What’s causing coffee market volatility?

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The price of Arabica hit a 13-year high in August 2024. GCR discovers what’s causing the surge and how coffee market volatility is affecting roasters around the world.

Beyond the pleasure and caffeination it brings to the one billion people who drink it, coffee plays a significant role in the world’s financial markets. Green coffee is one of the most traded agricultural commodities on the planet, with the global market value estimated to be between US$100 to $200 billion in 2023.

It’s not just a major component of the financial sector though. Fairtrade reports that 125 million people worldwide depend on coffee for their livelihoods, and it’s estimated that around 600 to 800 million people work across the industry from farm to cup. Statistics from the International Coffee Organization (ICO) put the total bags produced in the coffee year 2022/2023 at 168.2 million.

With the industry impacting so many peoples’ lives and wallets, it’s unsurprising that the steady increase in coffee prices over the past year has made headlines internationally. Coffee drinkers across the world are discussing the cost of their morning cup, fuelled by news reports suggesting consumer prices are about to skyrocket.

However, is the current upward trajectory as unprecedented as some commentators are suggesting? GCR put this question to the ICO, an intergovernmental body that brings together exporting and importing governments and promotes the sustainable expansion of the global coffee sector in a market-based environment.

Upward trajectory

“If you look at the current price of Arabica in nominal terms, it’s the highest in 48 years. You have to go back to the 1970s, when the black frost occurred in Brazil, to see the same kind of numbers,” says Dock No, Statistical Coordinator of the Statistics Section of the ICO.

“However, you have to assess the numbers in real terms. At the end of August, the price of Arabica was just under [US]$2.40 per pound and that’s the highest we’ve seen since 2011.”

The price of Arabica has been steadily rising since the start of the 2023/2024 coffee year (October 2023) in a similar manner to the market increase seen in 2020 as the world emerged from the first lockdown. No says this current trend can’t be attributed to a single factor but instead a variety of influences on supply and logistics.

“The supply of Arabica around the world has been affected by a number of extreme weather events. The frosts experienced across Brazil in July 2021 have had a knock-on effect, while Colombia has experienced about 13 months of continuous rain and Ethiopia is going through five years of drought,” he says.

These extreme weather events aren’t just impacting the price of Arabica. Vietnam, the world’s biggest producer of Robusta, has experienced a succession of poor harvests due to weather-related phenomenon.

“The price of Robusta has also been affected by an increase in the change of land use in Vietnam. The feedback we’ve received is that it’s not just one crop that coffee is being replaced with. However, the demand for durian fruit from China has increased greatly over the past 10 years and we’ve seen a lot of farmers uprooting their coffee trees and replacing them with durian,” No says.

At the start of 2024, announcements that many of the major shipping companies would not pass through the Suez Canal due to attacks from rebels in the area also influenced price rises. Rerouting around Africa adds about four weeks to many common coffee routes, adding supplementary cents to each pound of coffee for increased shipping costs.

“While the shipping route is a small factor, the impact is minimal and once it’s been factored in, it cannot continually put pressure on the prices,” he says.

According to No, the continued burden on growing regions across the world means that over the past few years demand is now greater than supply. This has led to the industry being more reliant on the stocks that have built up.

“The beginning of the coffee year 2022 is when we started to experience a lot of supply issues. That’s where we saw stocks of coffee starting to be drawn down. In Europe, for example, we saw stocks go down from around 14 million to seven million,” says No.

“Fast forward to now [September 2024], you have Vietnam telling everyone that there is absolutely no stock in the country. Its exports have plunged in the past three or four months and this is because, according to them, there are no domestic stocks left and they’re still waiting for the start of the coffee year.

“Everyone can see that the stocks are already low, and with the extreme weather events over the past 12 months affecting the coffee year that will start in October, this is impacting prices as demand is expected to outstrip supply. I personally think this is the fundamental reason why the prices are being driven up; there is an issue with the ability of the industry to supply the market with relative ease.”

