Back in September during the whirlwind week that was MICE our very own Tommy T was invited to talk as part of a panel discussion at Cafe Imports HQ in Abbotsford regarding the current state of the coffee industry.
Tommy has put together a transcript of his part of the discussion below for your reading pleasure.

Why does coffee cost so much?

A very broad question without a black and white answer unfortunately. This question is also coming from many angles, from drinker, to barista, to roaster, to importer and all the way back to producer. My goal is to provide some potential reasons for the increases in green coffee prices, discuss how they are all very intertwined and how we should communicate with our stakeholders about these factors and how we should begin to navigate these going forward.

I do not claim to know all the factors and definitely not the level of some of my peers. My knowledge comes from talking with our partners at origin, our importer friends and learning from our collaborative specialty coffee industry friends. Take everything broadly and hopefully this provides some clarity on the state of coffee globally and how we can navigate coffee into the future.

Covid

Everyone is probably sick of the catch all covid excuse, it has been universally accepted as the scapegoat for anything not going to plan. Coffee has also been impacted like any global commodity, but some of the most specific industry impacts were almost the catalyst for this perfect storm of coffee prices skyrocketing. Most coffee producing regions rely on unskilled labor as the engine to run the harvest season. Pickers are often day labor and marginalized people of the community. Covid impacted this group dramatically as they have limited access to healthcare and proper protection during the rapid spread of covid world wide during this time.

We can use Colombia as a reference in this time, many pickers would travel from densely populated cities to regional areas where they would stay for the duration of picking. This became drastically harder as producers firstly were worried about covid reaching the regional areas and their families, secondly the infrastructure for these pickers to travel, stay and eat were extremely limited and becoming expensive too. The result was a drastically reduced and expensive workforce for harvest, which continues now.

Covid also made it nearly impossible for importers to send buyers to origin. Yes, I was pretty bummed about not getting to travel to incredible regions to buy coffee, but more than our selfish desire to travel, it closed a sales channel for these producers who are relying on buyers returning each year to purchase coffee they have already produced. This means the producer has paid for everything that year to prepare coffee and is now ready to sell this crop to replenish funds so they can begin to pay for the following harvest. When this avenue of sales is pretty much non-existent, producers are left with coffee they can't sell, have to sell for a fraction to the internal market or have to trust that importers will air freight some samples and try to buy remotely.

Ask anyone who buys coffee, not only does this never fully replicate being at the farm, seeing the people, processing and communities, it takes so much longer and really drags the process out months longer than usual. Meaning longer before farmers get paid and the ripple effect of everyone in the supply chain getting paid later and receiving coffee later too.

Frost in Brazil

At the end of June 2021 Brazil was hit with the worst frost in over 40 years, decemating 30-50% of some producers' trees with frost too severe to recover from. We have some partners in the Alta Mogiana region and they report losses of 40% of trees on the entire estate. This is not a 1 year problem that we can bounce back from and recover back to full strength. If farmers are to replant they will not see yield from these trees for many years, they still require all the same resources but will not be yielding substantial cherry for up to 7 years from planting. This is a risky investment with the high likelihood of frost returning on these regions, continuing drought and delay on seeing returns, many farms are cutting their losses and switching crops to something more frost resistant like soya and corn.

The impact on Brazil alone is bad enough, 6th and 7th generation family estates are now considering leaving coffee production due to its bleak outlook, but the global impact is astronomical. On average Brazil produces on average more than 35% of the world's coffee. The International Coffee Organization is forecasting that the world will require 168 million bags of coffee this year, this has doubled in the last 30 years and has no signs of slowing down. Brazil's national coffee production has taken a massive hit, somewhere in the region of 40% reduction.

