'The industry's at risk': the high price of cheap coffees

It's a gleaming autumn morning in Melbourne and the under-caffeinated pour into Carlton's Seven Seeds cafe. Suits slug espressos, elbow-patched academics nurse flat whites and students exit with KeepCups on their way to the nearby University of Melbourne. Seven Seeds is also a coffee importer, roaster and wholesaler, and coffee geeks cluster here, too. "How about the cherry and muscatel notes in the Burundi batch brew!" exclaims a bearded barista wannabe. The bustle and energy feels very Melbourne: it's a vibrant scene that the city counts as its own. It certainly doesn't feel like coffee is in crisis.

Fourteen thousand kilometres away on their high-altitude coffee farm in Honduras, the Mierisch family should be pruning trees and clearing undergrowth, ready for the next growing season. But they're not. "We don't have the money to work our farm," says fourth-generation coffee farmer Erwin Mierisch. His family has been hit on all fronts: the rains are coming at the wrong time, the price for coffee has tanked and the banks won't lend against the likelihood of lower returns.

"When it rains, it pours," he says. "Right now, it's literally pouring down all the things that can go wrong." Many of Mierisch's neighbours have abandoned their farms, some heading to urban areas to scrape around for work, others joining migrant caravans hoping to enter the United States. Mierisch himself is in New York, working at a coffee roaster and sending money home.

"It's desperate and sad," he says. "The farms overgrow, the trees wither away but when your family is starving, you will do anything."

The disconnect between Australia's caffeinated buzz and the severe doldrums of producers in "Coffee Belt" countries 25 to 30 degrees either side of the equator is something that Seven Seeds co-owner Mark Dundon is trying to negotiate.

Dundon, 57, has been at the forefront of Melbourne's cafe scene for 18 years. His first cafe, Ray in Brunswick, pioneered a type of lo-fi suburban hangout, all milk crates, toasted pide and basturma (spicy cured beef) from the Arabic butcher down the road. When he opened in 2001, coffee was important but undifferentiated. "You'd get a silver bag of beans delivered and that was it: 'Trust us, use it.' I needed to know more." He went to the US and stumbled into what's known as coffee's third wave. (The first wave was the 19th-century proliferation of ground-coffee sales in the US; the second was espresso, Starbucks and its ilk.) Third-wavers appreciate coffee for its flavour and origin stories, they love alternative brewing methods and - yes - the men may have beards.

Dundon brought what he learnt back to Melbourne, kick-starting a new expression of Australian cafe culture which crept its way north, south and west through the 2000s. The fact that cafes bang on about the notes of orange blossom in the Colombian pour-over is in large part thanks to him. Today, Dundon's four Melbourne cafes employ 60 people and serve around 2000 cups of coffee a day. He's in this business deep. He also believes it's imperilled.

"Coffee has never been cheaper and there's no way to do good coffee cheaply," he says. "The price is the lowest it's ever been, adjusted for inflation. Farmers don't see a future in coffee: climate change is making it harder to grow and the price most farmers receive is below the cost of production. They will look at avocados, bananas, coca, depending on where they are, or they'll just walk off the farm and sell cigarette lighters in Bogot. If farmers don't get more for their efforts, the industry is at risk."

Dundon predicts big changes ahead. "Coffee is going to become really expensive - maybe $7 a cup," he says. "There'll be a shortfall, prices will spike and cafes will go out of business." The shakedown he foresees will change the industry. "A $7 coffee will have to be sensational," he says. "People will have two a week, not two or three a day. There'll be more coffee made at home. People will still go to cafes for socialising and a break, but you might see a machine making the coffee instead of three or four baristas."

There's an inequity at the heart of the coffee industry: it's grown in poor countries and consumed in rich ones. The biggest producers are Brazil, Vietnam, Colombia and Indonesia, while the biggest importers are the US, Germany, France and Italy, in an industry that moves about 10 billion kilograms of coffee per year. (Australia is a minnow at number 15, taking 1.7 per cent of annual global shipments.) The four key multinational buyers are Nestlé, Kraft Heinz, The J.M. Smucker Company and Starbucks Corporation.

At the mercy of this corporate might are the world's coffee farmers, about 25 million of them, mostly small - holders with a hectare or two of trees.

The majority - whether they're an Ethiopian auntie with two bushes in the yard, a Nicaraguan tenant farmer with a 12-kilogram basket strapped to his waist, or a Vietnamese villager winnowing beans by hand - are beholden to a coffee price determined on international commodity markets and mostly traded in futures contracts.

