Jan 2015 - Our picks of the new arrivals and

Date Posted:1 January 2015 

 

Happy New Year to all our wonderful customers.

 

Update on coffee prices

Earlier in 2014, we outlined what was happening to the price of raw coffee.

A drought in Brazil (the largest producer), another season of the terrible Coffee Leaf Rust (Roya) epidemic in Central and Southern America decimating 30+% of crops and the lower yields from Sumatra and Ethiopia all combined to create too much "really bad news" by adding to the supply deficit against expected demand.

We all know commodities are priced using supply versus demand. 

This bad news created a "perfect storm" for commodity traders by aggressively attacking arabica futures contracts - buying up to 4 times physical crop and artificially (or speculatively) driving up demand. 

Commodity traders love volatile markets - they seem to make money on a rising or falling market if they have their positions set appropriately. 

Alas, coffee roasters just lose as we are forced to pay the ransoms.
 

So what happened in 2014 ?

Forecasts of Brazil's harvest being lower allowed traders start panic buying future contracts. 

This creates price spikes and we witnessed up to 64% in rises during the first quarter of calendar 2014. 

It's important to point out here that the farmers are not getting that much more for their crops, it's just the trading benchmark reference (C-index) shifts considerably, so "parties in the middle" end up profiting whilst coffee roasters pay the ransom - roasters need coffee so we pay whatever it takes.

Throughout 2014, the price of raw coffee continued to rise. The C-Index played it's normal volatile game of rise & fall, but the overall average meant coffee roasters were paying around $2.80 per kilo extra for quality raw arabica coffees.
For some origins, e.g. Sumatra, it was much higher. 

The process of roasting coffee resulting in a loss (moisture) of around 18%, therefore the effective price impact was around $3.45+ per kilo.

Fast forward to January 2015 and the raw coffee brokers are now playing a new game - currency devaluation. As coffee is typically a bi-annual crop, the last set of main harvest contracts in the September - October 2014 period were written when the Aussie Dollar (AUD) was trading around US $0.95 cents.

All raw coffees are traded in US dollars. 

Farmers are not going to drop the price of their crop so with the $AUD falling to US $0.78 cents, we are now faced with a 15% increase in the cost of raw coffees for shipments landing into Australia in 2015.
 

So, what does this mean for the retail price of roasted coffee ?

Good question. It's sure as heck keeping me awake every night at the moment.

Our mycuppa business is run on razor thin margins. 

It makes us far more sensitive to movements in the price of raw coffees compared to the fat margins operating with many of our competitors selling equivalent or lower grades for around $40+ per kilo.

In a rising market, like what we have been dealing with for almost 10 months now, our business gets really squeezed.

There are price adjustments underway at the moment. 

These are in direct response to higher input costs and whilst not proportionate (technically, we should be trading around $6 per kilo higher across the board) they are of a magnitude that the whole industry cannot ignore, nor can the industry engineer a solution that mitigates higher prices - in a highly competitive market, quality is what sets you apart in the Australian coffee market and dropping standards (cost) is a risky and foolish) strategy.

Rest assured, we know how to play this game having been through this roller-coaster a few times - we continue to seek the best qualities as this is what builds an enduring business.

Picks for Jan 2015

2014 had not been so kind to Brazil. 

We selected the best lots on offer and now the forward story is much better.

Colombia, Guatemala and Ethiopia keep on kicking big goals and we have gone long on specialty Guatemala - it's just superb.

In mid-Feb 2015, a truly spectacular Colombian will be landing into our warehouse - it's a winner.

New season Rwanda Inzovu arrived into our warehouse mid Jan 2015 and it's a cracker (86 points) - soft lime and mild floral note in aroma, nice citric acidity, great balance, dark fruits, intense honey-like sweetness, full body, cocoa and chocolate finish (superb).

We have also taken 4 tons of India Tiger Mountain. 

Those of you that have not tried an Indian coffee - they really are the best kept secret in the coffee world. 

Indian coffees have a wonderfully rich classic coffee flavor (strong) with spice, nippy acidity and the best chocolate finish in milk-based espresso.

Update regarding freight performance

Unfortunately, the news is not good I'm afraid - but there is some light at the end of the tunnel and conditions are improving.

In our November 2014 newsletter we reported some serious issues regarding parcel freight services across Australia.

Since that time, we have not seen any reasonable levels of improvement despite vigorous (and formal) complaints to Australia Post management.

The problems are caused by Australia Post implementing automatic dimension weighing systems in their major state hubs for VIC and NSW. 

This change continues to result in congestion within each state hub as parcels are not being processed efficiently through the new x-ray systems. 

We are seeing delays of up to 3 days being imposed on transit timeframes.

We also noted the periodic failures by Australia Post in sending our customers the important tracking notification emails. 

Again, this is causing added levels of anxiety amongst our customers as it would appear that we have not sent the parcels, which in fact is not the case.

It is important to understand that parcel freight within Australia will never return to the previous performance levels we have experienced before August 2014 - at least not in the short term.

Congestion that previously only occurred around the holiday periods is now the norm.

As AusPost have the entire market monopoly on consumer parcel freight, they have zero incentive to improve performance metrics or customer support levels.

Our advice remains the same - expectations you have held for freight performance in the past are no longer valid and you need to factor that situation into your ordering time-frames. 

Express post is not an issue - it is literally 400% more expensive and 300% more likely to result in a damaged consignment.

Again, we stress this is not an isolated mycuppa issue - it's endemic across the entire online segment and no merchants are immune.

2015 = bigger and better

In early Jan 2015, we were very relieved to sign the contract for purchase of a new factory in Croydon South, VIC.

This has been a huge exercise over the last 18 months to find a suitable premises (I had given up many times with the lack of available gas capacity in the majority of commercial properties).

During the search, we also evaluated many new roasting plants and selected an innovative platform that will be installed in a state-of-the-art facility - further improving our position in the market as a quality provider.

It's a large project that will take at least 6 months - mycuppa runs 7 days a week and we cannot afford even a single day of downtime. It is also a large multimillion dollar investment for us.

One of the design intents for the new premises may include a modest customer collection facility. 

We have, for a long time. acknowledged this is a key customer requirement for those that may wish to pick up orders.

Further information will be provided over the coming months as we work through the details involved with the build and commissioning of the new facility.