Aug 2015 - The Truth About Micro Lot Coffees

Date Posted:1 August 2015 

Micro Lots - just another fad cooked up by the coffee industry ?

It was not that long ago that almost all the coffee farmed at harvest was sent to more centralized Co-Ops at origin for processing, grading, sorting and blending.
There you had the full spectrum of quality from the region ranging from literally undrinkable to absolutely spectacular. In the majority of origins, the lower grades would be set aside for local domestic consumption and the better qualities were designated for export. In almost all origins this practice continues today with the exception of say Ethopia whereby around half of the crop is consumed locally (a constant issue we face even today in getting our hands on reliable supply !).
Problem was though that back 5, 10 and 20 years ago, farmers could never contemplate receiving much of a premium for top grade qualities - so the required incentives to produce better coffee were never dangled in front of their noses.
The Co-Ops, or buyers, would then take the good stuff and blend it with the average or poor quality lots in order to raise the overall quality that met a desired minimum standard that overseas Roasters were demanding. Basically the great coffees were getting lost in the vast holdings.
When we purchased our raw coffee, we had no real indicator or guideline to navigate our way through the bulk shipments and instead we relied upon our Australian brokers to give away the rare little cryptic signal when they thought something that just landed was worthy of "jumping on".
Fast forward to the current situation and the world of coffee is remarkably different today - segregated micro-lots, nano-lots within micro-lots, complex scoring matrices, exuberant and rather poetic tasting notes and at times unrealistic prices that make you sit back and wonder - is this caviar.....why is it so special ?
You may be surprised to learn what drives the coffee market - that is, who determines the type and profile of the coffee beans that land in Australia. The beans that are purchased by roasters and end up in the grinder hoppers at cafes and homes around Australia.
The coffee market has multiple intermediate supply/demand dynamics at play. Despite what we may think, it's not your end-consumer ordering their morning 8oz takeaway latte from a Melbourne cafe that influences the direction of the coffee industry.
It's also not the popular hipster coffee companies that get plastered across social media pages or who may regular feature in some randomly compiled list of "Top 10 cafes".
It's the unknown and relatively conservative Australian brokers that sit in their offices trying to predict (or imagine) what coffee roasters will buy in the future. The brokers are around 3 - 6 months ahead of the curve as they evaluate and assess many hundreds of pre-shipment samples from exporters and farmers seeking to sell their recent crops. It's their job the whittle down the 850 possibilities to a more manageable list of 250+ coffees on offer.
The brokers have to take the risk in how much they buy and at what price - delicately balancing the future volatility of a fluctuating coffee index and the variable foreign currency movements. If they get it wrong, then they are left with warehouses full of raw coffee that won't sell - it's too expensive or it's not the right cup profile
Unfortunately, the Direct Trade initiative whilst noble in it's own right and something we support, the truth is largely "stretched" by many coffee companies keen to be seen as different or having something exclusive. In a saturated coffee market you really can't blame them for trying. The volume in Direct trade remains small - but still growing.
Micro lots are now more of a regular option from raw coffee brokers. Whereas a few years ago it was just a couple of lots, which grew to a few handful, now there can be up to 100+ micro lots flowing into Australia each calendar year.
Roasters are pushing the brokers for more distinct and higher grade coffees to help them stand out from the crowd. Brokers are in response to this pressure asking their contacts and suppliers at origin to quarantine the best lots so these can be sold at a premium and marketed accordingly.
Costa Rica was one of the early adopters of this practice and we have now seen Colombia, Brazil and more other origins follow.
These days, we are fortunate to be able to source micro lots from just about any origin - although you sometimes wonder if in fact it's a micro lot or someone is trying to grab a higher premium through "marketing".

Does a micro lot mean it tastes better ?
Micro lots are sold at a premium. This premium can range from 15 - 200% depending upon the cup score or the demand for that particular bean, varietal or processing type.
Micro lots have been handled with greater care from the moment the cherries were hand-picked, graded at the farm, processing with more monitoring and testing, packaged with distinctive markings and in some cases liners and of course the longer term storage.
It's all done this way to preserve integrity (quality), ensure value for money and to improve reputation. This forms a positive confidence loop that over time ensures higher prices are paid to the farmer as the incentive increase for every improvement in quality.
A micro lot may also be created to allow a farmer to experiment with alternative processing methods. As an example, most Central American coffees are fully washed and now we see Costa Rican farmers playing with wet-hulled and sun-dried methods as they attempt to extract more from their crops.

Will Micro Lots just be a passing fad ?
No. We think the concept is robust and the market simply can't get enough of it.
Every single coffee company wants improvement in the product. Generally, this is performed by sourcing higher grades which come with an attached higher price. Coffee companies also want something unique or differentiated from their competitors.
The Micro Lot system achieves everything that has been trending in the world of coffee over the last 7 years - traceability, sustainability, ethical and social benefits for impoverished farmers, higher quality grades, unique cup profiles, etc. - it ticks all the boxes.
We see Micro Lots as a well entrenched concept that will remain in the long term.
Coffee companies have been borrowing the term "seasonality" from the wine industry in describing their micro lot offerings and the use of "seasonality" will eventually apply to micro lot systems.

