Thursday, May 30, 2024

Bean Counting: The rising cost of a cup of coffee

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While Ireland is traditionally a tea-drinking country, our coffee culture has come into its own over the past two decades.

In 2021, Bewley’s Coffee Consumption Report found that 78% of Irish adults drank coffee each day. And it wasn’t just a one-a-day habit. Three cups was the alleged daily average.

Gone too are the days of Gold Blend being the default. Nowadays a Nespresso machine is a normal feature of kitchen countertops – while expensive espresso machines and elaborate coffee brewing tech are a common sight too.

Our café culture has boomed, too.

Research by BrewSmartly in 2021 suggested that Dublin had one of the highest concentration of coffee shops per capita in the world – second only to Amsterdam.

That was in no doubt helped by the explosion in coffee carts during the height of the pandemic – many of which have become a permanent fixture of sports club grounds and local parks.

But café connoisseurs will no doubt have noticed that their beverage of choice has been putting a bit more of a dent in their finances lately.

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The bad news is that it’s probably only going to get worse in the coming months.

How much more are we paying for our coffee now?

It’s hard to give an exact answer to that, but if we look at the ‘coffee’ category in the Central Statistics Office’s consumer price index, we can see that prices were around 16% higher in March 2024, when compared to March 2020.

That’s actually slightly below the overall pace inflation in that time – which was a little over 18% across the board between March 2020 and March 2024.

But that coffee price from the CSO is based on the coffee you’d pick up in your weekly shop – it would not include the price of a coffee in a café.

And there’s no official data on that either – it would be buried within the CSO’s prices for restaurants and hotels, which would obviously include a lot of other products and services.

Instead the best we can do is try to find prices from specific coffee places from 2020 and compare them to what they’re charging today.

Doing that shows that café prices are rising at a faster pace than shop-bought coffee.

With Starbucks, for example, a large americano is now close to 19% more expensive than it was in 2020. A large cappuccino is 16.5% dearer, while a large mocha is 18.6% more expensive.

For Costa a large americano is now 23% dearer, while a large cappuccino has seen a similar price increase. A large mocha, oddly, is only 7.6% dearer than it was before, though.

But really it’s difficult to give a short answer to the question ‘how much dearer is coffee’ – because really coffee is not one thing; it’s actually multiple products and markets.

What do you mean?

If you go all the way back to the start of the process – there are essentially two varieties of coffee that we consume – robusta and arabica.

Vietnam is the world’s big producer of robusta beans, and Brazil is the biggest producer of arabica.

And, generally speaking, robusta is the cheaper type of coffee that’s used in the production of instant coffee – while arabica is preferred for fresh brews.

And, even within that, there are different grades of arabica – so your artisanal producer is going to be seeking out a very specific type of bean for their products, maybe from a particular region or even particular farm, compared to what a mass-market brand might seek.

And the price they pay per kilo will differ as a result.

But we can get a broad sense of how prices have shifted in recent years through the commodities markets – where coffee futures are bought and sold.

If we look at what’s called the US Coffee C Futures, which covers arabica we can see that, back at the start of May 2020, buyers were paying somewhere in the low to mid 90c per pound. At times that price fell down as low as the mid-to-high 80c range.

Today, though, the price is around $2.23. That’s upwards of a 130% increase in price in four years.

Now, there is a lot of volatility in that price – it has been higher than $2.23 in the past four years – and it has fallen back to the kind of $1.50 range a few times too… but the trend is absolutely upwards.

And what about Robusta?

Well we can get an idea of its price through the London Robusta Coffee Futures.

This is in sterling, and just to confuse things even further, it’s priced per metric tonne rather than per pound.

Here, though, the upward trend is even clearer.

Robusta was priced around the £1,250 mark back in May 2020. Today it’s around £4,150 per metric tonne.

That’s a tripling in price in the past four years.

What that tell us is that, as much as coffee has gone up in price for consumers here in Ireland, it’s not nearly as severe as what’s happening at source.

What’s happening, to some extent, is that people along the chain are cutting costs or trimming their margin in order to absorb some of that increase.

But these are also futures markets prices – they’re the price people are paying for coffee that will come to market months down the line. That means that some of what we’re seeing here are price increases that are yet to hit the end consumer.

So what’s impacting prices?

Weather is one of the big factors.

Brazil’s harvest was badly hit back in 2020 and 2021 by a combination of a harsh drought, which impacted coffee plants’ ability to grow seeds in the first place, and a freak frost that also damaged crops.

And if we go back to that futures market – you can see the price of arabica futures climbed rapidly from early 2021 onwards, as those involved tried to digest the knock-on effect of the world’s biggest producer being so badly hit.

Output from Brazilian coffee farmers has bounced back to a large extent, and the country is now expecting its third increase in production in a row this year.

However things were so bad back in 2020 and 2021, it hasn’t been enough to make up for those losses.