Amid the supply and demand conundrum, No stresses that just because the prices are rising doesn’t necessarily mean the farmers are receiving the additional money.

“There are many different reasons why the prices have been rising and some have nothing to do with prices paid to purchase those beans from the farmers. The simple cost of business has gone up and none of that is being reflected in the income of the actual coffee,” he says.

Ripple effects

The ripple effects of these current market trends are being felt by businesses across the supply chain – especially roasters who must make the decision to absorb costs or pass them on to their customers.

Producing 12 million cups of coffee each day, Löfbergs is one of Europe’s largest coffee roasters. Anders Thorén, Head of Corporate Communications at Löfbergs, says the company has experienced increased prices in many areas.

“The cost increases have had an effect at all levels, including our customers and consumers,” he says.

“Fortunately, we are accustomed to the fluctuation of green coffee prices and never compromise on taste and quality. We have a well-established purchasing model along with long-standing, strong relationships in coffee-growing countries, which is a strength.”

As extreme weather events become more frequent and coffee supply looks more uncertain, Thorén says Löfbergs is focused on planning for the future.

“Coffee growers are constantly exposed to small and large weather-related effects, which affect us as a roaster and, in turn, place great demands on planning and risk management. It also demonstrates that our investments to support coffee farmers in their work to cultivate sustainably and face climate change are more important than ever,” he says.

“Price and quality volatility will likely increase in the future, posing even greater challenges to our supply chain. To remain efficient and resilient, we need to invest in both our operations and supply chain, incorporating new technologies. Climate change will require farmers to adapt or even relocate, which is why we are investing heavily in two key industry risks: climate change mitigation and supporting the next generation of coffee farmers. Our goal is to safeguard access to the rich diversity of coffee’s natural flavours, ensuring a sustainable future for all coffee lovers.”

With coffee prices reaching the mainstream news, ensuring the right message is communicated to customers is paramount for roasters. Thorén believes it is important to emphasise the journey coffee makes from farm to cup.

“Inflation, rising interest rates, volatile energy prices, extreme weather events, and global conflicts are challenges that affect everyone, including our customers, who are understandably concerned,” he says.

“Here, it is important for us to highlight how much work is behind a cup of coffee. In that aspect, coffee is still cheap even if the price has increased recently.”

Conversations on coffee

Andrew Low, CEO of Coffee Supreme, a New Zealand-based specialty roaster with locations across the Asia-Pacific, echoes Thorén’s focus on messaging.

“We scored an own goal in the coffee industry when we started talking about input costs and the price of green beans, and now we’re attached to the commodity price,” says Low.

“For example, you don’t buy a bar of chocolate tracking the cocoa price. You buy almost any other food or drink product based on the value of that product, the value of that brand, and how it makes you feel.”

For businesses to survive in all areas of the supply chain, Low believes prices must increase, resulting in a higher price point for consumers.

“We are at a critical juncture in the specialty coffee industry. If we want to support the diversity of small business and artisan roasters, we must increase price,” he says.

“I would be encouraging cafés to put their coffee up 25 cents [AU] four times over the next 18 months. Small, incremental changes are received much better than one big increase.”

Low doesn’t believe the messaging around price increase should centre around the cost of ingredients, but instead focus on the experience of the product.

“It’s not about explaining the cost of farming or the cost of labour as people get bored and turn off. Comparison is a great tool because what something is worth is a relative thing. I like to use simple examples, such as why am I okay paying $5 for a bottle of water, which costs about 40 cents to make, but I’m upset paying $5 for a coffee that’s hand-picked, processed, roasted, and brewed in front of you. It defies logic,” says Low.

“It’s also important to communicate what coffee unlocks. Coffee is the only drink that allows you to have a conversation with a friend and check in on how they are, have a business meeting and come up with an idea, or take a moment for oneself. It transcends what’s in the cup to be community and our social fabric, and I think that’s worth paying for.”

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