fbpx

Editor’s Note: This article is part of a series originally published in Tea & Coffee Trade Journal. It is reprinted here with permission. You can download the original pdf of the article here or visit the feature on their website, courtesy T&CTJ.

How Coffee Auctions Evolved into the Modern Era

This month, T&CTJ is launching a three-part series on coffee auctions. The series will evaluate the history of coffee auctions and their modern influence in specialty coffee. Part one focuses on the history and evolution of the coffee auction.

By Chris Kornman

 

 

Auctioning is perhaps one of the most convoluted and least efficient ways to complete a coffee transaction. It also happens to be one of the very first means used for trading green coffee. It persists today as the primary method for purchasing coffees from nations such as Kenya and Tanzania, and it maintains an important role in the promotion of high quality microlots. It can also, in best case scenarios, function as a method of discovery for roasters and producers, a means toward closer relationships through the supply chain.

Before taking a stab at evaluating the successes and failures of current systems, I think some context is in order. By examining in detail, the origins of our modern auctions, we can have a better understanding of the best direction to take for the future. With that in mind, I’d like to take a magnifying glass to a few pivotal moments in history.

Colonial Origins

Once coffee was wrested from Yemeni commercial monopoly in the twilight of the 17th century, it quickly began sprouting up across the globe. The Dutch, who’d managed to smuggle the tree from Mokka to Malabar to Jakarta (then called Batavia) were already Europe’s leading drinkers of Yemeni and Indian grown coffee. However, it was their colonial holdings on Java that produced green coffee that first went to public auction. The year was 1711, the harvest was 894 pounds, and the winning bid was 23 ⅔ stuivers, “about [USD] forty-seven cents,” per pound according to William H Ukers in his coffee encyclopedia, All About Coffee (first published in 1922). The amount could be said to be worth around USD $20 dollars per pound of coffee if compared to today’s consumer goods or gold value. It was roughly the same as the average daily salary for a common labourer in Western Europe at the time.

Amsterdam, joined shortly thereafter by Rotterdam, was engaged in regular auctions of Dutch coffee from Java; by 1864 the auction was held once per month in each location. Similar commodity auctions, depending on the European country in which they were held, were a common and profitable scheme. Most coffee-producing colonies employed slave labour on smallholder plots and private and government-owned plantations alike. Auctions were also the norm for purchasing coffee on site in colonial Java per Coffee: From Plantation to Cup 5th Edition, by Francis Beatty Thurber. but with only one bidder – the Dutch East India Company (in Dutch, Vereenigde Oost-Indische Compagnie, or VOC) – you can surmise the effect on prices. The result was a commodity somewhat short in supply, in high demand, with hardly any cost on the front end of the supply chain.

It bears mentioning that despite the tone-deaf cultural oppression of the VOC and thereafter the Dutch government in Indonesia, an important anti-colonial novel emerged penned by Eduard Douwes Dekker under the pseudonym Multatuli. Called Max Havelaar: Or the Coffee Auctions of the Dutch Trading Company, the work served as a thinly veiled critical exposé of the widespread abuse of power in the Dutch East Indies and a call to action for the European nation. In the 20th century, the Max Havelaar label was the first name given a Fair Trade certification, and the Max Havelaar Foundation remains in Netherlands as the local Fair Trade member organization.

Back in Europe and in the United States as well, Jonathan Bayer, in his piece “Society at Auction: Coffee-house Culture in Occupied New York” (published in the Journal of American Revolution in 2016), noted that many early coffeehouses were frequently used as auction rooms. These auctions would often be conducted “by the candle,” meaning a candle of a predetermined length would be lit, and the auctioned item would be sold to the highest bidder once the candle had burned out.

The auctions, in addition to high tariffs and taxes, maintained an established elitism in consuming countries. If a pound of green coffee was selling at the Amsterdam exchange for roughly the day wage of a common labourer at the time, it stands to reason that that few of the common people would drink the beverage. However, as the 19th century neared its end, a number of conditions began to democratize coffee consumption, thereby making coffee more financially accessible, more readily available, and less reliant on auctions for transaction.

Democratization, Globalization

The disestablishment of auctioning coffee cannot be pinned to any single factor. The world at large, and the coffee world in particular, changed with unmatched rapidity in the late 19th and early 20th century in a multitude of ways. Coffee leaf rust obliterated production in Dutch colonial Java, as well as across much of south Asia and the Pacific. Elsewhere global demand exploded in synchronicity with many producing countries in the Americas gaining their independence from colonists, effectively eliminating pre-existing European monopolies. As labour cost gradually increased, the local auctions no longer benefited the likes of the Dutch East Indies Trading Company; Java held its final government auction in June of 1905.

Better shipping reliability, improved warehousing, higher volumes and more consistent supply globally, the regulation and standardization of the import/export trade, and the establishment of foreign trading firms on site for procurement in producing countries all led to heavier reliance on business to business bids and trades rather than large open outcry auctions. An underwater telegraph wire from Brazil to Madeira connected the world’s leading coffee producer to Europe (Bill Glover, “The Evolution of Cable & Wireless, Part 3, published in History of the Atlantic Cable & Undersea Communications), opening the information highway in 1873-4, and in 1882 the New York Coffee Exchange became a loudspeaker for stabilized coffee pricing that the entire world could hear. The age of the isolated export auction was in its twilight by the time William H Ukers completed his seminal encyclopedia on coffee in 1922.

Import auction houses remained the norm into the modern age, however, and open outcry was the method for price discovery on the Coffee “C” Futures contract market all the way until 2008. This soft commodities trading floor functions now as a market for “paper” coffee, setting global pricing benchmarks but trading relatively little physical coffee. Since October of 2012, the Intercontinental Exchange (ICE) has been converted to a 100 percent electronic platform. The value of the “C” market is in futures trades, a forum where money can be made (or lost) by speculating on market changes, and assets can be protected against fluctuations by hedging. Thus, while still a coffee auction in some regards, for most practical purposes, buying and selling real coffee is not the “C” Market’s primary function.

The allure and thrill of gathering publicly and bidding to win on a rare coffee has never completely been lost, however. Weekly auctions still take place during and after harvest in Kenya and Tanzania, and Ethiopia’s ECX still uses a hybrid of open outcry trading floor and electronic trade. I’ve written at length about these systematic auctions and their fallout elsewhere. Suffice it to say that in each of these three countries the vast majority – and nearly all smallholder-produced coffee – is channeled through a government-run auction. For better or for worse, each of these countries use the auction as a means for earning the government additional money from their sale and have restricted to varying degrees the ability of producers to access a direct-to-exporter market.

Part two of the series will address modern iterations of coffee auctions.