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MORE ARTICLES FOR THE COFFEE SERVICE DECISION-MAKER:
[How Much is Your Business Worth?] [Making it Buying, or Selling] [Of Coffee, Grounds and Percolators] [Prince and the Predator] [Profits and the New Tycoon] [Transactional Cost Analysis for OCS] [What's Your Price] [Where Do Prices Come From]
CHECK THE STUART
DAW ARTICLE ARCHIVES
What's Your Price?
(What Should the Right Price for Green Coffee Be?)
by Stuart Daw
The coffee
service panel at the 2005 NAMA show in
Atlanta
covered many aspects of the business. But one question from the floor that
particularly caught my attention had to do with “what should the right price for
green coffee be?” It was aimed at finding an answer amid the current confusion,
the immediate cause of which was the publicity surrounding the Katrina hurricane
and the probable loss of a lot of green coffee stored in New Orleans.
The market
had already been rising before Katrina and the question was timely, for there
was much public outrage over the “obscene windfall profits” being made by oil
companies, a rage given an extra boost by the media and some demagogues in
Congress. The panelist, in attempting to answer, may have sounded evasive, so
the questioner insisted on some finite number. The answer came out, “$1.15 per
pound.” But actually the panelist would have better off avoiding a specific
number, for there is no such thing. The only proper answer in the long run is
the philosophic one: THE MARKET, THE LAWS OF SUPPLY AND DEMAND!
But in the
short run some strange things may happen to green costs. The “specs,” the
speculators, those traders who never actually touch coffee, make a living trying
to guess where the over-all market is headed based not only on the fundamentals
of supply and demand, but on a wild array of charts and curves that seem to the
lay person to have no connection to actual coffee beans. And specs are taking a
macro view of the entire market for arabica and robusta coffees regardless of
origin, age, or relative quality. Their only concern: is the market about to
rise or fall on the New York Board of Trade index? An amazing amount of money
is being “gambled” every day by traders trying to discover the answer in a maze
of longs and shorts, puts and calls.
For coffee
growers in the countries of origin, the “correct” price is what it should always
be: what a willing buyer agrees to pay to a willing seller. Any attempt by
well-meaning individuals or groups to artificially change that equation is, in
the long run, wasted. But for the OCS or vending operator at the convention,
what was really meant by the question was, “Is my price going to rise or fall,
and when, and how do I know if I am getting treated right by my supplier?" The
correct answer is to be found in a proper relationship between roaster and
customer, one in which the customer knows the markup over roasted cost of his
product(s), what are the components of the blends, the shrinkage factors, and
how much inventory the roaster normally carries for his customers’ protection.
To keep
green cost changes in perspective, between November 24, 2003 and March 18, 2005,
the dates of the recent lows and highs covering about 16 months time, the market
rose by 80.6 cents per pound, which is 96 cents per pound roasted, given a 16%
average shrinkage. Then how come your price never did rise by that amount? For
the simple reason that your roaster’s average green cost never was at the low or
the high. His purchases are spread over a continuum of time, with the average
blend costs moving gradually, and usually only slightly up or down with each
purchase. No one can be lucky enough to always buy at the low, or unlucky enough
to always be at the high. And there may be a lag of three months or more from
the time the coffee was bought and the time it arrives.
A nightmare
for the roaster comes when he sends out a letter announcing a price increase
based on the average cost of new arrivals of green coffee ordered three months
ago, and his letter arrives the day after the market just dropped three cents.
The buyer opens a notice of increase when he expects a decrease. And so very
often the roaster simply tears up the letter before sending it, meaning he has
to “eat” the higher green cost. He finds it just too difficult to stand on his
head and preach a sermon on coffee economics to the customer.
Today's
market (November 14, 2005) is just above the middle of the aforementioned
range, and if by some miracle it stayed there, your net increase over the lows
of November 2003 should be around 50 cents per pound, while making some
allowance for unusual circumstances such as the Tsunami that hit Sumatra,
driving coffee from that country well beyond its normal relationship to the
NYBOT “C” Contract price.
So when you pick up the Wall Street Journal and see
that the price of green coffee fell two cents yesterday, you shouldn’t run to
the telephone to demand an immediate price decrease. Don’t expect your roaster
to effect rapid changes, knee-jerking weekly to the latest market fluctuation.
He is, after all, not just your roaster; he is also your procurement officer,
watching market conditions on your behalf. And if your volume is high enough to
warrant it, he may be happy to let you decide how long a market position you
wish to take based on some hunch or need you may have, and to cover himself
accordingly.
And
lastly, remember that the roaster’s margin is smaller than that of any class of
customer he serves, and the lower the margin, the less anyone in any facet of
the coffee business should gamble on the future. Thus at whatever level the
market is at a given time, the roaster, to survive in the long run, is wise to
buy for his customers’ needs and not gamble the farm in hope of a quick gain.
(c) 2005
Stuart Daw
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