A confluence of factors is increasing the cost of beans for farmers. This could lead to coffee prices dropping to your local cafe by the end of the year.
Coffee futures, the price large-volume buyers agree upon for coffee delivery, doubled in July after hovering around $1 per pound for many years. This is a new record high not seen since 2014. Although prices have slowed a little, they are still high at $1.90 per pound.
Coffee drinkers who are already paying $8 for a bag of coffee in the supermarket, or $5 for a cup, may be worried about higher prices. However, a rise in coffee prices on international futures markets doesn’t always translate into lower prices for the consumer.
Here are some factors that could influence whether Americans will pay more for their morning jolts in the near future.
WHAT HAPPENED?
Brazil’s coffee production was hit hard by a prolonged drought and two July frosts. Wholesale prices rose to $2 per pound immediately. Carlos Mera, who analyses the coffee markets at Rabobank, stated that the frost will have a significant impact on the 2022-23 harvest.
Brazil’s frosts were caused by COVID-related supply chain disruptions, dearth of shipping containers and labor shortages. Coffee drinkers will be disappointed if rising costs are added to their coffee.
Alexis Rubinstein is the managing editor for Coffee & Cocoa, a commodities brokerage StoneX Group. It’s never been such a perfect storm before. It has usually been a supply-and demand scenario.
“We have never had to deal with a supply-demand issue on top a logistic issue, on top a labor issue, or on top a global pandemic.”
WHY CAN RETAIL PRICES GO UP?
Although it is difficult to estimate the extent of Brazil’s crop loss, Mera stated that estimates range between 2 million and 6 millions bags of coffee. This is about 12% of the production from the largest producer of Arabica beans, which is used in most coffees sold worldwide. Higher prices almost always correspond to lower supplies.
Grace Wood, an industry analyst at market research firm IBISWorld said that even if coffee prices don’t rise by the end this year, they will most likely in 2022 as per capita demand increases.
Wood stated that this would only lead to increased demand, which will further disrupt operations and make it harder for operators already facing supply problems.
Mera stated that coffee bean buyers who purchase them in the grocery shop will probably see a greater increase in their prices, as about half of the price is due to the beans themselves. He said that the cost of the bean is only about 5% of your cup, so coffee roasters may not have to carry the price increases over immediately.
Is it a certainty that retail prices will rise?
Although it seems probable, higher coffee prices on international future markets are not a guarantee that your favorite roaster’s prices will rise. Brazil’s damaged crop is still over a year away from harvest. This gives plenty of time for many factors and to reverse the course of events.
Rubinstein stated that higher international prices can stimulate production. Farmers will have more money available to invest in their crops, and prices will fall if there is more coffee on sale. However, this will depend on how many beans the big roasters have stored to make it through whatever price rises.
Starbucks, the largest coffee retailer in the world, said it wouldn’t have to increase its prices due to Brazil’s lower production. The CEO of Starbucks, a Seattle-based coffee chain, Kevin Johnson, stated that his company has 14 months supply. This will allow it to make it through fiscal 2021 and most likely 2022.
WHAT DO YOU THINK ABOUT MY LOCAL ROASTER?
Independent specialty roasters, even smaller ones, sign contracts to purchase their beans in advance. This allows them to be prepared for any shortages, such as the one in Brazil. They source beans from all over the globe, so any gaps can be filled by others.
Chris Vigilante, coowner of Vigilante Coffee, has stores in Maryland suburbs. Vigilante said that specialty roasters do not buy beans from the same international commodity market as big players like Nestle or Keurig Dr. Pepper. Vigilante stated that although we are not as affected by Brazil, we will feel the impact of it.
Vigilante stated that he pays $3.50 to $5.50 per pound for most beans. These beans are of higher quality and come from smaller farms. Although he has no plans for raising prices, Vigilante said that other small shops may raise theirs because other essentials are more expensive.
Vigilante stated that he has seen specialty coffee roasters talk about raising prices. However, he believes it is more because of the price of coffee than the cost of other supplies like cups and equipment.
