Coffee: a question of price

The coffee market is worth more than $430 billion per year and employs almost 120 million people around the world. In fact, coffee is the second most traded good worldwide, after petroleum. For the past thirty years, every day in London, New York, and Singapore the prices of Arabica and Robusta are negotiated. Coffee prices vary as much as they do because they’re highly subject to various external influences of a social, environmental, historical, geopolitical, and economic kind. 

We’re currently living through a moment of profound crisis due to various global events, first and foremost Covid and the Russia-Ukraine conflict, but nevertheless coffee continues to be a highly consumed beverage and therefore a good on which traders speculate enormously.

To understand the volatile history of coffee prices, it’s first of all imperative to become familiar with three key elements that have characterized the coffee industry in the modern era:

1. the unchecked ascent of the free market in the global economy in the 1990s; 
2. the exponential growth of the coffee market over the past 50 years;
3. the socio-political and environmental issues within producing countries.

THE UNCHECKED ASCENT OF THE FREE MARKET IN THE GLOBAL ECONOMY IN THE 1990s 

From 1963 to 1989 the coffee market was regulated by the International Coffee Agreement (ICA). The idea of regulating this market came about during the Post WWII economic reconstruction due to the need to keep the price of coffee stable for those entities involved in its production, importation, and processing. An indicative price was thus set, assigning specific export quotas to each exporting country: if the established price dropped below the target price, the quotas were reduced, while if it surpassed the target price, the quotas were increased. In this way consumers could always have a regular supply of coffee based on prices which were remunerative for producers. The agreement defined the export prices according to annual price ranges for Arabica and Robusta, with diversified agricultural funds (cultivations of grains and fruit) in the event of excessive over-production.

With the advent of unbridled liberalism and with the desire of consumers to try more “special” coffees, as of 1989 the International Coffee Organization (ICO) was no longer able to set export quotas, bringing this agreement to an end. In fact, the assignment of export quotas based on production volumes ended up encouraging over-production at the expense of quality. Thanks to the free market, consumers had developed a new, more complex, and refined taste, and began to prefer the soft and fruity Arabica over the earthy and full-bodied Robusta. This change in taste affected the prices of the two varieties, leading to an increase in the price of Arabica to the detriment of Robusta. In fact, the indicative price of Robusta went from $1.34/lb in 1989 to an average of $0.77/lb in 1995, the price dropping by approximately 75% over five years. 

THE EXPONENTIAL GROWTH OF THE COFFEE MARKET AFTER WWII 

After WWII, the world’s average annual coffee production exceeded 100 million sacks. Over the past 50 years, the average annual increase in coffee consumption has been 1.9% and in the past two decades it has risen to 2.2%. This increase means that since 1964 the coffee market has grown by 190% (from 57.9 to 166.5 million sacks). The continuous expansion of small independent roasting companies that favor the use of specialty coffees with higher prices for the general public, and the continuous increase in the consumption of coffee-based beverages in Asian and African markets (long-standing tea drinkers), confirm this trend.

A standard sack of coffee weighs between 60 and 70 kg, so it’s easy to deduce the weight of this industry in the global landscape. Since 2015, approximately 9 million tons of coffee are being produced per year. And despite the pandemic, a fixed growth rate of 8.3% is expected for the next five years.

Factors like the increase in the number of people that consumes coffee outside of the home, the increase in retail sales via e-commerce, the growing demand for specialty coffee (100% Arabica), the lower birth rate in richer countries (therefore a larger adult population able to consume), and the increase in consumption of green coffee in emerging economies are clear signs that, despite the ongoing pandemic, the coffee market isn’t slowing down.

THE SOCIO-POLITICAL AND ENVIRONMENTAL ISSUES IN PRODUCING COUNTRIES 

When we talk about the price of coffee, we must always take into account certain external determining factors. 

Coffee plantations, especially at high altitudes, are highly sensitive to climatic changes. Drought, frost, and other natural events cause a drastic decrease in their production, which results in a reduced supply. This in turn has an impact on the final price. 

Another element that must be analyzed is the logistical cost of coffee. Fuel is needed to transport coffee from the producing countries to the consumer countries; gas is needed to roast the coffee. Currently, with the long days spent at home due to Covid (and the relative increase in energy consumption) and the problematic conflict between Russia and Ukraine, the prices of petroleum and gas have increased dramatically. When the price of petroleum and gas is high, the transport and roasting of coffee are no longer negligible factors. The higher the price of traditional energy sources, the higher the price of coffee on the stock market. 

In the past year, the price of black coffee beans has risen by 25% due to turbulent political events in Colombia (the third largest coffee producing country in the world) and an extreme drought followed by frost in the producing states of Brazil (the number one coffee producing country in the world). These issues have primarily affected the more valued variety, Arabica, which these days has limited availability on the market. On the New York stock exchange, Brazilian Arabica has reached $1.32/lb and has never in the past four years been so expensive. This past October the volumes of Arabica in the official warehouses of the Intercontinental Exchange dropped by 9.1%. For Robusta, which is a simpler plant to cultivate and therefore less susceptible to climatic changes, things have gone better even though a 4.9% drop in stock has nevertheless been registered.

When it comes to Colombia, 2020 was a year of profound crisis and constant political tension. There have been many public demonstrations protesting the violation of human rights perpetrated by the conservative administration of Duque, who has never recognized the peace agreements which were established by the previous administration. These demonstrations were violently repressed, resulting in various deaths and paralyzing the economy of the country, and therefore of coffee as well. 

Returning to Brazil, the lack of water in the leading coffee production regions, like San Paolo, Minas Gerais, Parana, and Espiritu Santo, which have always enjoyed optimal environmental conditions for these cultivations, together with a lack of seasonal labor for the harvest due to Covid, have resulted in a 30% drop in Brazilian Arabica production. This is worrisome when we consider that Brazil alone is responsible for one third of the total global production of Arabica. Overall, the export predictions for the June 2021-June 2022 period are 38.2 million sacks of Arabica as compared to 45 million in the previous year. Furthermore, within a context of ongoing economic crisis, the extreme political-environmental positions of Bolsonaro and his initial denial of Covid, definitely further exacerbated the critical situation regarding coffee.

To summarize, the collapse of the International Coffee Agreement, followed by a free market with less and less oversight, in which financial speculation reigns, compounded by the fragile political-economic context of producing countries, has severely damaged farmers from developing countries which produce coffee and who were denied the proper prices for this product which is so beloved around the world.

In the next article we’ll further explore the following topics; how the volatile nature of coffee prices encourages a continuous gap between producing/exporting countries and consumer/importing countries.