YOUR FAVORITE HOT DRINK IS A HOT COMMODITY

ActivTrades

By Chris Illing

Because of problems in the supplier countries, coffee prices have been rising for more than a year. Those who enjoy hot beverages must be prepared for worse – coffee can get significantly more expensive.

Bad news for coffee drinkers: the prices of the caffeinated hot beverage have already risen sharply in recent months - and according to experts, it should continue to rise in the future. One reason for this is on the supply side: with climate change, there is an increasing threat of crop failures in many countries. Another reason is the increasing demand: coffee consumption is increasing worldwide, especially in emerging countries. The full effect won’t be realized until the harvest of the 2022 crop. And if you apply the law of the market, the price level in the coffee business is likely to continue to rise.

This trend began many months ago. Since its low point almost two years ago, the coffee market has been on an upward trend. According to the International Coffee Organization (ICO), prices have already risen by more than 50 percent in the current year alone. A pound of Arabica coffee is now being traded for more than $2 on the commodities exchange in New York. Two years ago the price was just over $1.20 per pound.

There are various reasons for the recent rise in coffee prices: in Brazil, by far the world’s largest producer and exporter of coffee, extreme weather fluctuations adversely affected crop yields. At first, the coffee farmers suffered from a period of drought, followed by unexpected frosts and snowfall. In Vietnam, which has established itself in second place in the global producer ranking in recent years, it is above all the corona crisis that disrupts the supply chain. The Delta variant of the virus is spreading rapidly in Southeast Asia: The port of Ho Chi Minh City, one of the most important hubs worldwide for coffee beans, is currently being significantly restricted in its operations due to lockdowns and a shortage of containers.

In Colombia, the third largest supplier of coffee on the world market, political unrest is disrupting the bean business. And as if that weren’t enough, global shipping and other parts of retail logistics have been in a capacity crisis for months, in which freight costs have skyrocketed – this increase is also driving coffee prices up.

These problems can also have an effect on the consumer. The German coffee giant Tchibo, market leader for the industry, raised its prices in the summer of 2021, a first in four years. Depending on the variety and country of origin, Tchibo raised its prices in June by 10-15 percent per pound.

Starbucks on the other hand, did not raise their prices for your favourite cup of Joe, due to their buying power and hedging strategy. The company can afford to buy large amounts of coffee in advance and locking in attractive prices.

“Over the years we’ve created a very thoughtful approach to how we source, warehouse, and use hedging techniques to ensure we always have supply of premium Arabica green coffee at an attractive cost basis,” Starbucks CEO Kevin Johnson told investors in an earnings call in July. “In fact, we purchase green coffee 12 to 18 months in advance, and we never stopped buying green coffee through the pandemic.”

However, there are some indications that coffee lovers will have to be prepared for further increases in prices in the future.

“Coffee has become more expensive recently, but basically it is still too cheap,” says Steffen Schwarz, head of the Coffee Consulate training and research centre in Germany and an experienced connoisseur of the coffee beans. He is certain coffee prices will continue to rise dramatically.

Schwarz cites the earlier-mentioned consequences of climate change as the main reason. In India, one of the ten largest supplier countries, crop losses of 30 to 70 percent have been regularly reported for several years due to changed weather conditions. The freak weather that was recently observed in Brazil also fits into this context.

On the other hand, the global demand for coffee is increasing continuously. In emerging countries in particular, coffee consumption increases with prosperity. The US is often named in statistics as the largest consumer of coffee in the world. In fact, the secret number one on a per-person basis have been the Scandinavian countries, like Finland and Norway. The Finns drink up to four cups a day, accompanied by sandwiches, cookies and cakes.

For the experts there is therefore only one logical consequence: the price of coffee will continue to rise. However, critics also emphasize that the price has been far too low for years anyway. Most coffee farmers in countries such as Brazil, Vietnam, Colombia or India could not cover their costs even with the price level that has now been reached again. It only works because many family members lend a hand without wages, and because many of these companies are not even able to set up a correct cost calculation.

If the farmers only get 30 cents more per kilo of coffee, it would solve many problems, and raise their standard of living dramatically. But the world market has not yet approved such an increase - not even after the price