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If you are a coffee lover then you may have occasionally thought about how those coffee beans got to your kitchen.
We have previously written about coffee farming and also about the price of coffee.
In this post, we take a further look into the price of coffee beans and the economics of coffee in a curated article thanks to some great data analysis by Chartr. We will see just how much money a farmer can make from farming coffee.
As you know coffee is a brewed drink prepared from roasted coffee beans, which are the seeds of berries from the Coffea plant. Coffee is one of the largest agricultural commodities traded throughout the world.
Coffee is consumed by millions on a daily basis. It has become an important part of the economy in many countries and helps create numerous jobs for coffee farmers, coffee roasters, baristas, and many more.
Consequently, coffee’s popularity around the world makes coffee a valuable commodity that can significantly affect the economics of countries around the world.
Coffee Commodities and Futures Market
Coffee is considered an agricultural commodity and is one of the most frequently traded commodities in the world.
In fact, coffee is the second most traded legal commodity in the world after oil. The export market for coffee is worth over 19 billion dollars in 2019 and growing.
Australia (my home country) is a relatively small coffee-growing country but exported coffee and coffee substitutes to the value of AUD$68 million.
Coffee is also one of the most volatile commodities with coffee bean prices changing constantly.
Coffee prices are affected by supply and demand like other commodities.
However, the price of coffee is also affected by speculation from trading coffee on commodities and futures markets.
A futures contract is a standardized legal agreement to buy or sell a tradeable asset at a predetermined price at a specified time in the future, between parties not known to each other.
Coffee is also traded as a futures contract.
Companies use coffee futures contracts to lock in a guaranteed price for coffee. Farmers use futures contracts to lock in a sales price for coffee.
Futures contracts guarantee that coffee can be bought or sold at a fixed price.
This agreement allows buyers and sellers to know the revenue or costs involved and can reduce risk.
However, if the coffee price goes up then the farmer will not gain from the increased price during the term of the contract. That is, the farmer would have sold their coffee at too low a price.
If the coffee price goes down then the buyer will lose money at the end of the contract. That is, they would have spent too much on the coffee.
It is this up and down movement of the coffee price that can significantly affect the economics of countries that trade coffee around the world.
Coffee Prices
We’re all bored of hearing and reading about inflation, but our ears pricked up when we heard that coffee prices are at their highest level for more than a decade at about $2.50 per pound.
Few commodities invoke emotion like coffee, with 62% of Americans drinking coffee every single day each one of which gets through 3.1 cups on average.
Coffee prices may have doubled in the last year, but the cost of your latte probably hasn’t.
The caffeine bean supply machine
Arabica coffee accounts for about 75% of the world’s production and is mostly cultivated in Brazil (about 37% of the world’s total supply) and Colombia.
Robusta coffee accounts for the remaining 25% and is mostly produced in Vietnam (15% of global supply) and Indonesia.
Other major coffee producers include Peru, India, Uganda, Ethiopia, Mexico, and Cote Ivoire.
Robusta is the coffee bean that is popular in Europe and espresso coffees while Arabica beans are popular in the United States.
Coffee prices have always been volatile. Periods of excessive supplies have progressively driven down prices until a catastrophic event – either environmental or political – results in a correction.
Unfortunately, Brazil has been hit by lower-than-expected temperatures, drought, and even some frost which are hurting its coffee crops and output.
Ethiopia, which accounts for about 4% of global production, is also seeing supply disruptions as the escalating civil war, that has seen schools close and rebels take control of some towns, continues.
In Vietnam, heavy rains have delayed the coffee harvest.
Ongoing shipping bottlenecks, labor shortages, and COVID are also playing their part in disrupting the supply chain.
All of these events contribute to a restriction of supply, and with constant demand, increases the price of coffee beans.
Given that wholesale prices of coffee beans have doubled since this time last year, you’d be forgiven for worrying that the price of your grande double-shot hazelnut latte is about to double as well but that’s unlikely.
That’s because the cost of the wholesale coffee itself typically makes up only a tiny proportion of the total, according to a 2019 UK study from the Financial Times and Allegra Strategies.
Indeed, the cost of the actual coffee is usually only around 4% of the cost of a typical cup, which in the study worked out to about £0.10 ($0.13). That proportion is probably even lower for an order like a hazelnut latte, which will have sweeteners and more milk than a typical cup.
1 Pound ≈ 0.453 Kilograms
Coffee Price Per 1 Kilogram = 5.20 USD
The current market price of coffee can be found at Business Insider
Future Coffee Prices
The destruction of coffee trees due to frost in Brazil and the other supply problems mentioned above will undoubtedly affect future coffee prices.
If the frost in Brazil has severely damaged the coffee trees then there may be a considerable drop in world supplies.
We can’t foretell the future but if these farming and supply issues continue then the coffee bean prices could go even higher than they are today. Maybe even up to US$4.00/pound or more?
Coffee Farmers Get a Pittance For Their Coffee Beans
The data above is from 2019, and just in the UK, but even if only broadly accurate, it gives a good sense of how complicated the coffee supply chain is. The coffee roaster usually accounts for most of the cost of the actual coffee, while exporters, transporters, and processors take their cuts, leaving the actual grower with around just 10% of the coffee cost.
In the study by the Financial Times and Allegra Strategies 10% of the price of a coffee works out to be just one penny from a typical £2.50 ($3.30) cup of coffee.
With prices rising, that number might be a little higher than in this example, but it’ll remain just a fraction of what it costs you, even if you order a simple double-shot espresso.
Corporate farmers (farming done by larger corporations) may be able to deal with this low return from the price of a cup of coffee by producing more coffee and taking advantage of economies of scale.
However, according to the Fairtrade Foundation, more than 125 million people around the world depend on coffee for their livelihoods, with around 25 million smallholder farms producing 80% of the world’s coffee.
Maybe, the future increased price of coffee beans will mean we pay more for our coffee?
The question is will the increased price of coffee finally give the smallholder coffee farmers a larger share of the price we pay for our coffee?
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For a bit more detail on the history of coffee prices please see an excellent article by Jonathan Morris in The Conversation.
Everything You Should Know About Coffee Farming
Where Do Coffee Beans Come From: From Plants to Home
Coffee for an Environmental Cause
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