Why coffee isn't getting cheaper despite 13-year low in bean prices

The price of the coffee beans favoured by Starbucks and Tim Hortons is at a 13-year low, but even a casual java drinker could tell you the price at the counter certainly hasn’t fallen.

So, what gives? Well, the short answer is that coffee bean farmers in Brazil have been producing far too many beans, which is driving down wholesale prices.

This year, the price of a pound of Arabica coffee fell below US$1 on one of New York’s largest commodities exchanges. It bottomed out in late May at US$0.87, and closed Tuesday at US$1.05.

These numbers represent about one-third of what the peak price was back in 2011. The futures contract price is at its lowest point since 2006.

Brazil is the world’s largest coffee bean producer. Its farmers produce around 65 million bags of Arabica coffee, or about a third of the world’s overall supply.

But with this recent dip in coffee bean prices, the bottom line is that farmers are losing money.

“The immediate effect is farmers are going to cut as much as they can,” Rodrigo Costa, coffee director for the U.S.-based Brazilian trading firm Comexim told CTVNews.ca over the phone, referring to producers likely slashing costs spent on fertilizer or labour.

Some Brazilian farmers are even abandoning the industry altogether. But Costa said a lot will simply diversify their crops and predicted many will stay the course unless they find something more profitable.

 

WHY SO MUCH PRODUCTION?

Stellar weather conditions in Brazil in 2018 coupled with farmers recently investing in trees, fertilizers and improved farming and growing techniques led to the recent flooding of coffee production.

“But if everyone does the same thing, you’ll end up having a bigger supply, which is what’s happening recently,” Costa said, adding that the Brazilian government halving of the value of the country’s currency has also played a large role.

For a century, Brazil has had a lockdown on the global market but recently, other countries such as Colombia and Vietnam have been stepping up production.

Many Central American countries such as Honduras are now producing various types of coffee with some targeting higher-end, organic beans which bring in more money. “Everyone wants to blame Brazil alone but it’s not the only country, although they do control the pendulum,” Costa said.

Both 2017 and 2018 saw notable coffee overproduction globally, which has shrunk wholesale prices to low levels.

 

BUT MORNING CUP OF JOE ISN’T GETTING CHEAPER

But if you think all of this will mean your latte will be cheaper, you’d be wrong. When comes to the retail level, we just haven’t seen prices adjust yet.

In fact, for the past five years, the monthly retail price of 300 grams of roasted or ground coffee has hovered around the same price, according to Statistics Canada figures.

Costa explained that the price of coffee at the counter is more affected by the costs associated with labour, employee salaries, advertising, rent and distribution.

“For big players like Starbucks, the cost of coffee likely represents less than 10 per cent -- maybe even closer to five per cent,” he said. “And other [factors like advertising and labour] aren’t getting cheaper.”

He explained that because of the two or three-year crop cycles for coffee farmers, it will take some time for them to adjust and prices to climb back up.

But one survey from Bloomberg forecast coffee futures to average US$1.24 a pound this year—up from the average US$1.15 in 2018. Costa expects the price of a pound of Arabica coffee not to shoot up again for another two years.