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By: Holly Kragiopoulos 04 January 2017
Brexit…most of us are fed up of hearing about it, I know I certainly am! Without wanting to air my personal political views here, I think we can all say that we were unprepared for the decision that was made on the 24th June 2016.
Uncertainty is a familiar concept in the coffee industry. As a specialty roaster committed to quality and ethics, we work as hard as we can in partnership with our importers to remove as much uncertainty as possible for the farmer and guarantee sustainable and profitable prices year on year. However, coffee farming is a volatile profession. Global weather patterns, social and political unrest, pests and disease can all have a dramatic effect on the global value of coffee. A bumper crop in Brazil (the world’s largest coffee origin) one year can mean prices plummet regardless of origin or quality purely because there might be a surplus supply that exceeds demand. It is in these times that specialty focused buyers have a great responsibility on their shoulders to protect the farmer and ensure they still achieve a fair price for their coffee that reflects the costs of production and superior quality. In a world where most commercial buyers are buying low and selling high, responsible buyers can offer a welcome partnership to producers who might have previously been exploited by the harsh realities of the global coffee market.
It doesn’t, however, work the other way – and quite rightly so! The years of 2013-15 saw excessive rainfall in Brazil and leaf rust hit coffee farms right the way from Mexico to Peru, diminishing yields by as much as 75-80%! This was a catastrophic time for coffee farmers whose costs of production had essentially doubled because their yield had halved. All of a sudden, the global market reacted to the reduced supply and prices skyrocketed to levels that are rarely seen in the industry. Due to our commitment to cover costs of production, we worked hard to safeguard our producing partners throughout this period, causing green coffee prices to rise by up to 20% in some cases. By the start of 2015, we had to enforce a price increase on our wholesale offering and have been working hard ever since to keep this price stable.
In the months leading up to the referendum, we had briefly discussed some vague possibilities on how we thought a ‘vote to Leave’ would affect our business and the industry that we work in. There was no doubting that any major political change would have a heavy effect on currency exchange rates and as all green coffee is traded in USD, this change could indeed be disconcerting. We were mildly worried – only mildly because of our relative certainty that we would vote to Remain.
As we all know, that was not the case and we woke up on the morning of 24th June feeling uncertain and anxious along with what seemed to be the rest of the country! We watched in horror as the markets reacted to the outcome and the value of the GBP plummeted. We began to think through what this might mean for the cost of our precious specialty coffee – already priced at a higher point in comparison with the wider market. We have always hugely valued and respected our wholesale and online customers who have understood their responsibilities as producers and consumers and are on board with what we do here at North Star. In many ways, Brexit could halt the amazing progress being made in the specialty industry if quality coffee becomes inaccessible due to price.
Taking these possible consequences into account, we therefore decided to bide our time and wait it out. No one had any idea how things would turn out and as we had contracted all of our coffee up until November 2016, we had a few months to play with to see what happened. To react immediately would have been irresponsible and presumptive and was not in keeping with our values of transparency and openness. We even thought and hoped that the insanity of the Trump election might work to our advantage if the USD weakened but no, we are now having to face the reality that our coffee is costing a lot more going into the new year of 2017 than it did in previous years. The incredibly sad thing about all of this is that the increased price we are paying is of no benefit to the farmer, nor the exporter nor the importer. No one is making more money as a result of a higher sales cost, it is literally vanishing into thin air through currency exchange rates.
In short, when we contracted our new crop coffees for the year ahead in November 2015, £1 was worth $1.54. In the last year, we spent $144,760.00 on green coffee purchases which cost us £94,000.00. When we contracted our coffees for 2017 in November 2016 following the aftermath of Brexit, £1 was worth just $1.22 meaning that same $144,760 spend was all of a sudden going to cost us over £24K more at £118,655.73. That is nearly £25,000 which has just disappeared! £25K that has not gone to the farmer or made our business any more profitable. It is so tough to get your head round but this is the reality that we are now facing.
We have looked into the possibilities of swallowing this loss and fielding the blow, and in the case of coffees that arrived in the UK after June 24th (such as new crop Rwandan’s/Ethiopian’/Colombian’s) that is precisely what we have been doing. Our bottom line has taken a hit and not just from our coffee suppliers – almost everything that goes into our product has seen a price increase of between 8 and 12%. From our brew equipment, to the bags and boxes that we use to pack our coffee, transport charges are also set to rise due to higher oil prices – another commodity that comes off worse with these exchange rate fluctuations.
Perhaps we, alongside our esteemed competitors, could continue to take the hit for another year, anything to keep people drinking ethically sourced specialty coffee! Unfortunately, all this does is put a halt on the growth of the industry and our business which means our aspirations to set up social projects in the communities we work with in coffee origins go on the back burner.
The reality of this situation is that the global value for a cup of coffee has always been too low which is why we still have impoverished coffee farming communities in 2017. Over the last couple of decades we have seen a focus on more sustainable buying practices and an improved understanding of the harsh realities of being a coffee farmer. But crucially, the price of a cup of coffee has not risen dramatically enough to truly represent the quality of specialty grade coffee and the costs involved from the farmer, exporter, importer and roaster to produce it.
For many, a cup of coffee is a wake up call only and is viewed as a commodity, a mass produced crop. But there are those amongst you who live and breathe great quality coffee and who want to support local roasters and independent shops who are doing an amazing job – it is to you whom I speak to now. The prices of the coffees on our online shop and our wholesale prices are going to have to go up in line with the percentage increases we are facing on the cost of our green coffee which are between 8 and 10%. Whilst this might seem like just another faceless or unjustified price increase, it is a situation we are all going to have to become a lot more familiar with when buying anything that is not grown and produced in the UK. If we want to guarantee the future and quality of the coffee industry and keep our producers farming great coffee, we are all going to have to take some of the hit.
That is not to say that if the GBP rallies and gains strength again against the USD that we will not readdress our prices. We want to be totally fair and transparent with everyone that we work with through North Star from our farmers to our customers. This blog post has been written now because we are now sure of our immediate course of action and we felt it only fair to communicate our reasoning. We are not simply being opportunistic and capitalising on the chance to raise prices and become more profitable, we are simply riding the wave (or tsunami!) of Brexit trying to fight our way through to continue doing what we do best. We hope that you can all understand and stick with us through this challenging time and would love to hear from you with any comments or questions. NS x