From the Field, News, Resources for Roasters

Friday, December 3, 2021

Why Do My Coffee Prices Change?

A question we frequently hear is “why do my coffee prices change?”(and more recently, this has mostly been phrased as “Argh - Why do prices increase?!”) There’s no short answer, so we’ve marshalled our best minds to help us give you an overview of why coffee prices change over time and in these specific circumstances.

“The three biggest factors driving changes in prices right now are supply & demand, the recent frost in Brazil and freight rates,” explains Ilya Byzov, Quantitative Trader for Sucafina Specialty North America. In this article, we’ll explore each of these in more depth and analyze how they impact the prices you pay.

Supply & Demand Impact C Market

Supply and demand can be a complicated mechanism to understand, but Ilya’s has some answers. “Let’s work on a very simple example,” he says. Suppose you have 10 roasters who all buy 10 bags per year of coffee (100 bags total). Each year there is just enough production to meet demand, and 100 bags of coffee are produced.

Suppose a frost in Brazil wipes out 40 bags of production, and we now have 60 bags of production to meet the demand of 100 bags for roasters. What happens? Well, either some government entity rations out 6 bags to each roaster and every roaster loses 40% of their customers, or the free-market mechanism takes over.

In a free-market economy, supply and demand mean that when the amount of coffee available shrinks, the cost of coffee rises. In theory, this means that fewer people will be willing (or able) to secure supply. In a broader context, this is the current situation. A major frost has wiped out a significant proportion of the Brazil’s upcoming coffee crop. As the world’s largest coffee producer, this reduction in Brazil’s expected crop size is significant. No matter how you spin it, there will not be enough supply to meet global demand at the current prices. Therefore, producers will have more pricing power and will almost certainly raise their offers accordingly. Overall, prices will go up until demand for the coffee reduces or until there is more supply.

At the same time, higher prices also mean that many roasters will substitute the coffees they were previously buying for other, less expensive options as the price of their initial choice increases. For instance, a roaster who was previously including Kenya AB in a blend may switch to using a Tanzania FAQ. Or, as we’ve seen in the market recently, many roasters draw on ICE certified stocks that are available at lower prices than coffees on the spot market.

With supply and demand, these substitutions will likely continue until demand for  more expensive coffees levels out as many roasters switch to other options. When demand is more inelastic – meaning when demand remains relatively stable even as prices rise or fall – prices across the supply chain will continue to rise until people are priced out of the market. One example of this is Indonesia, where there isn’t an immediate substitute, and we’re seeing very high prices in Indonesian coffees this year. This supply and demand interaction is even more drastic when you consider the relationship between production and demand. “Demand for coffee on a global level is very inelastic [demand remains very similar even when prices rise precipitously],” Ilya explains. “In the last 20 years, coffee consumption went up by an average of 1.98% per year.” Coffee is also relatively price inelastic, meaning that people will generally continue to purchase their coffee even if the prices change year on year. However, “production can change 20 to 25% each year,” Ilya says. “Arabica is very finnicky, it isn’t as consistent as people are.” This gap between inelastic demand (that doesn’t change much) and elastic supply (that can vary greatly year-on-year) leads to frequent market fluctuations as people compete for scarce supply or drive prices down during times of oversupply.

Coffee prices change when supply and demand interact to create scarcity or abundance. The interaction between the relative stability of demand and the fluctuations of supply are key factors that impact coffee prices. The next factor we’ll look at, frosts in Brazil, also impacts futures prices.

Brazil Frost Impacts Supply Forecasts

While supply and demand are global factors that impact prices, Brazil is such a significant producer of coffee that major events impacting supply in Brazil are a force unto themselves. In addition to being the biggest global producer, Brazil is also the only major coffee producer subject to frost risk. Frosts can negatively impact supply forecasts for several years and, as a result, have significant impacts on the market. Parana is the main frost-prone state in Brazil, but climate change has expanded frost’s reach further north.

 “A major frost event can affect coffee prices in the long term,” explains Luis Fernando Esteves, Head of Research & Trader for Sucafina North America. “It does so by significantly reducing production and causing a tightening of global supply. Lower supply then translates into higher prices that can sustain for an extended period of time.”

Trees impacted by frost will have to be pruned or replanted, leading to reduced yield and loss of production. If trees are replanted (which, increasingly, they are not) they can take 3 to 5 years to begin bearing fruit and get back up to yields. Even with pruning mildly affected trees, it can take approximately 1 to 2 years to get back to pre-frost production levels.  Frost’s impact on the market can be long-lasting and affect global coffee production for several years. In 2021, the frost impacted 3.7 million bags, and we recently increased our consumption estimate by a million bags overall. With these numbers, consumption increased as supply decreased, putting further pressure on coffee prices. Putting that together, we are now increasing the deficit by 4.7 million bags, roughly to production of El Salvador and Guatemala combined.

Freight Rates Compound Costs

Unlike supply & demand and the frost, freight rates impact coffee prices directly through shipping costs, rather than indirectly through the futures market. Freight costs are included in the final price of the coffee, so when freight rates go up, the final price will also rise so that companies can cover their costs.

Freight rates have increased six-fold since 2019. This unprecedented jump in prices is the result of a perfect storm, explains Georgina Bleeker, Logistics Officer with Sucafina SA in Switzerland. “Lockdowns due to the coronavirus, the Suez Canal blockage from MV Ever Given, exponential demand for goods from Asia to the US after the complete stoppage of vessel movements (creating a shortage of containers) and an increase in congestion at bunkers and hubs have all resulted in the rates we see today.” Congestion spans not just the ports but also warehousing and trucking, creating a traffic jam that’s slowing delivery. Containers are now waiting longer to board ships, spending more time on ships, more slowly removed from ships and taking longer to be trucked to destination.

These slowdowns are due in part to a lack of effective capacity. Bottlenecks extend outside the port to the entire system of trucking

At the moment, it’s uncertain exactly how long these freight increases will last, but, Georgina says, they are likely to continue at least into the first half of 2022. Our logistics team is hard at work navigating these increased rates.  “Freight rate negotiations for 2022 are beginning, and we are looking to diversify our options since having alternatives is crucial to shipping in this unreliable environment.” Since freight rates are so high right now, we suggest that as you look at purchasing coffees, you look at landed prices – rather than FOB – to get a more complete picture of your projected costs.

It’s important to also note that there are many more factors impacting costs including labor shortages, social unrest, reduced ICE-certified stocks, Robusta availability and more. Understanding the conceptsconcepts, we’ve covered here will help you gain insight into the broad strokes of how the market moves, but these other factors will also impact coffee prices. As always, we invite you to reach out to your trader if you have any questions and we’ll direct you to someone who can help.

What Can I Do?

These factors may seem completely out of your control, but that doesn’t mean you can’t do anything to weather them. Our team is here to help you plan for price fluctuations and mitigate the impact changes have on your business.

On the freight side, “It is important to know that the whole supply chain has been affected and not only are the freight rates increasing but so is transit time as a result of port congestion and backlogs of cargo,” Georgina says. While some things such as transit times and freight costs are out of our control, planning ahead for your coffees can save you time and money in the long term.

With the changing C market “It’s helpful to plan for periods of volatility by pricing forward when prices are good. Don’t miss your chance to lock in prices for coffee when the market is favorable,” Ilya says. “Another option is to be flexible in your sourcing option. At any point in time, some coffees will be more expensive, so consider a different origin or grade. Keep yourself flexible to changing your blend components and you’ll be able to be more much nimble in a changing market.” Reach out today to talk to us about fixing prices, booking ahead and substituting origins; we’re here to help you.