Why coffee bean prices have doubled in the past year – and could double again

International Coffee Day is very different this year. Introduced by the International Coffee Organization on October 1, 2015, to raise awareness of the product and the challenges producers face, the day generally focused on how the low prices paid for unroasted beans barely cover costs to farmers – not to mention supporting their families.

Not this year, however. Over the past 12 months, the C price – the benchmark price for basic grade Arabica coffee on the New York International Commodity Exchange – has fallen from $ 1.07 per pound (454g) to around $ 1.95. In July, it hit $ 2.08.

Almost all coffee delivery contracts are benchmarked against price C, so prices for green Arabica (unroasted beans) have increased by over 80% over the past year. Those for Robusta coffee – a cheaper and less appetizing alternative – increased by more than 30%. And there is a good chance that these prices will increase even more in the coming months. We may be on the eve of a major price correction that will move the market upward for years to come.

Why is it expensive

The main reason for the price spike is a series of environmental events in Brazil. By far the world’s largest coffee producer, Brazil accounts for around 35% of the world’s harvest. Production volume fluctuates regularly between ‘on’ and ‘off’ years, and generally this is not enough to significantly affect prices as producers mitigate their risks through inventory management and price hedging in. using the coffee futures market.

However, the yields in 2021 are expected to be considerably lower. This is due to the combination of a severe drought earlier in the season, which reduced the number of coffee cherries, and recent severe frosts which could further damage fruits and even trees. Brazilian authorities predict the lowest Arabica crop in 12 years.

The big question is how this affects future production. Coffee trees can take up to five years to mature, so it will take a few seasons before the extent of the damage is clear. If, as some respected journalists suggest, the frost causes maximum damage – potentially affecting two-thirds of trees – there could be a lasting decline in global supplies. This could see prices cross the $ 3.00 mark and even $ 4.00.

Coffee prices fell in the latter part of the 2010s, mainly due to the expansion of world production. Photo credit: Carl De Souza / cds / AFP

Long coffee cycle

The history of coffee has been characterized by extreme price volatility. Periods of oversupply gradually lowered prices until a catastrophic event – environmental or political – caused a correction.

During the 1930s, a combination of bumper crops and weak consumer demand during the Depression resulted in a glut of supply. To reduce excess stocks, Brazil has resorted to dumping coffee at sea and converting it into locomotive fuel. At the other extreme, many coffee trees were killed in 1975 when Brazil was hit by a series of “black” frosts. This resulted in a 60% drop in production in the next harvest and a tripling of prices between 1975 and 1977.

In 1962, the International Coffee Organization introduced producer quotas to try to keep prices at a sustained level in the face of these ups and downs. This was supported by the United States to prevent communism from spreading from Cuba to mainland Latin America, but it was abandoned at American insistence after 1989.

This led to oversupply and ultimately a turn-of-the-century coffee crisis in which the price of C remained below $ 1.00 for four consecutive years. It tended to trade for around $ 1.00 to $ 2.00 a pound, and falling prices caused many producers to go hungry.

The price did not recover until a leaf rust on the coffee plant infected a significant part of the production in Central America and Colombia. The bitter irony of the coffee market is that prices for producers only improve when many of them suffer unsustainable losses.

Robustness issue

Coffee prices fell in the latter part of the 2010s, mainly due to the expansion of world production. Most notable was Vietnam, which is now the world’s second largest producer of coffee and accounts for around 18% of total world production. Up to 95% of Vietnamese production is Robusta.

Robusta was actually first used for growing coffee due to an environmental disaster when coffee production in East Asia was all but wiped out by leaf rust in the late 19th century. century. More recently, procedures for “cleaning” Robusta to reduce bad tastes have improved to the point that roasters increasingly resort to increasing their proportion in a blend. This is especially the case when targeting markets that are primarily price driven, such as instant coffee.

If prices continue to rise now, using more Robusta in blends could prevent coffee from becoming too expensive for consumers. But that will be difficult to do, at least in the short term, due to severe Covid-19 restrictions in Vietnam. This caused considerable disruption both in the transportation of coffee from the central highlands to the Ho Chi Minh City export hub, and in the management of shipping logistics. The same problems have arisen in many coffee producing countries.

As a result, we have brokers struggling to ensure sufficient inventory, roasters thinking about how to pass price increases on to their professional customers, and consumers facing the prospect of paying higher prices for products from the market. household coffee.

But will producers be the winners of this latest price hike? Brazilian agro-industries that will survive the immediate impact of the frosts surely will, as will well-capitalized mid-size farms in Latin America.

But what about the smallholders and subsistence farmers who make up 95% of coffee producers? For years, the International Coffee Organization and its member states have portrayed these farmers as the victims of global market forces. We are now going to find out whether these players are capable of returning the added value generated by their coffee to farmers. If so, International Coffee Day will indeed be something to celebrate.

Jonathan Morris is professor of history at the University of Hertfordshire.

This article first appeared on The Conversation.

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