For prized Arabica coffee (as opposed to lesser loved Robusta beans), the commodity price is known as the "C price". It's based on supply, demand and speculation. Beyond a base level of adequacy - the coffee must not be mouldy, for example - it is unrelated to the quality of the coffee traded. It also has nothing to do with the economic viability of the people actually growing the stuff. Producers have been beholden to the free market since 1989, following the breakdown of export quotas that kept prices relatively stable.

Now, futures traders often lock in low prices for coffee that hasn't yet been grown, meaning that farmers are behind before they've started. The system works to maintain supply of cheap, mass-market coffee, not quality coffee or viable farms. Small traders, for the most part, don't have the market clout to set their own prices, or access to roasters who will pay a premium for higher-grade coffee.

This year the C price has sunk to about $US0.90 per pound, a 12-year low and about 25 per cent lower than last year, while the cost of production hovers around $US1.40 per pound. A global glut caused by a bumper year in Brazil, the world's biggest producer, is the immediate cause.

Brazilian farms tend to be larger and flatter, meaning that it's easier to machine-pick coffee cherries. Bigger farms and increased mechanisation have reduced production costs and increased yield, efficiencies which push prices down even for higher grades.

Even when supply steadies next year, market analysts expect the C price to rise only as far as $US1.25 or so. It's patently unsustainable. Erwin Mierisch uses a personal index to illustrate the way the market has shifted. "In 1977, it took seven bags of coffee [a bag is 60 kilograms] to buy a pick-up truck," he says. "Now, you need 2000 bags."

The day after I speak to Mierisch, I see a video on Instagram of a Brazilian coffee farmer. He is hacking down his coffee plants with a machete, angry and upset. "It's a shame that the NY mafia [Wall Street] is killing the dreams of many coffee growers in the world," reads the caption. The plants are healthy, planted in neat rows on a well-tended hillside. It's gutting to see them destroyed. The day I view the clip, the C price drops to $US0.87.

I also speak to Angele Ciza in east central Africa's Burundi. She owns seven coffee washing stations in the north and east of her country. Smallholders bring their coffee cherries to her Kaliko depots to sell, then Ciza's team undertakes the careful process of washing, fermenting, pulping and drying them to produce the green beans that are sold and exported. They ship about 10,000 bags a year. "We suffer from the New York market," she says, referring to the C price. "We have the same cost here to produce coffee and if the market is low, we lose money." Selling better coffee at higher prices to specialty roasters is one way to bypass the C price, but it's not easy to make those connections from Burundi, and it costs more to produce better coffee. "It takes more time, it takes more care," she says. "We use many people and they hand-select at each step: when the farmers come, after washing, after fermenting, and then drying."

Ciza, 55, has multiple challenges as a female entrepreneur in Burundi, one being that her husband has to guarantee any financing she takes on. Nevertheless, she is fiercely committed to the welfare of Burundi's coffee community, and particularly its women. "Coffee is my passion and coffee is family," she says. When her business does well, she helps growers with health care. "We have a big problem with malaria here," she says. "It affects farmers I buy from and people that work for me. It is the first sickness to kill the children. If I can find a good market for my coffee, my objective is to help my home population, to fund medical treatment and insurance. In this season, many children have malaria. It touches me."

Melbourne's Mark Dundon believes brokers, local roasters, cafe owners and, in the end, consumers who want good coffee should pay more for it and - in fact - will have to. "The C market is about cash, investment and returns, not what the goods are worth," he says. "The farmers are feeling so low at the moment. They are not being rewarded. They feel like they don't have any input into the value of their coffee."

Andrew Mackay has worked in coffee for 45 years. He's chairman of the Australia Coffee Traders Association and a director of Sydney-based Cofi-Com, one of Australia's biggest importers. He admits that the market system has its frustrations. "People don't have to be in coffee to buy coffee futures," he says.

"They are paper traders, just interested in the return, but they can have a bearing on physical coffee prices without being involved in the supply or end use of coffee. It makes life difficult. The fundamentals of coffee aren't reflected. It's very tricky."

Seven Seeds trades outside the C market system, as do an increasing number of other players small and large. Nespresso tops up the C price by 30 to 40 per cent for 100,000 farmers who supply them in 13 countries. Starbucks owns a coffee farm in Costa Rica that supplies a small proportion of its coffee directly. FairTrade is perhaps the best known advocate for better prices and conditions for coffee farmers, working on behalf of 810,000 farmers in 30 countries to increase farm-gate prices. It's a complicated scenario: even if buyers purchase above the market price, it's usually with reference to it, and most farmers live hand-to-mouth. Unless help comes to them or they can access specialty buyers, they're at the mercy of middlemen (often known as "coffee coyotes") and the C price.

