The rise in green coffee price is a complex result of a range of events that have occurred over the last two years.
Among them are climate change, political instability, and supply chain disruption due to the Covid-19 pandemic, as well as rising labour costs and soaring demand.
The increase in the price of green coffee threatens the entire market. Players across the supply chain will feel the impact, from producers and traders, to roasters and eventually, end consumers.
As the uncertainty of the coffee market continues, it puts in perspective the fragility and vulnerability of the industry to external factors – raising concerns among many.
To find out more about the recent price hike and its implications to the coffee market, I spoke with green coffee sales executive of Mercon Specialty, Emily Smith.
Why is the price of green coffee rising?
The C price is the global benchmark for arabica coffee.
Essentially, the C price is determined in the C market – the global commodity exchange market for coffee. Coffee is traded on the Intercontinental Exchange (ICE) in New York, through a financial instrument known as futures contract.
As with most financial markets, the law of supply and demand governs the C market. Any factors that cause changes to the supply and demand of coffee will influence its price.
Therefore, the C market is known to be inherently volatile, with prices that are perpetually fluctuating. In the past two years, there has been a steady upward trend in coffee prices.
Notably, in 2021, prices recorded a 76% annual increase. Moreover, the price of coffee futures also reached a 10-year high at $2.5 per pound last December.
A multitude of factors contribute to the current high prices. For instance, the frost and drought events in Brazil caused a substantial loss to the global coffee supply.
These extreme weather events are believed to be caused by climate change, which is having detrimental effects across the coffee industry.
Additional factors, such as civil unrest and the recent surge in oil prices because of the Russia-Ukraine crisis, have only exacerbated the situation. Together with container and labour shortages and supply disruptions due to global Covid-19 restrictions.
“Ocean freight costs are commonly 2-3 times more than what they were two years ago,” says Emily, who has also worked as a roasting educator.
Consequently, there is a greater reliance on land transportation. “Overland freight itself has risen dramatically,” she explains. “This is due to increased gas prices and a shortage of labour in the trucking industry.”
Moreover, this has impacted the price roasters pay for land transportation for the delivery of their green beans.
Important to realise is there are no signs of slowing on the demand side. The National Coffee Association found consumption levels among American consumers have soared to a two-decade high.
This is causing retailers and roasters to stockpile coffee in anticipation of price and demand increases. As a result, the coffee market experiences a further supply crunch, which drives prices even higher.
How is the rising cost of green coffee affecting producers & roasters?
The increase in green coffee prices affects all parts of the supply chain.
On the face, this may seem like good news to coffee producers. After all, higher coffee prices would mean producers can earn more for every pound of coffee they sell.
However, this might not be the case when examined closer. Price increase is a direct consequence of reduced production, with many coffee producers still struggling to recover from the loss.
What’s more, 80% of the world’s coffee is produced by 12.5 million smallholder coffee farmers.
Yet, the disaggregated nature of the producers and the lack of resources have prevented them from participating directly in the market. As a result, they are forced to be the price-takers instead.
Furthermore, coffee is a perennial crop, taking around three to five years to mature. Even if producers respond to the current high prices by planting more crops, the market may have already shifted when the crops reach maturity in a few years’ time.
In Colombia, higher coffee prices have prompted producers with pre-existing contracts to default in the hope of reselling their crop at a better rate.
However, delivery defaults can lead to major losses within the whole industry.
“When a grower does not deliver, the whole chain gets stuck losing money,” explains Roberto Velez, CEO of Colombian Coffee Growers Federation (FNC).
On the other hand, price increase will also affect coffee roasters, as this translates directly to higher costs, which cuts into their profit margin.
At the same time, roasters must decide whether to pass the higher cost onto consumers, which is likely to drive them away.
What can roasters do?
Price increases are an inevitable condition given the volatile nature of the coffee market.
That said, there are a few things that roasters can do in order to manage pricing risks better.
Monitoring inventory is an essential part of running a roastery. Having a proper system in place is essential to ensuring green stock security and preventing panic buying.
Additionally, staying connected with traders or producers to keep up to date with the latest holding and logistical situation is equally crucial. This helps cultivate a collaborative environment for both parties to navigate and work through any market uncertainties.
“Use your coffee importers as a resource,” Emily says. “We are partners in this industry. None of us know what the market will do tomorrow, but we are happy to share the insights that we might have about current conditions.”
Another key point is for roasters to stay informed of what is happening at origin and in the market. This can help them respond to any price movement appropriately.
More so, they should keep their options open by sourcing coffee from other origins when one becomes too expensive. At the same time, roasters should be creative and flexible with blends.
Emily advises roasters to look for alternative components that can keep costs low while delivering the same, or an even better, flavour experience.
Roasters should also aim to be transparent and communicate any price changes with consumers. This includes sharing the reason behind the price hike together with a breakdown of costs to give consumers a clearer picture on what is happening in the market.
“Customers may grumble,” Emily says, “but explaining to them why the product is more expensive can typically help alleviate their concerns.”
In times of a supply crunch, some importers may sacrifice quality to limit price increase. Therefore, it is advisable that roasters diligently cup green samples prior to purchase as well as after the arrival of a shipment to ensure quality.
All in all, climate factors will increase the possibility of a further supply decline. Studies have suggested half of the land used to grow coffee will become unproductive by 2050.
Therefore, pivoting your business to a more sustainable narrative becomes more important than ever. In particular, switching to sustainable packaging is the first step that roasters can take to minimise their impact on the environment.
We are also able to digitally print QR codes onto a range of sustainable coffee packaging, with a quick turnaround time of 40-hours and 24-hour shipping time.
MTPak Coffee also offers low minimum order quantities (MOQs) to micro-roasters who are looking to remain agile while showcasing brand identity and a commitment to the environment.