Royal.Coffee.News

The C market has risen from its sub prime mortgage meltdown low of 1.10 to a high this week of 1.33. The further out months are flirting with the 1.40’s. From our point of view the market is getting its fuel from these factors:
1. Weather in Brazil. There needs to be adequate rainfall in Brazil to stimulate and maintain a successful flowering. This has not yet happened, and until it does some speculators will buy the market with the thought of a greatly reduced crop next year. If they are right, and it does not rain enough in the next 4-6 weeks, the market most certainly will be going higher. But if they are wrong and Brazil receives adequate rains, the prospect of very large crop will return to the market’s mentality.
2. Currency. The dollar is very soft and at record lows against the Colombian Peso, Brazil Real and Euro. Since exporters get paid in dollars they ask for higher coffee prices to offset the dollar’s declining value.
3. Oil. Oil has hit an all time high and this of course affects transportation and production costs.

Of these factors, weather by far is the most volatile. Since there has not been any significant frost in years, the onset of Brazilian spring rains has become the new flash point for market speculation. The recent run-up of th C market reminds me of a story I heard in the early eighties about the famous black frost of 1975 in which the market moved from below a dollar to 3.77/lb…..

On the eve of the frost in July of 1975, a group of very large coffee growers and exporters was meeting and having drinks together in El Salvador. El Salvador at the time was one of the largest producers in the world. The biggest of these Salvadoran exporters had offered 5000 bags to a large U.S. buyer, which the buyer had not accepted. This exporter had hired a man to go to Brazil and sit in a motel room and check a thermometer every 20 minutes all night long. If the temperature went near 32 degrees he was to call El Salvador. That evening, after a few cocktails, the phone rang: “ Senor, the temperature is 32 degrees and it has been that low for 30 minutes”. The large exporter called the U.S. buyer at his home. After telling him about his man in Brazil, he reoffered the same 5000 bags which he had offered earlier that day, but now at five cents per lb. higher than the prior offer. Keep in mind that 5 cents per lb. in 1975 was huge, about a $33,000 dollar difference in the value of this offer, but it would seem more like $100,000 today. …After hemming and hawing for a long time the U.S. buyer could not make up his mind. Finally the exporter said, “Look, there has been a frost, are you bullish? Or are you an asshole?” After along silence, the buyer finally said... "I’m an asshole”, and hung up the phone.
The next day news of the frost hit the general market, prices went up the daily limit and sellers withdrew their offers. The market continued up the limit for several days in a row and prices marched relentlessly higher, eventually getting so high consumers started a coffee boycott.

Despite the frenzy of the 1975 frost market, this frost was very instrumental in creating the Specialty business we see today. When coffee prices quadrulpled, it permanently established a higher benchmark. A few years after the frost when the C market went down, the commercial roasters, all buying the cheapest coffee they could, dropped their prices and resumed their price competition. Specialty roasters did not drop their prices nearly as much. Now, for only 10-20 cents more, small roasters could buy the best coffee in the world, and the since they continued to sell at the higher frost-price levels, an extra dollar or two per lb. profit became built in and provided the incentive, capital, and profit structure for the growth of the Specialty Industry.