volunteer in Bolivia with the Peace Corps and for an energy start-up company in Argentina. David is a passionate believer that technology will be a key driver in the evolution of agriculture supply chains in the coming decade. He is the proud father of a twelve-year-old girl and enjoys live music and street art in his (rare) free time.}

_{Jordan Hooper began his coffee career at the end of a two-year volunteer stint in Nicaragua. He’s always worked in the trade, starting in the cupping lab of a specialty importer prior to experience trading and managing both commercial and specialty trading businesses. Jordan joined Sucafina in 2016 as Managing Director of Sucafina Americas and transitioned into his new role as Head of Green Coffee Trading in January 2024.}