We have been hearing about the cost of retail coffee rising but let’s take a closer look at why this is occurring. A hike in coffee prices will further raise the cost of a shopping basket following increases for other items such as bread, vegetable oils and sugar. The United Nations food agency’s index of world food prices for July showed a year-on-year rise of 31% at a time when many consumers are struggling financially due to the pandemic.
And with the latest weather impact of the most devastating frost in decades in top coffee producer Brazil and record freight cost sparked by COVID-19 has caused massive shipping logjams are expected to push retail prices to multi-year highs in the coming weeks.
Brazil, a top coffee producer, has suffered both a drought and frosts this year. Data issued by the U.S. Bureau of Labor Statistics show average ground coffee prices rose to a peak of $4.75 per lb. in April, This is up 8.1% from a year earlier and the highest level since July 2015, as drought took an initial toll on Brazil’s crops. In Brazil, the world’s number two consuming nation after the United States, roast and ground coffee prices increased 3.4% in June, according to statistics office IBGE.
The worst cold snap in Brazil since 1994 sent the price of green coffee beans to the highest level in almost seven years. The extent of the damage is still being assessed. But in areas where coffee trees have not survived it may take up to seven years for production to fully recover.
Coffee prices are set to rise further. After the July frosts, Brazil’s coffee industry group (ABIC) told roasters to analyze their costs and adjust prices accordingly, to preserve the sustainability of their businesses. ABIC estimates that green coffee prices for roasters in Brazil increased around 80% from December to late July. “Some companies, including market leaders, have already announced price increases,” ABIC said in a letter to associated roasters seen by Reuters.
The production cycle of arabica coffee alternates years of high and lower production. Since trees get stressed after a large crop, they produce less the following year. Brazil, for example, is currently in an off-year, with production seen at around 55 million 60-kg bags by analysts, down from around 70 million bags in 2020. The worst drought in 90 years has also impacted output, leading Arabica coffee on the ICE Futures U.S. exchange to double in price over the last 12 months.
A larger production in 2022 was considered key by analysts to guarantee a balanced global supply next year, as consumption grows around the world due to the reopening of coffee shops after coronavirus-related restrictions.
The rise in transport costs, linked to a shortage of shipping containers, will play a major role in driving up prices. Coffee is normally shipped in containers, in contrast to commodities such as grains which are transported in bulk carriers.
Many coffee companies find it easier to withstand a rise in the cost of beans, at least in the short term, than increasing shipping costs as they often fix the price of their purchases several months in advance. “We have hedging here in place for a good percentage of our coffee needs for the rest of this year and even for part of next year so I’m not short-term worried about that,” Nestle Chief Executive Mark Schneider said during a recent conference call, adding this was not the case with transportation costs.
Carlos Santana, coffee head trader for EISA Interagricola, a unit of ECOM Trading, said it was very challenging to ship coffee, particularly in the Americas. “It is almost not economical to use this route right now. The ports in the U.S. are full, shipping companies do not want to take more cargoes to there, so they charge more. Prices are more than three times higher than they were before the pandemic,” he said. He also said the problem is widespread, impacting all players. “Brazil is such a mess logistically right now.
Julian Thomas, managing director of Maersk Brazil, part of the world’s biggest container shipping line, said the “current bottlenecks from measures to contain the pandemic and a strong demand are also impacting supply chains in and out of Brazil.” German container shipper Hapag Lloyd added that there were delays for shipping goods, “but not only coffee”. Brazil accounts for an estimated 30% of global exports and its peak shipment season has already kicked off.
Interview quotes from: https://www.reuters.com/