That’s in part because global inventories of coffee were badly hit by that shortfall and are still at decades-long lows.

Meanwhile on the robusta side, Vietnam has been experiencing hotter-than-normal weather lately.

That was exacerbated by El Niño last year, and it continues now with some areas in the midst of a month-long heatwave.

As the name suggests, robusta is usually a more robust plant compared to arabica – but despite that the severity of the weather means the country’s coffee output has still suffered.

And that explains why the price has seen a particular spike in recent months – the futures market is up 90% since October 2023 alone.

In fact it’s gotten so expensive that some robusta buyers are actually buying lower grade arabica instead – and that’s pushing prices higher across the board, even at the higher end of the market.

So is it just the weather?

Weather is a big factor, but it’s definitely not the only one.

Higher energy prices are of course having a knock-on effect too – because it costs more to roast the coffee, and ship it half way around the world.

And shipping itself has gotten more expensive – not just because of energy costs, but also because the multiple rounds of disruption that we’ve seen in global shipping the past four years.

Covid of course led to a huge log-jam which took a long time to unwind – then we had the Ever Given blocking the Suez Canal, and more recently the attacks on ships in the Red Sea, which has led to many shipping companies diverting their cargo towards longer, slower and more expensive routes.That might not have had too much of an impact on what was coming from Brazil – but it would have impacted shipments from the likes of Vietnam.

And another factor in the rising price are the markets themselves.

Those futures markets for arabica and robusta are subject to the same kind of activity as any other traded commodity, meaning there are people who are buying and selling futures who don’t actually want the end product… they just want to profit from the change in price.

So, for example, when word comes in that Vietnam’s production could be down this year – some of the resulting rise in the market price is based on people moving in and essentially betting on where the price will be in a few months’ time.

It doesn’t matter that they’re not actually looking to buy coffee – their activity still pushes up the cost to real coffee buyers.

But perhaps the biggest other factor in the rising price is China.

What’s happening with China?

They’re going through the same change that Ireland went through maybe a decade or so ago; they’re shifting from being a country of tea drinkers to a country of coffee drinkers.

The important difference, of course, is that Ireland is market of 5 million people – China is a market of 1.4 billion people.

A consumer trend here represents a blip on an industry’s balance sheet – but one in China represents a major shift.

And the growth of China’s coffee market represents a fast-paced trend.

According to figures cited by Reuters from the International Coffee Organisation, coffee consumption in China grew by 15% in the year ending in September 2023.

The number of branded coffee shops in China grew by 58% in 2023, according to Alegra Group.

A big part of that was driven by indigenous brands like Luckin Coffee – which added more than 5,000 outlets last year – and Cotti Coffee – which added more than 6,000 shops.

Big global players like Starbucks and Canada’s Tim Hortons are investing heavily in China too.

Starbucks had 6,806 stores in China by the end of last year.

And all of that means that demand for coffee is sky-rocketing – and because it takes anywhere from three to five years for a new arabica coffee plant to give you a harvestable crop, it’s impossible for growers to react to that quickly, even if the weather and all the other factors are on their side.

So prices will keep going up?

It seems that way, yes.

A number of artisanal Irish coffee brands expect to see prices go up in the not-too-distant future.

Of course some of the bigger companies could, in theory, absorb at least some of the increases.

Starbucks, for example, made a profit of $5.87 billion last year, up 27% on 2022.

Nestlé’s underlying trading operating profit was up 17.3% last year, meanwhile.

But that’s probably wishful thinking.

According to one Irish brand, having a good relationship with specific growers can help mitigate against price rises to some extent – because you’re maybe less reliant on what’s happening on the market price.

But, ultimately, what’s happening there will end up feeding through to what they’re charging for their produce.

And if coffee companies have to pay more per pound for what they’re getting later this year, then that will ultimately get passed on to us as end consumers.

Is there anything that might help ease the pressure?

Well there may be a tiny ray of hope… farmers in Costa Rica feel their plants are actually adapting to the changing climate, and so might not be as badly impacted by weather as feared.

There may also be some parts of the world that will now become more suitable to coffee growing due to climate change.

Meanwhile there are efforts – particularly by big buyers like Nestlé – to help develop plants that are more able to deal with extreme weather conditions, But those efforts are still a research project rather than anything real.

It is also worth noting that parts of Southern China is in so-called Coffee Belt – which is the strip of land around the equator that is best suited to growing coffee.

China is currently a relatively small producer – it’s inside the top 20 coffee producing countries in the world but a minnow compared to Vietnam and Brazil.

But given the explosion in demand for coffee in China, you would assume the government there is looking at trying to meet more of that with its own goods. And when China decides it wants to ramp up production in a particular area, it usually does so at any cost.

Again, though, that will take time… years really. So even if that does happen, it won’t give much relief to the prices being paid today.

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