A caffe latte is $4.50 at Seven Seeds. Raising it to $5 - a reasonable bump to account for the higher, fairer purchase price, according to Dundon - would cause an uproar. "People think a $4 latte is a god-given right but that's not the true cost of coffee," he says. He contrasts it with craft beer. "A specialty beer - made from water, brewed down the road - is $12. I'm not knocking the beer. I think they've represented their product really well. We haven't represented coffee and told the story of how hard it is to make a great cup." He also owns two cafes in Los Angeles. "I charge $US5 [$8] there for a cup of coffee and no one bats an eyelid. That price is expected."

To smooth a path to the higher prices that will support quality coffee production, Seven Seeds is focusing on transparency: Dundon tells me that his company (co-owned with Bridget Amor) pays producers an average 3.56 times the C price. They also print information about specific coffees onto cards given out at the cafe. Those cherry-scented Burundi beans cost Seven Seeds $10.31 a kilogram. If sold on the commodity market, the same beans would have fetched $2.91. FairTrade would have wrangled $3.95. All those figures are on the card, aiming to connect Australian latte-sippers to Third-World farmers. It's no surprise that a small, independent buyer like Seven Seeds pays more than Nestlé, for example; the difference is that these particular Burundian smallholders are being given the financial incentive not only to stay on their farms, but also to put in the extra effort it takes to grow high-quality coffee.

"We don't want to bash people over the head," says Dundon. "If you want to come in and grab a coffee, that's fine, but we want to lead by example. Previously, you would have expected politicians to do this sort of stuff. Now I don't see hope in politics. We have to do it, we have to follow principles that we believe in."

The other big C is climate change. According to a prediction by global collective World Coffee Research, demand for coffee will double by 2050, pushed by Millennials in the US and soaring demand in China, where rapidly expanding local chain Luckin is facing off against Starbucks to convert one billion tea drinkers. In the same period, climate change means the amount of land suitable for production will halve. Coffee plants are extremely sensitive to climatic shifts and irregularities, requiring predictable patterns of rain and dry to set fruit and help it grow and mature. Rain at the wrong time, or unexpected heat, can create ideal conditions for pests like the dreaded leaf rust which can turn a plantation into a field of dead sticks. A leaf rust epidemic in Central America in 2012 caused 1.7 million people to lose their jobs, and devastating outbreaks persist.

As warmer temperatures creep up mountains, so do coffee farmers, chasing ideal weather at higher altitudes. But they can bump up against national parks and nature reserves. Some give up, others farm in forbidden areas, adding to environmental ravages.

Erwin Mierisch is in no doubt about climate impacts on his family's farms in Honduras and Nicaragua, covering about 720 hectares altogether, split over eight plantations. "It's increased our cost of production and decreased our yield," he says. "Ever since I can remember my grandpa would say, 'You're waiting for the first rains of May.' It's a saying; a sign of hope. Our coffee plants flowered in March and it always started raining in May like clockwork, and the coffee beans would develop. Now we're not getting rains until the third week of May, even mid-June, and they're not as consistent as they have been. Without rain, the beans fall off the trees." Later in the season, there's the opposite problem. "We might get too much rain in October and November: the cherries split and fungus goes into them. The amount of water we get in a year might be the same, but we're not getting it when we need it."

Coffee is particularly vulnerable to climate change because it's been the subject of very little research and development. Crops like corn, wheat and soy are grown in wealthy countries and have long histories of expensive R&D and innovation. Coffee, by contrast, is considered an "orphan" crop: going about its business in isolation, under-innovated and under-resourced. A World Coffee Research report from 2017 notes "there are 3600 varieties of watermelon [in an international registry of plants and] only 50 varieties of coffee - a stark indicator of how little coffee breeding has been done around the world ... The global investment in coffee agricultural R&D is precariously low."

Since launching in 2012, World Coffee Research has been funded by dozens of small and big players in coffee, Starbucks and Illy among them, to increase coffee biodiversity, develop more robust trees and communicate improved agricultural practices. Its research is bearing fruit, but plant breeding is slow work and the coffee industry is so diverse, decentralised and socio-economically precarious that major industry-wide shifts are nigh impossible.

Back in Melbourne, Mark Dundon is at the Seven Seeds factory, where they roast up to two tonnes of green beans a week. He's standing at the tasting table in a large, light laboratory, engaged in the esoteric activity of cupping coffee. Eleven different coffees are lined up for blind tasting. The selection includes each batch that's been roasted at Seven Seeds today, plus a few competitors. The coffee is ground, topped up with boiling water and allowed to steep for 15 minutes. Dundon dips a spoon in each cup, then slurps it with a thin, harsh whipping inhalation that sounds like the last of the bathwater being sucked violently down the plughole.

