Wallenford eyeing bigger Chinese market for Blue Mountain coffee
Published:Monday | August 20, 2018 | 12:00 AM
Sister companies Wallenford Coffee and Mavis Bank Coffee Factory are looking to develop a market for coffee in China to rebalance and eventually equalise with Japan - a big undertaking, given that Japan buys around 80-90 per cent of all Jamaica Blue Mountain coffee, JBM.
The coffee combine, for which Wallenford Coffee Company CEO Mark McIntosh is vice-chairman, would also have to overcome cultural practices in China, he concedes.
With a 5,000-acre collection of properties, including half of the local lands used to grow Blue Mountain coffee, is the largest processor of green beans for high mountain coffee.
Wallenford and Mavis Bank themselves currently sell 70 per cent of their output to Japan, but want to manage that concentration risk by reducing their exposure to that sole market and consequently, the influence it has over setting the price of the coffee from Jamaican producers.
The Chinese are largely tea drinkers, but McIntosh says he hopes to build a market for high-priced brew as replacement of the counterfeit products that are sold as Jamaican coffee. JBM coffee is a luxury product that fetches some of the highest prices in the world.
Since the financial crisis of a decade ago, when Japan retreated from the market - hurting the bottom lines of Jamaican coffee businesses in the process - there were efforts at the time to seek out new markets in the United States and China, with limited success.
Lower coffee prices
But with the past two years characterised by a lowering of coffee prices, Wallenford/Mavis Bank is ready to try for market diversification again, but with little illusion that it will be easy.
Japan became the main consumer of JBM as a result of 30 years of legislative change and cultural support, and a similar achievement in China would be challenging, McIntosh acknowledged.
The price of Jamaican coffee remains stuck at around US$27 per kilogramme in Japan for green beans, while break-even for his operation is closer to U$33 per kilogramme, according to McIntosh. Consequently, coffee growers are being offered less for cherry at the farm gate.
"Three years ago, we paid farmers more, then went to the customers and charged them more. The problem is, where there is a shortage the customers reluctantly accept this. But as the quantity increases, they say no," said the Wallenford CEO.
"The price has come down. We are not able to pay the farmer any more," he said.
Wallenford is facing a revolt from farmers over the price paid for harvested beans, which is down to about half of what they were earning two years ago. The farmers believe they are being exploited and some have raised the prospect of seeking out their own foreign markets.
Basil Williams, 60, who owns one of the larger operations delivering JBM cherry coffee to buyers locally, Clifton Mount Farms, says he has plans to go into direct export himself. Speaking earlier this year with the Financial Gleaner, he argued for a price of at least $8,000 per box, based at the time on the US$25 traders were earning on the world market.
"My long-term plan is to do some exporting of finished product - roasted beans. I would be 10 times better off," said Williams, adding that Clifton Valley Farms was already a known brand.
But declaring himself "tired of the misinformation," McIntosh is holding fast to the company's new payment policy, saying it was underpinned by market conditions.
"Right now, we are paying $3,000 per box in full - no second payment," said McIntosh. "Before that, customers were paying more for the coffee, so we were paying more to the farmers. But as the supply increased, the customers responded by saying the price is too high. The payment to farmers is directly related to what we get. The average price is about US$27 per kilogramme for export-grade coffee."
As he explains it, a box of coffee generally yields three kilogrammes of export-grade coffee. Depending on the time of year and the price, the company's purchases of cherry coffee usually account for 40 to 60 per cent of its costs, with transportation, processing, packaging, and fees and taxes paid to the Coffee Board as additional expenses.
"Break-even is US$33 per kilogramme," said McIntosh. Based on the price paid by Japan, that creates an adverse gap of US$6 per kilogramme. However, the actual size of the loss "is reduced by what we do with the other grades of coffee," he said.
The dilemma for the industry, he added, is that if farmers are incentivised to produce more, the market will eventually punish them with even lower prices, based on the laws of supply and demand.
The $3,000 paid to farmers and the US$27 being earned by Wallenford is based on supplies of 230,000 boxes of coffee. When farmers were earning $6,000 per box, that farm gate price was calculated around supplies of 160,000 boxes, McIntosh noted.
Jamaica itself is not seen as a viable replacement market for JBM supplies, because locals tend to prefer instant coffee, not brewed coffee, while the other big buyers - the hotels - "don't want to buy 100 per cent Jamaican coffee because it is too expensive," said McIntosh.
By itself, high mountain coffee would be supplied at around US$8 per pound (US$3.63/kg), which the local market is unwilling to pay. Jamaican coffee is therefore blended with cheaper imported beans to bring the product to a price point that hotels and instant coffee processors are comfortable with.
McIntosh also noted that while the new coffee cess imposed by commodities regulator JACRA has increased coffee import prices to around US$3 per pound (US$1.36/kg), the beans were still cheap enough to deliver a blend at competitive prices.
Earnings from local sales, he added, is helping Wallenford/ Mavis Bank overcome losses on the export side.
Correction: This article has been updated to correct some of the the unit prices of coffee from pound to kilogramme.