The New Reality of Coffee Economics: From Premium to Practical
Exploring How Rising Prices Are Reshaping Sourcing Strategies and Redefining Specialty Coffee Standards
HYPOTHESIS
Coffee, a global commodity with a global market valued at $129.92 billion in 2023, is expected to grow to $183.67 billion by 2030. It is one of the most widely consumed beverages on the planet - the world consumes about 500 billion cups of it every year. Despite its economic significance, the coffee industry faces numerous challenges, including volatile prices, climate change, and unequal distribution of profits along the supply chain. While one might anticipate its pricing to be governed by factors like production costs, supply and demand, and consumer preferences, a more significant influence emerges: coffee futures. Let’s understand how this economic mechanism has reacted to the coffee crisis that has prolonged for 4 years now, and how these futures shape the future of the coffee industry.
Null Hypothesis: The coffee crisis has led to a fundamental shift in the coffee future market.
Alternate Hypothesis: The coffee crisis’ effect is only temporary in nature, bound to bounce back to stabilisation.
TESTING
Understanding Coffee Futures:
Most coffee aficionados understand the ‘macro’ steps of coffee (a farmer grows coffee, then that coffee must be roasted before brewing according to your chosen method), minus the technical details (e.g., processing methods, roasting curves, extraction yields etc). But when it comes to the role of the C-Market and how green coffee is bought, it’s not as simple.
The price of green Arabica coffee beans is determined, at least in part, by the C-Market, which does not rely on a fixed "per pound" cost but instead fluctuates with market changes. The price of coffee, like stocks or other commodities, changes constantly and is set by commodities exchanges, notably the Intercontinental Exchange (ICE) in New York, which establishes the C-Price for Arabica coffee.
This C-Price is driven by supply and demand dynamics. When coffee supply is limited, prices rise until supply matches demand. As prices increase, some buyers opt out due to higher costs, stabilizing prices when the remaining buyers are willing to pay for the exact quantity available. This responsiveness of demand to price changes is referred to as price elasticity of demand, reflecting the market's sensitivity to pricing shifts.
Most of the activity in the C-Market revolves around ‘futures contracts’. Coffee futures are financial contracts that obligate the buyer to purchase a specific quantity of coffee beans at a predetermined price on a future date. These contracts are traded on commodity exchanges, and their prices are influenced by factors like supply and demand, weather conditions, economic indicators, and geopolitical events. The basic unit of a coffee futures contract is 37,500 pounds of coffee.
By trading coffee futures, participants in the coffee industry, such as producers, roasters, and traders, can hedge against price fluctuations. For instance, a coffee producer can sell futures contracts to lock in a price for their future harvest, protecting themselves from potential price declines. Similarly, a coffee roaster can buy futures contracts to secure a supply of beans at a fixed price, mitigating the risk of price increases.
Types of Coffee Futures:
When trading coffee futures, it is important to know that there are primarily two versions of coffee that are floating around. They are Robusta and Arabica. Coffee futures are traded on various exchanges such as the Singapore Commodity Exchange which primarily deals with the Robusta coffee while Brazil’s Commodities and Futures Exchange (BM&F) deals with Arabica and the Tokyo Grain Exchange offers both Arabica and Robusta.
In the U.S. coffee futures are traded on the Intercontinental Exchange (ICE) or formerly called the New York Board of Trade (NYBOT)
Similar to crude oil which has various versions such as heavy or light sweet, coffee is categorized based on some characteristics of the beans. Arabica beans are said to have a sweeter and softer taste while Robusta is said to be stronger in taste with a grainy overtone.
Arabica coffee is largely produced in sub-tropical climates and requires rich soil, shade and sun. It is estimated that over 70% of the coffee grown in the world is Arabica. They are more vulnerable to pests and cold weather. Arabica coffee is grown at a higher elevation of 600 to 2000 meters. Arabica coffee is usually sold in specialized coffee stores and in specialty food stores.
For example, in Italy, the highest quality pure Arabica beans are used to make espresso. Robusta coffee is easier to farm, growing at altitudes of 200 – 800 meters. In terms of yield, Robusta coffee produces more yield compared to Arabica and also has lower costs for production. Robusta coffee is usually found everywhere as it is a lot cheaper compared to Arabica version.
Seasonality in Coffee Production:
More than 90% of the coffee trade is traded in the green or unroasted coffee beans. Seasonal factors play a big role in coffee production, influencing the price of coffee futures. While there is no extreme peak production for coffee at any given time of the year, coffee consumption is said to decline by 12% on average during the summer months. On the other hand, coffee imports of the beans are seen to decline during the spring and summer months while demand picks up in fall and through winter.
Coffee prices typically rise during the August – October months with a low being formed during October before price starts to move steadily higher. Coffee prices are generally bullish, forming a peak during the June-July months largely due to the weather impact the crop in Brazil and the winter months in the Southern Hemisphere. Coffee from Brazil is harvested starting in May and runs into several weeks.
Low prices for coffee generally tend to create problems for producers. When coffee prices fall below the cost of production there is little to no economic incentive to produce coffee. During these periods, coffee production grinds to a halt due to expensive overheads. The result from this is that the coffee trees yield less due to lower labor and use of fertilizers and also impacts the quality of the coffee that is produced. This impacts the Arabica coffee beans which grows at higher altitudes and thus is more expensive to maintain and grow.
The Supply Chain Lag
The coffee supply chain encompasses several stages—from cultivation and harvesting to processing, shipping, roasting, and retailing. This complexity introduces a time lag between fluctuations in coffee futures prices and the prices consumers encounter at their local cafes or stores.
