Insights

Look Away from the ‘C’: Learning from 10 Years of Cup of Excellence Auction Prices

Posted on 7th Apr 2019 09:46:18 in Transparency

Anyone who follows the specialty coffee market knows that we are in the midst of a genuine coffee price crisis (see SCA Launches New Initiative to Address the Coffee Price Crisis and Appoints New Executive Director). While the problem is longstanding and the issues are vexing, those seeking more appropriate compensation for specialty coffee growers, and those concerned about the future supply of specialty coffee, are suggesting that price conversations and negotiations must be based on something other than current commodity prices; i.e., “producing countries and other players are concerned that today’s ‘C’ contract is not the right price discovery mechanism.” Coffee Producers Demand Immediate Action Amidst Price Crisis

 

However, this aspiration is often met with skepticism: “Colombia’s growers’ federation has suggested that high-quality producers untether their prices from the New York market, though traders were uncertain about the feasibility of the effort.” Coffee growers, future crops at risk amid low global prices -producers

 

To inspire confidence in our collective ability to create a more appropriate foundation for specialty coffee pricing, we can look to the Cup of Excellence (COE) competitions and auctions.

 

Learning from the Cup of Excellence

 

“In 1999, Cup of Excellence held its first-ever coffee-evaluation competition in Lavras, Brazil, located in the Minas Gerais state in the southeast of the country. Then called Best of Brazil, the competition brought together experienced coffee professionals to evaluate top coffees from the region, with the goal of rewarding farmers with high prices for their high-quality coffee.” Cup of Excellence Celebrating Its 20th Anniversary

 

We assembled published data from all COE competitions and auctions and then searched backward – using Facebook and Twitter – to find the dates of each auction. This process uncovered dates for 80 auctions run in nine countries between 2009 and 2018. We then visited www.investing.com and recorded the New York ‘C’ (NYC) price on the day that each auction closed. Across the auctions in the sample, the NYC price ranged from a low of $1.01 to a high of $2.68, and averaged $1.49 per pound. Over the same period, winning COE auction bids ranged from $2.50 to $300.09 and averaged $10.92 per pound.


 


A simple regression model reveals how specialty coffee pricing becomes sensible when buyers focus on quality. On average, in COE auctions, every quality point corresponds to an extra $1.06 per pound. Coffees that rank among the top four in each competition receive additional premiums that range from an average of $2.25 (4th rank) to $33.57 (1st rank). Basic economics come into play once again when we look at the coefficient on the lot size variable. Every additional sack of coffee that is made available at a COE auction leads to an average price reduction of $0.14.

 



Finally, note that the effect of the prevailing NYC price is virtually zero in this model. The small negative coefficient estimate is not significantly different from zero.

 

From the Cup of Excellence to the Rest of the Specialty Market

 

No one will (or should) believe that these results generalize to the rest of the specialty market, or that it will be easy to replicate or scale the COE pricing effects. However, the observations are promising for individuals and organizations looking for more appropriate pricing of specialty coffees. This thought exercise also indicates what needs to be done so that the entire specialty market can have a more sensible pricing foundation:

 

  • Inform sellers and buyers about coffee quality;
  • Ensure that multiple buyers are on hand to consider each coffee;
  • Post recent prices so that sellers and buyers can update pricing expectations; and
  • Think and work hard for 20 years.

If we start making these changes to the way that specialty coffees are evaluated and priced, we might one day run a similar regression model (perhaps based on Specialty Coffee Transaction Guide pricing data) that reveals a broader specialty market that sets prices based on a coffee’s quality and standing, and not on current commodity price references.


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