mycuppa August 2015 Newsletter
Micro Lots - just another fad cooked up by the coffee industry?
It was not 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 spectacular.
In most cases, lower grades were reserved for local consumption, while better rates were intended for export.
With most coffee origins, this practice continues today except, say, Ethiopia, whereby around half of the crop is consumed locally (a constant issue we face even today in getting our hands on reliable supply !).
The problem was, though, that back 5, 10 and 20 years ago, farmers could only contemplate receiving a little 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-op, or buyers, would then take the good stuff and blend it with the average or poor quality lots to raise the overall quality that met a desired minimum standard that overseas Roasters were demanding.
The great coffees were getting lost in the vast holdings.
When we purchased our raw coffee, we needed a real indicator or guideline to navigate the bulk shipments.
Instead, we relied upon our Australian brokers to give away the rare little cryptic signal when they thought something 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.
Roasters purchase the beans and end up in the grinder hoppers at cafes and homes around Australia.
The coffee market has multiple intermediate supply/demand dynamics at play.
It's not those ordering their morning takeaway coffee that influence the coffee industry.
It's also not the popular hipster coffee companies that get plastered across social media pages or may regularly 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 to whittle down the 850 possibilities to a more manageable list of 250+ coffees.
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 right, they are left with warehouses full of raw coffee that won't sell - it's too expensive, or it needs to be the right cup profile.
Unfortunately, the Direct Trade initiative, whilst noble in its 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 can't blame them for trying.
The volume of 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 handfuls, 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.
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 other origins follow.
These days, we are fortunate to source micro-lots from just about any origin - although you sometimes wonder if 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, processed with more monitoring and testing, packaged with distinctive markings and, in some cases, liners and, of course, the longer-term storage.
It's done this way to preserve integrity (quality), ensure value for money and improve reputation.
This forms a positive confidence loop that, over time, ensures higher prices are paid to the farmer as the incentive increases for every quality improvement.
A micro lot may allow a farmer to experiment with alternative processing methods.
For 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 be a fad?
No.
We think the concept is robust, and the market can't get enough of it.
Every single coffee company wants improvement in its 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 coffee over the last seven 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 long-term.
Coffee companies have been borrowing the term "seasonality" from the wine industry in describing their micro lot offerings, and "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 eight years ago - well before the concept became a popular trend.
As we happily exist on the relative fringe of mainstream coffee, we can explore new, innovative, interesting and exciting coffees that regularly arrive in Australia.
For almost five years now, we have been offering numerous micro-lot coffees - although this has been a relatively low-profile stance regarding 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 about 50% in 2016 - subject to the performance of the Aussie Dollar against the Greenback.
Some exceptional examples of micro lots include the following:-
All of our Ethiopia Grade 1 coffee - Yirgacheffe and Sidamo are micro lots
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 "placing" because it's not a negotiation by any stretch of the imagination.
As a buyer of raw coffee, I enjoy the unique privilege of having zero bargaining power.
We 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 favours - just a straight price to lock in now.
With just two key brokers in Australia servicing up to 900 brands on the retail side, each broker has a range that is ironically not held by the other broker.
It means you have 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 Ethiopian coffees that had risen more than 20% since November 2014.
All coffee is traded in US Dollars.
Farmers want their respective dues, so when the Aussie drops, the price of coffee rises somewhat proportionally - well, that's what you would expect should happen.
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.
Ten 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 coffee.
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 globally.
This statement emphasizes the importance of using high-quality raw coffee beans, as roasting techniques cannot compensate for it.
Whenever I contact the coffee brokers, the price is different - today, tomorrow, or next week.
The price is a function of the global C-Index and the currency.
Some origins, such as Ethiopia, Sumatra, and Kenya, trade at higher differentials due to crop shortages and international demand.
At mycuppa, we have been through a rising market several times.
These cycles tend to be in 3 - 5-year periods.
In this current rising market cycle, it has proven more difficult than in previous cycles.
This is due to sharp rises in the other non-raw coffee costs associated with our manufacturing, e.g. packaging, energy, labour, rent, marketing, insurance, logistics, overheads, compliance, etc.
An interesting example is our energy costs since the last rising market has 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 rise since the drought in Brazil in January 2014.
The local retail price of coffee increased by an average of $2.75 per kilo in 2015.
As for the timing and the amount each company chooses to increase, that is indeed 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 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 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 effect it has on their business.
We will lift prices on some items.
However, we will not raise prices at the same rate that our costs increase - our costs have increased 22% since November 2014, translating into an average $4/kilo increase on the retail side.