Coffee cultivation is a time-intensive process, with trees taking years to mature and produce cherries. Once harvested, the beans undergo processing to remove the outer pulp and parchment. Processed beans are then exported, often involving international shipping that can take several weeks. Factors such as global shipping congestion can further delay this stage. Upon arrival in the destination country, beans are roasted and packaged. The roasted coffee is then distributed to retailers or directly to consumers. Finally, the coffee reaches cafes, supermarkets, and consumers. Retailers may adjust their pricing based on various factors, including wholesale costs, operational expenses, and competitive dynamics.
Recent trends support this lag effect.
According to the Wall Street Journal ‘global coffee consumption is set to exceed production this year’. The United States Department of Agriculture forecasts that consumers are set to increase consumption by 1.8 million bags to 165 million 60kg bags in 2021, versus the previous year, yet global coffee production is expected to decline to 164.8 million bags this year.
Coffee prices have remained stubbornly high over the past two years, driven by weather-related disruptions, supply shortages, and global logistics challenges. The Arabica futures price reached $2.75 per pound in September 2024, marking a 46% increase since the start of the year and a 91% rise year-over-year. But while buyers and sellers alike have been hoping for prices to stabilise, recent surges show no sign of a meaningful drop.
For coffee shops and roasters, this new economic environment is shaping not only what’s on offer but also how coffee is purchased and consumed.
Since Brazil’s frost in 2021 wreaked havoc on coffee crops, coffee prices have remained resiliently high. Coffee prices surged nearly 13% in response to the frosts, reaching a six-and-a-half-year high at the time. The Brazilian frost severely impacted Arabica coffee production, leaving the market under-supplied at a moment of peak demand.
To make matters worse, weather-related disruptions continue to pile up. Further dry spells are happening in Brazil – the nation’s worst drought in more than seven decades. In Vietnam, Robusta yields are declining because of heat and drought – with the price of Robusta coffee nearly doubling since early 2023. Unpredictable conditions are also increasing in coffee-producing regions like Colombia and Ethiopia.
Potential supply shortages in these countries, especially Brazil and Vietnam, have been driving up global coffee prices. Logistics issues due to the global supply chain crunch during and after the pandemic have added further strain.
These sustained price hikes are reshaping the coffee industry. Specialty coffee businesses, already operating on thin margins, face challenges in sourcing quality beans without raising prices, cutting margins, or compromising quality. Many smaller roasters and coffee shops are turning to commercial blends or reducing offerings to stay afloat. Despite hopes for stabilization, no significant price drop is in sight, leaving businesses to adapt to this lasting reality of high costs.
Effects of the Coffee Crisis:
The rising costs in the coffee market are significantly changing how specialty coffee roasters approach sourcing. Traditionally, roasters prioritized premium lots scoring above 84 points on the grading scale to highlight unique flavors that justified higher consumer prices. However, with the soaring costs of high-grade coffee, many roasters are now shifting focus to more affordable coffees scoring between 80-83 points. These “regular” specialty coffees strike a balance between maintaining quality and controlling expenses in a cost-sensitive market.
This change is impacting the entire specialty coffee supply chain. Producers, who were once motivated to invest in achieving ultra-premium scores, are now experiencing reduced demand for top-tier lots. As a result, many farmers are scaling back on high-cost production practices and focusing instead on producing “good enough” specialty coffee that meets acceptable quality standards while being less expensive to produce.
Exporters are also under pressure. Many are being asked to handle larger volumes of microlots, which can be impractical, or to sell at market rates since roasters can no longer afford significant premiums. In Colombia, for instance, processing stations are becoming more common, where intermediaries purchase cherries at competitive prices, process them to enhance quality, and sell to higher-paying markets.
Some roasters are even diversifying by creating commercial divisions to cater to cost-conscious consumers, blurring the line between specialty and commercial coffee sectors. According to industry experts, this trend is likely to grow as larger players adapt their purchasing strategies to include lower-scoring coffees and more traditional buying methods.
The economics are clear: when the C Market price stays low, specialty coffee remains viable due to the added value of modest premiums. However, when prices exceed $2.50 per pound, absorbing the costs becomes unsustainable. Roasters are then forced to raise consumer prices, reduce margins, or adjust their raw material standards.
Ultimately, this shift reflects the financial pressures roasters face and signals a transformation in the specialty coffee landscape as businesses and producers adapt to ensure survival in a challenging economic environment.
CONCLUSION
Despite hopes that coffee prices would eventually stabilise, industry leaders suggest that these elevated prices may be here to stay, at least in the near term. Several factors point to a prolonged period of high costs. Climate unpredictability remains a key risk for coffee-growing regions, with rising temperatures, erratic rainfall, and extreme weather events posing continual threats to supply stability. Additionally, labour shortages in coffee-producing regions, coupled with rising costs of fertilisers and transportation, have compounded the difficulty of lowering coffee prices.
For coffee buyers and roasters who have held off on large purchases or waited for prices to drop, this could mean a change in strategy. Instead of waiting out the market, businesses may need to find ways to adjust permanently to this higher-cost environment. Some roasters are exploring direct trade relationships with farmers to cut out intermediaries and secure more stable prices, while others are expanding their product lines to include blends that mix lower-cost coffees with specialty beans.
For consumers, this could mean fewer choices of high-end coffees or a rise in more accessible specialty blends as shops and roasters find ways to balance quality and price. As high coffee prices appear less a temporary challenge and more a fixture of the coffee market, the impact on specialty coffee culture is undeniable. Cafes may become more selective in their offerings, while roasters lean toward diversified, flexible portfolios. Ultimately, consumers may find themselves choosing between pricier premium cups or more economical blends.
Thus, we accept the null hypothesis; the coffee crisis and the future aspects of climate change and labour issues have created a high-price reality that may reshape the industry’s identity in lasting ways.
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