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Coffee groups paying rich premium to sidestep market volatility

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Major coffee groups are paying some 30% more for their coffee than the futures price, in an effort to protect farmers from market movements blamed on speculators, and underpin the security of high quality supplies.

Jean-Marc Duvoisin, chief executive of Nestle's Nespresso arm, said that the business bought its coffee at values "30-40% higher than the market price", as set by New York arabica bean futures.

The premium reflected in part the high quality of the beans that Nespresso buys, Mr Duvoisin told Agrimoney.com.

However, the business is also paying up in an effort to shield smallholder growers, which it relies on for supplies, but who have found the volatility of futures prices increasingly difficult to deal with.

'Volatility getting stronger'

"These up and downs [in futures price movements] are getting stronger every year," Mr Duvoisin told the International Coffee Forum in Milan, citing fund trades as exacerbating price movements.

He estimated that "60-70%" of this price instability was caused "by speculative activity, not actually as a result of buying and selling physical coffee".

Prices that Nespresso paid were "not linked to market price", and had "smoothed down" the fall in values received by the business's growers during the market decline this year.

Separately, Andrea Illy, chairman and chief executive of Illycafe, said that the Italian coffee group had pioneered this kind of strategy more than 20 years ago, after the collapse of world price controls, with the move having been recognised in ethical awards.

Coffee origins

Mr Duvoisin said that Nespresso's strategy meant the business was not "actively" buying coffee from the international market, with more than 80% of supplies secured by its farmer support programme.

For smallholder growers, meanwhile, it provided "social and economic" benefits, at a time when the difficulty of earnings a living from coffee is being seen in farmer poverty, and a preference by farmers' children to turn to other sectors for employment.

Such support was "essential if farmers are to have a sustainable livelihood", he said.

"This is what [the industry] should be working on, creating active relationships with farmers."

By Mike Verdin, in Milan

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