"This one has a little more body but is still quite transparent," he says about coffee number two, then moves to the third. "That one's delicious, it really has a nice sparkle to it." He's checking for flavour and consistency. "We roast every day, we taste every day," he says. "Last time they asked me at the gym how many coffees I'd had that day, I think I said 17. They freaked out."

The rigour applied at the tasting table is carried through to the cafes. If profitable, that helps with paying fair prices for coffee. But many Australian cafe operators have entered an increasingly competitive industry on a wing and a prayer. "There's not much of a margin in cafes; 4 per cent would be average," says Dundon. "A lot of cafe owners aren't monitoring their costs. The easiest thing to look at is the big weekly coffee bill - there'll always be someone telling you they can do it cheaper. Other things are harder to work on: is the barista wasting milk or doing double shots, what are the food costs, are bank fees biting?"

When cafe owners get squeezed, and buy cheaper coffee, that cosy specialty story they tell their customers may become a little far from the truth. "There's a lot of nonsense," Dundon says. "When Melbourne first started talking about a specialty coffee movement six or seven years ago, growers thought it was great. But now I have producers calling me up and saying, 'There's some Australian here trying to buy coffee for $1.50 a pound.' I feel bad. He's representing Melbourne as well."'

Brazilian coffee farmer Felipe Croce has been a keen watcher of the Australian landscape - his coffee is purchased by roasters in Melbourne and Sydney. "It's a fascinating scene," he says. "I don't think there's anywhere in the world quite like it." Croce visited Australia in 2012. "I arrived at Melbourne Airport and the customs officer asked me what I do. I told him I was a coffee farmer. He started talking about his favourite coffee shops, giving me advice on where to go for coffee. I was like, 'Where am I?' It's an amazing market - people love coffee, they really enjoy it and they have high expectations. I got perfect espresso and flat whites in a bar at night. I haven't seen that anywhere else in the world." But in recent years, he's noticed shifts in the way some Australian roasters are purchasing. "The scene has now got a bit saturated and there's a lot of competition," he says. "Not everyone is walking the walk in roasteries."

In some ways, Australia's rich coffee culture is also its problem. Coffee is so entrenched in daily routines that it sticks in the consumer craw to pay for it as though it's a luxury product. Similarly, the third-wave enthusiasm that spurred dozens of new roasters to set up shop has created competition that's put pressure on expensive ethics and made a mockery of the ill-defined and unregulated term "specialty coffee".

Sydney roaster Paul Geshos owns Mecca Espresso. "I definitely see a saturation in roasting and on the retail level and I don't know how sustainable it is," he says. "There's a bit of window-dressing: a roaster or cafe might showcase one really nice expensive coffee that creates a perception that everything produced by that brand is at a high level. But often the bulk of what's being roasted isn't matching that." Instead of cycles of downward price pressure, Geshos hopes consumers will slowly be trained to pay more as ethical producers communicate the story of great coffee. "Twenty years ago, coffee was probably $3 a cup. Why isn't it triple that now? Look at inflation, housing prices. Look at wine: people don't blink an eye at $20 for a nice glass. Spending $20 for an amazing cup of coffee shouldn't be unrealistic."

Brazil's Felipe Croce implores roasters and coffee drinkers to think differently about their favourite beverage - and, while they're at it - everything else. "It's wrong to drink cheap coffee, just like it's wrong to drink cheap milk and eat cheap beef," he says. "If we're trying to live in a world that's ethical and sustainable, if we're trying to be part of the solution, we need to understand that cheap coffee is one of the things threatening our global balance."

Croce has radically changed the way his fifth-generation family farm operates. He's attracted premium buyers by turning his farm organic and changing production methods to focus on quality as well as yield. Making better coffee is risky work in an uncertain climate: plants are generally prized for flavour or disease resistance, not both. The processing differs, too. "Commodity coffee is thrown into giant dryers and dried over 72 hours, whereas we ferment and dry our specialty coffee over 20 days." It costs Croce about $US3.20 a pound to produce his high-end coffee and he is able to sell it for $US6. "That works for me," he says. He can see a future. With invested buyers rewarding him for quality, he has incentive to reinvest in his farm and in quality coffee.

Paying more for a cup of coffee won't make farmers rich, but it will help them survive - maybe thrive - and if that means consumers need to change their habits, so be it, thinks Croce. "If you want great coffee in a great cafe, I'm sorry, but it is going to have to cost," he says. "I still don't think coffee will be too expensive when you compare it to other products though. Maybe you'll drink less coffee, or drink more of it at home. How much is a Coca-Cola? How much is a glass of wine? I don't think there are expensive products - there are just products you don't value. If you think it's too expensive, you don't need to buy it. No one needs to drink coffee."

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