If you’ve noticed higher price tags in the coffee aisle at your local grocery store or cafe, you certainly aren’t alone. Retail coffee prices increased as much as 50 percent in the fourth quarter of 2022 compared to the previous year. As a result, millions of consumers are feeling the financial strain as they either increase their monthly coffee budget or cut back on the product altogether.
While it mirrors the inflation seen across the board over the past few years, coffee prices are uniquely susceptible to these kinds of fluctuations. And it isn’t just the consumer that has to deal with higher costs. Recent years have also shown a significant increase in costs related to shipping coffee, which directly contributes to the price hike on consumers.
Ultimately, it requires a long journey for coffee to reach a supermarket’s shelf or your neighborhood café, and there are several different factors along the way that can contribute to abnormally high prices. Below, we’ll explain some of those factors and whether shippers and consumers can expect lower prices in the future.
The Increased Global Demand for Coffee
As you can guess, the demand for high-quality coffee isn’t exclusive to North America or Europe. Some estimates state over 2 billion cups of coffee are consumed daily throughout the world, and millions rely on its production in order to make a living. Technological advancements and globalization have made it much easier for people to gain access to different kinds of coffee from different regions around the world, increasing the demand even further.
It isn’t just the demand for coffee itself that’s increased. More consumers are becoming aware of the methods in which coffee is produced, increasing the demand for “fair-trade” coffee that ensures its producers aren’t being exploited.
They also want to ensure the coffee beans themselves are of the highest quality possible. However, top quality, fair-trade coffee beans can be rare and, as a result, more expensive.
The Global Supply of Coffee
The demand for coffee is as high as it’s ever been, but there are several factors that can impact the actual supply. And when the supply is lower than normal, shippers and consumers will naturally have to deal with higher prices.
Perhaps the thing most impacting the global supply of coffee is changing climate and weather patterns. In 2021, Brazil, the world’s largest coffee exporter, experienced its worst drought in decades, followed by frosts and heavy rainfall in the next year.
These issues are also not exclusive to Brazil, as changes in weather patterns are an increasing global phenomenon. These inconsistent weather patterns can greatly impact the quality and quantity of coffee crop yields. They can make for a shorter harvest or alter the labor practices used to produce coffee. In some cases, severe weather events like hurricanes or floods can completely wipe out a harvest altogether. There is also the risk of crops being wiped out by other factors such as pests or disease. Anything that causes the global supply to fluctuate will, ultimately, have an impact on pricing for both shippers and consumers.
Labor and Production Costs
As we mentioned, it takes a long journey for coffee products to show up in front of us on a daily basis. There’s so much that goes into the entire process beyond just successfully growing the crop itself. It’s a process that requires various types of labor from different types of workers.
Someone has to pick the coffee when it’s ripe (usually by hand), separate the coffee seeds, ferment it and dry it. That coffee then needs to be packaged and shipped to all different parts of the world, delivered to roasters, roasted and then either brewed by a barista or stocked on a grocery store shelf.
The labor and transportation costs will vary depending on the origin source of the coffee. Going back to Brazil, the country’s extensive coffee production capabilities means that prices on imports are generally lower than that of other countries.
On the other hand, countries with sought-after coffee beans but much smaller economies of scale will require more intensive labor. Ethiopia is a good example of this, as it primarily relies on small farms for its coffee production and has the added barrier of a mountainous terrain that can make for difficult transportation.
Finally, there’s also the physical distance that can impact coffee prices. Although the price of fuel has declined since reaching record highs in 2022, high fuel prices combined with long distance travel will also have a significant impact. That’s not even accounting for things like labor issues and other disruptions that can also impact the flow of freight.
Finally, the state of the global economy can also play a major role in coffee prices. This can mean either an increase or decrease in coffee prices depending on the conditions.
For example, a recession will likely lead to a decrease in demand for commodities that aren’t considered “essential”, which could lead to a decrease in the price of coffee as people have less disposable income. Along those lines, increased competition could lead to a decrease in prices as producers find cheaper ways to make and ship coffee around the world.
Similarly, currency fluctuations can have a major impact as well. Coffee buyers who pay in U.S. dollars will have to be aware of its current strength. If the currency of the country you’re importing coffee from depreciates against the U.S. dollar, it can make shipments more expensive for buyers. Changes in trade policies, tariffs or export restrictions can also impact the flow of coffee between countries and, consequentially, its pricing.
What Can Shippers & Buyers Do?
While the information presented above isn’t the definitive list of everything that can impact global coffee prices, they all play a major role.
So, how can traders reduce their own costs and, subsequently, consumer costs? While many of the factors contributing to high costs are out of an individual’s control, you can work with professionals capable of increasing your cash flow in times of supply chain volatility.
With over 25 years of experience providing global financing solutions, RTS International can help importers and exporters keep costs down by increasing their cash flow and bringing greater visibility and control to their supply chain. Our highly experienced team serves a wide range of industries, including coffee trade, with clients in more than 40 countries worldwide.