Why are coffee prices rising around the world today

If the world were a nation, coffee would be the national drink.

The popularity and universality of coffee cannot be underestimated. It is the second most traded commodity in the world 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 an unlimited 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 increased. According to one estimate, its price is now close to highest in five years. This has been accompanied by an aggravating shortage that could lead to a long-term global coffee crisis even as demand continues to grow.

Coffee 101

Botanically, almost all the coffee we drink comes from just two species in the coffee family. These are Arabica and Canephora (a.k.a Robust).

The first is the “good stuff”, high quality coffee with smoother, sweeter, almost chocolate vibes (eg your Starbucks takeout). Robusta is the harshest: it has more caffeine and is more bitter (eg your espresso or instant coffee).

Arabica represents about 60% of all coffee produced in the world. The rest is mainly Robusta. Both of these species can be traced back to Africa (particularly Ethiopia), with their use becoming common in the 15th century, mainly in the Arab world, before spreading to other regions.

Coffee production 101

Let’s talk about culture. Coffee is a stubborn plant. It requires extremely specific conditions to grow – narrow temperature ranges, hot days, cool nights, a specific amount of precipitation, and a dry season of several months. Arabica in particular is sensitive; Robusta is slightly more resistant.

Let’s talk about geography. Because coffee has such strict cultivation requirements, there are only certain regions of the world where it can be grown. These are mainly found in the mid-altitude regions of tropical countries.

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

FOR YOUR INFORMATION: Despite its ubiquity, coffee has had a marred reputation throughout history. Its consumption has been banned for religious reasons; people were literally beheaded in public for sipping it in the Ottoman Empire. For decades, it’s been linked to heart disease, diabetes, nutrient deficiencies, and even premature death. In fact, as recently as 1991, WHO has classified coffee as a possible carcinogen!

Coffee and India 101

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

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

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

Global coffee inflation

In early June, the benchmark New York Arabica futures index hit a four-and-a-half-year high of nearly $ 1.70 a pound, up nearly 70% year-on-year.

Thanks to coffee stocks and moderate demand due to the lockdowns, consumers have been largely spared from a price hike… so far. As the world slowly reopens and demand increases, some retail outlets have already started to pass rising costs onto consumers.

Why is coffee getting expensive?

The reasons are as complex and interconnected as the global bean supply chain.

The main driver, unsurprisingly, has been the COVID-19 pandemic. This has caused a serious crisis in the shipping industry and labor shortages around the world.

COVID-19 has shaken up global shipments. Many ports have been closed, freight demand has plummeted and bankruptcies have skyrocketed. This has affected the supply chains of virtually all products on the market. After all, 80% of international trade in (volume) is carried out by sea. In particular, a severe shortage in the availability of shipping containers has caused bottlenecks for the coffee trade.

Additionally, harvesting coffee is a labor intensive process, which means it cannot be done while maintaining social distancing. So, for example, when India entered a nationwide lockdown last year, thousands of migrant workers were forced to flee home. Back in the coffee plantations of southern India, that meant less people to harvest gout = delayed / decreased yield.

In recent months, Brazil has also been rocked by a severe drought and political instability in Colombia, which inadvertently affects coffee production. Not to mention the devastating coronavirus crisis in Brazil, the largest exporter of the raw material.

The Long-Term Perspectives: A Coffee Apocalypse?

On a larger scale, rising coffee prices have been a trend for many years. And all of this cannot be attributed simply to food inflation. In the United States, for example, coffee prices have increased by 17% since 2016, although inflation has increased by 10% over the same period.

In fact, it is widely believed that a global coffee crisis is knocking on our doors. This is due to two main reasons.

A, until 1989, coffee prices were relatively stable despite fluctuating productions. This was in large part due to the International Coffee Agreement (ICA), which acted as an OPEC for coffee exporting countries.

In 1989, the ICA collapsed following disagreements over the export quota system. In the years that followed, coffee prices plummeted and were mainly determined by the market and production. Arguably, this was done to the detriment of small coffee producers, i.e. those who own land of less than five hectares (60% of all coffee grown comes from these farmers).

In the absence of a consensus-based price stabilization regime, many small farmers turned to more lucrative crops or sold their land to larger producers. This gradual consolidation of the coffee market accompanied by the exodus of small plantations does not bode well as global demand continues to increase.

Of them, the climate crisis. We have already seen how delicate coffee growing is. Global warming is causing erratic weather patterns and warmer temperatures, both of which are disastrous for the crop. By 2050, almost half current coffee-growing regions could become inhospitable for cultivation.

This is already happening. In Colombia, the Zona Cafetera region has warmed by 1.2 degrees since 1980. This has forced farmers to move higher into the mountains to find cooler pastures for the plant, leaving low-lying plantations to either produce poor quality beans or to disappear altogether.

How to fix coffee inflation?

Solving distribution bottlenecks and addressing labor shortages are short-term solutions. Establishing a fair global coffee trading system and broader climate action are long-term projects.

Each of them is difficult in its own way, but the climate crisis is arguably the biggest worry. With global temperatures expected to rise 1.5 to 2 degrees even with proactive action inspired by the Paris Agreement, avoiding the coming coffee crisis is easier said than done.

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