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Coffee Economics: Why Coffee Prices Today are Increasing Around the World

Editor, TRANSFIN.
Jul 15, 2021 2:41 AM 6 min read

If the world was one nation, coffee would be the national drink.

Coffee’s popularity and universality cannot be understated. It is the world's second-most traded commodity after oil. At least 500 billion cups of it are consumed each year, and coffee beans are also used in beverages, cosmetics, fertilizers, art and pharmaceuticals.

But like all commodities, coffee is not a limitless resource. Its production and distribution are chained to geography and geopolitics. And the international supply chain that brings it to our tables is as complicated as it is delicate.

Over the past year, due to a combination of factors, the price of coffee has steadily climbed. By one estimate, its price is now at a nearly five-year high. This has been accompanied by an aggravating shortage that could lead to a global coffee crisis in the long run even as demand grows relentlessly. 

Coffee 101

Botanically speaking, nearly all the coffee we drink comes from just two species of the coffee plant family. These are Arabica and Canephora (aka Robusta).

The former is the "good stuff", the high-quality coffee with milder, sweeter and almost chocolate-y vibes (e.g. Your Starbucks take-out). Robusta is the hard stuff: it has more caffeine and is more bitter (e.g. Your espresso or instant coffee).

Arabica accounts for about 60% of all coffee produced in the world. The remaining is accounted for mainly by Robusta. Both these species can be traced back to Africa (particularly Ethiopia), with their usage becoming commonplace by the 15th century primarily in the Arab world before spreading to other regions.

 

Coffee Production 101

Let's talk cultivation. Coffee is a stubborn plant. It requires extremely specific conditions to grow in - narrow temperature ranges, warm days, cool nights, a specific amount of rainfall and a months-long dry season. Arabica in particular is sensitive; Robusta is slightly hardier.

Let's talk geography. Because coffee has such stringent cultivation requirements, there are only some regions of the world where it can be grown. These are chiefly in medium-altitude places of tropical countries.

So while, for example, Columbia, Vietnam and India are major coffee producers, only certain parts of these countries actually grow coffee (respectively: Zona Cafetera region in the Andes, Western Ghats and the Central Highlands).

FYI: Despite its ubiquity, coffee has had a stained reputation throughout history. Its consumption was banned due to religious reasons; people were literally decapitated in public for sipping it in the Ottoman Empire. For decades, it was linked to heart disease, diabetes, nutrient deficiencies and even premature death. In fact, as recently as 1991, the WHO listed coffee as a possible carcinogen!

 

Coffee and India 101

While India is a major coffee producer (of both Robusta and Arabica varieties), Indians are mainly a tea-drinking people. This is why about 70% of made-in-India coffee is exported. The country is the sixth-largest producer and fifth-largest exporter of coffee in the world.

Geographically, production is concentrated in the hilly regions of Karnataka (which accounts for more than two-thirds of Indian coffee), Kerala and Tamil Nadu. Kodagu, Chikmagalur and Wayanad districts are famous for their productive (and picturesque) coffee plantations.

Given India’s status as a coffee exporter and given the relatively low demand for the drink, Indian consumers have so far been largely spared of a substantial increase in coffee prices. In other countries, the story is slightly different...

 

The Global Coffee Inflation

At the start of June, Arabica futures benchmark in New York hit a four-and-a-half-year high of almost $1.70 a pound, up almost 70% YoY.

Thanks to coffee stockpiles and muted demand due to lockdowns, consumers have been largely spared an increase in prices...so far. As the world slowly reopens and demand climbs, some retail outlets have already begun shifting the rise in costs onto consumers.

 

Why is Coffee Becoming Pricey?

The reasons are as complicated and interconnected as the bean's global supply chain.

The main driver, unsurprisingly, has been the COVID-19 pandemic. This caused a severe crisis in the shipping industry and labour shortages worldwide.

COVID-19 upended global shipping. Many ports were closed, demand for cargo plummeted and bankruptcies skyrocketed. This affected the supply chains of virtually all traded commodities. After all, 80% of international trade by (volume) is carried out via sea. In particular, a severe crunch in shipping container availability caused bottlenecks for the coffee trade.

Furthermore, coffee harvesting is a labour-intensive process, meaning it cannot be done whilst maintaining social distancing. So, for instance, when India went into a national lockdown last year, thousands of migrant workers were forced to flee to their homes. Back in the coffee plantations in South India, this meant fewer people to harvest the drop = delayed/decreased output.

Recent months have also seen Brazil reeling under a severe drought and political instability in Columbia, both of which inadvertently affect coffee production. Not to forget the devastating coronavirus crisis in Brazil, the largest exporter of the commodity.

 

The Long-Term Outlook: A Coffee Apocalypse?

On a broader scale, the rise in coffee prices has been a trend for many years now. And not all of it can be attributed simply to food inflation. In the US, for instance, coffee prices have increased by 17% since 2016 even though inflation rose by 10% in the same period.

In fact, by all accounts, a global coffee crisis is knocking on our doors. This is due to two main reasons.

One, until 1989, coffee prices were relatively stable despite fluctuating outputs. This was largely due to the International Coffee Agreement (ICA), which acted like an OPEC for coffee-exporting nations.

In 1989, the ICA broke down over disagreements about the export quota system. In the years that followed, coffee prices went into free-fall and were primarily market- and output-driven. Arguably, this was to the detriment of small-scale coffee farmers i.e., the ones with land holdings of less than five hectares (60% of all coffee grown comes from such farmers).

With the absence of a consensus-driven price-stabilisation regime, many small-scale farmers moved onto more lucrative crops or sold their lands to larger producers. This gradual consolidation of the coffee market alongwith the exodus of small plantations does not bode well as global demand continues to surge.

Two, the climate crisis. We've already seen how coffee cultivation is a delicate process. Global heating leads to erratic weather patterns and warmer temperatures, both of which are disastrous for the crop. By 2050, nearly half of the current coffee-growing regions could become inhospitable for the crop.

This is already happening. In Columbia, the Zona Cafetera region has warmed by 1.2 degrees since 1980. This has forced farmers to move higher up the mountains to find cooler pastures for the plant, leaving low-lying plantations to either produce low-quality beans or die out completely.

 

How to Fix the Coffee Inflation? 

Fixing distribution bottlenecks and addressing labour shortages are short-term solutions. Establishing a fair global trade system for coffee and broader climate action are long-term ones.

Each of these are challenging in their own ways, but the climate crisis is inarguably the biggest worry. With global temperatures slated to rise by 1.5-2 degrees even with proactive Paris Agreement-inspired action, avoiding the incoming coffee crisis is easier said than done.

FIN.
 

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