We have already noted that some producers are electing to leave coffee, and the ones replanting are at least 5 years of recovering the lost yields. This is not a momentary blip, rather likely a decade of rebuilding the Brazilian coffee industry. To try and put it simply, the world is going to be 25 million bags short for the next 5 years. When supply is low the world climbs over each other to make sure they aren't the ones left without, this is when prices increase and in late July we saw 7 year high C-prices of $2.20 per pound. This meant that Brazil's misfortune and inability to produce enough coffee raised the value of every other country's coffee almost overnight. The coffee world was scrambling to replace the coffee they had expected to buy from Brazil

Lack of Supply

With the world 25 million bags of coffee short, buyers moved quickly to secure coffee to fill their contracts. This not only had an impact on price but also coffee availability, coffees that buyers had been contracting for years were now unavailable as the mad scramble came to secure anything not nailed down. Lower quality coffee was now fetching the same prices as high quality specialty coffee. The cost of production between these is huge, farmers who had invested in improving coffee quality were not being rewarded for these efforts. We found that on average, the coffee we had purchased from our importer friends had increased on average 30% since the previous harvest. Simultaneously it is great to see producers receive increased prices and tough to see the instant increases effect on the supply chain.

Cost of Fuel & Fertilizer

The world got expensive in the last few years in general, the conflict definitely increased this in many ways. The two biggest impacts on the coffee supply chain are fuel and fertilizer, both of which most of the world's supply comes from. This creates a lack of supply which increases the prices at origin. Reports of internal transportation from mill to port doubling as truck drivers struggle to find and pay for fuel. The same with fertilizers, crops without fertilizer are likely to yield less and ultimately result in a higher cost of production per kg. These small increases must be considered and then covered all along the supply chain to ensure the producers are receiving more money than it cost them to produce that coffee.

Cost of Shipping

The cost to send things around the world is another product of all these factors combined. Fuel prices have contributed to the cost of running ships and also the availability of containers. The price of a container compared to previous years has almost tripled in some countries. Not only has the price and availability of containers changed, but the transit times have also increased with coffee being delayed by up to 2 months. This comes with its own costs to roasters mostly by having to find gap fill coffees or potentially being long with coffee when it finally does arrive.

Currency and Inflation

Inflation is a hot button topic, hitting people with mortgages, renters, students and businesses. It is having massive impacts on the coffee supply chain too. Inflation is a product of the fluctuations in supply and demand slowing chasing the price higher and higher. This flow on effect sees prices increase at every stage of the supply chain and compound into a higher final price. We then need to account for currency exchanges. Each producing country will often set a farm gate price in their local currency, this is then converted to USD by the exporter. We can potentially pay in USD if we have purchased some already, otherwise we will then need to pay in AUD when the coffee gets to us in Australia. Depending on how the USD is performing, we can see swings of $2-3 per kg (AUD) of green coffee on the final landed price. This is somewhat down to planning and organization, but the majority of it is luck.

Overall with inflation and currency factors we can expect coffee prices to increase 10-15% overnight without any warning. These are just challenges all global supply chains deal with but often people can forget coffee isn’t like products grown, produced and sold in one country.

Thanks for the doom and gloom Tommy, but what do you want me to do about it?

This piece isn't designed to scare or guilt, the objective is to provide context and knowledge into coffee pricing, and challenge us as consumers to show our support with what we buy and who we buy from.

Seek out people doing great things, the people supporting people all the way through the coffee supply chain and are doing long term business with producers over many years. If your coffee doesn't cost $4.5 you should be asking yourself who has been exploited or ripped off in order to achieve this? Look past the beautiful aesthetic of a cafe or retail bag to indicate quality, or the token photo of a farmer or their children on marketing material to show they care. People doing good things have nothing to hide and will share who their importers are and know where and why that coffee was purchased, putting money where their mouth is and supporting their partners through thick and thin. Simply, let's put some value back into how we consume coffee, like we do with wine, spirits, chocolate and any other specialty quality products.

Demand incredible coffee and happily pay for it.

Do good, drink coffee.

So why does coffee cost so much? 🤔☕️