Does mycuppa have a Micro Lot strategy ?
We were one of the first companies to base our entire business around Single Origin coffees - we specialized in Single Origin about 8 years ago - well before the concept became a popular trend.
As we happily exist on the relative fringe of mainstream coffee this affords us the flexibility to explore new, innovative, interesting and exciting coffees that regularly arrive into Australia.
For almost 5 years now we have been offering numerous micro lot coffees - although this has been a relatively low-profile stance from us in terms of awareness marketing.
You may be surprised to learn that currently around 30% of our raw coffee volumes are micro lots and we see this lifting to around 50% in 2016 - subject to the performance of the Aussie Dollar against the Greenback.
Some exceptional examples of micro lots include the following:-

Guatemala Coffee Beans

Burundi

All of our Ethiopia Grade 1 coffees - Yirgacheffe and Sidamo are micro lots

Brazil Cambara - # 261

Nicaragua Diamond

Panama

Colombia Excelso

coffee in the desert?
Impact of falling Aussie Dollar and the shortage of specialty grades

Many of our subscribers reading our articles over the last 18 months have become accustomed to my occasional rant regarding the rising price of coffee.
Generally, the rant occurs in the days following contract placing with brokers for another 10 tons of coffee. I use the word "placing" because it's not a negotiation in any stretch of the imagination.
As a buyer of raw coffee I enjoy the unique privilege of having zero bargaining power. I simply get told the price it's going to cost at today's rates and it's my choice then to "take it or leave it" - don't waste time thinking about it or you will lose the buying opportunity to another roaster who needs coffee and it may go in a matter of minutes. There is no volume discount, no loyalty reward program and no favors - just a straight price to lock in now.
With just 2 key brokers in Australia servicing up to 900 brands at the retail side, each broker has their own range that is ironically not held by the other broker. It means you have just one and only one place to buy that bean you need.
This last week was a particularly difficult week to purchase more raw coffee. The journey of the Aussie Dollar since November 2014 has been offering brokers an interesting position from where they can adjust prices.
My backside hit the ground on Thursday afternoon when buying more Ethiopia coffees that had risen more than 20% since November 2014.
All coffee is traded in US Dollars. Farmers want their respective dues so that means when the Aussie drops the price of coffee rises somewhat proportionally - well, that's what you would expect should happen and you would think it should not apply to 100% of the raw coffee price because there is a local warehouse and logistics component that is not subjected to foreign currency movements.
However, there is a second and more powerful force at play affecting the price of raw coffee in Australia - it's called the global shortage of specialty grade.
10 years ago Specialty grade coffee was barely a needle in a haystack. As the world's demand for better tasting coffee has increased, so has the competition for the best grades of coffees. Australia competes with Asia, Europe and the US for quality coffees. Roasting companies are constantly moving their quality index up and with that comes the battle to source better lots.
The standard of coffee in Australia and New Zealand is the highest in the world. It goes without saying that this can only be maintained with high quality raw coffees. No amount of roasting wizardry can turn a bad raw coffee into something delicious.
Every time I contact the coffee brokers the price is different - today, tomorrow, next week. The price is a function of the global C-Index and the currency. Some origins such as Ethiopia, Sumatra, Kenya, etc. trade at differentials that can be up to twice other origins due to crop shortages and higher worldwide demand.
At mycuppa, we have been through a rising market a few times previously. These cycles tend to be in 3 - 5 year periods.
This current rising market cycle has proven more difficult than in previous cycles. This is due to quite sharp rises in the other non-raw coffee costs associated with our manufacturing, e.g. packaging, energy, labor, rent, marketing, insurance, logistics, overheads, compliance, etc.
An interesting example is our energy costs since the last rising market have tripled.
Rises of input costs exceeding 20% in less than 12 months will affect the retail price of coffee in the Australian market and every coffee company in Australia is equally impacted.
We have seen the market rising since the drought in Brazil January 2014.
The local retail price of coffee is being increased by coffee companies on average $2.75 per kilo during 2015. The timing and the amount each company chooses to increase is variable.
Should the Aussie Dollar dive to between 65 and 70 cents that will likely trigger another 50 cent rise for retail coffee per kilo.
An Aussie Dollar at 60 cents puts the retail price of coffee up between another $1 - $1.75.
Some companies will pass each increment on at the time of the cost impact.
Others will absorb in the hope that the rise is a temporary short-term situation. Companies that choose to absorb increases may also be scared that their customers will search for alternatives or may have locked in contracts with their own customers without thinking of the coffee price volatility.
Other companies will alter their sourcing strategies to the cheaper lower qualities to neutralize the impact of the rising prices which again is a game to see what impact it has on their business.
We will lift prices on some items. However, we will not lift prices at the same rate that our costs increase - our costs have increased 22% since November 2014 which translates into an average $4/kilo increase on the retail side.