Brewing trouble: the rising costs of coffee in an unpredictable climate

By Kanica Goel, Senior Commodity Analyst at The Smart Cube

In recent months, the global agricultural commodities market has been marked by considerable volatility, impacting prices, supply chains and trade dynamics worldwide. The effects of such instability are most keenly felt by consumers. Indeed, the price of everyday items such as orange juice and olive oil have more than doubled recently, primarily due to extreme weather changes. What’s more, resulting disruptions in logistics have further exacerbated the situation, as manufacturers struggle to adapt.

Among this volatility, the price of a particular commodity has hit an all-time high: coffee. Prices have risen over 30 percent since the start of this year and 67 percent in the last year. As a result, certain coffee shops have started charging more than £5 for a takeaway cup, prompting outrage from consumers. However, alternative strategies exist that would prevent consumers from having to cover the balance for the increased costs. 

Factors driving up coffee costs

The primary factor driving increasing coffee prices is supply concerns in two key coffee-producing nations: Brazil and Vietnam. Together, these two countries account for 55 percent and 50 percent of global coffee production and exports, respectively.

In fact, in March 2024, Brazil’s Minas Gerais region, which is responsible for an estimated 30 percent of the country’s Arabica crop, faced an unprecedented deluge with precipitation levels soaring to 235 percent above the historical average for that time of year. However, this was short-lived with April experiencing a drought and May continuing the dry spell. These atypical weather patterns have had serious implications for the regions’ agricultural output, most significantly causing damage to Brazil’s Arabica crop.

Simultaneous drought conditions in Vietnam – the world’s largest producer of Robusta coffee beans – may result in a projected production drop of 20 percent Y-o-Y in MY2023/2024 (October 2023 – September 2024), producing the smallest coffee crop for the country in four years. Already, exports have been affected. During the first half of 2024, coffee exports from Vietnam were at 902 million tonnes, a drop of 10.6 percent Y-o-Y. 

Primarily favoured in Europe, Robusta is mainly used in the production of instant coffee. With this in mind, the lower coffee bean yield not only impacts the price of premium beverages bought from coffee shops, but also the more affordable varieties brewed at home. These price increases are therefore having tangible effects on consumers’ daily lives.

The future of coffee

As summer arrives in the UK, demand for coffee will decrease due to the hotter weather, which will impact prices over the coming months. However, ongoing concerns relating to coffee supplies have triggered short covering of coffee by investors and traders. This has the potential to keep the commodity’s price further elevated in the short term.

In the long term, prices are still projected to rise, primarily due to the unpredictability of the climate in recent years. The Robusta coffee market supply is on track to be in a negative balance for the fourth consecutive year, which will keep the global prices elevated. In addition, exponential increase in the use of coffee as a substitute for cocoa and strong demand from Asia will exert upwards pressure on prices.

A few things to consider over your next cup of coffee

However, an uptick anticipated for Brazilian and Colombian arabica coffee production amid improving weather conditions in the LATAM region will keep prices from reaching another record level during this year. Higher rainfall in June supported a pick-up in harvest activities in Brazil – as of 25th June, about 50 percent of the country’s MY2023–2024 harvest was completed, up 5 percentage points from the previous year during the same time.

Preventing supply disruptions

As a quick fix to combat the impact of rising coffee prices, food manufacturers have begun to transfer the burden of increased commodity input costs to consumers. For instance, the UK’s largest coffee chain Costa Coffee has increased prices by upwards of 13 percent. However, manufacturers can employ several strategies to prevent supply disruptions and minimise the impact of rising ingredient costs.

This includes actively evaluating multiple suppliers and assessing their critical vendors. By identifying multiple suppliers in different regions, the reliance on a singular provider will no longer leave firms vulnerable to unexpected price hikes when purchasing commodities from areas with decreasing production.

Firms should also map supplier dependence. By conducting a comprehensive assessment of exposure to suppliers, organisations can ensure that any dip in production doesn’t significantly impact operations.

For example, coffee producers should review their exposure to vendors from Brazil and Vietnam and consider other coffee-producing regions such as Colombia. Already one of the largest coffee suppliers to the UK, the country’s Arabica production is projected to increase, now rivalling Brazil as an Arabica powerhouse.

Elsewhere, to maintain profitability and ensure a steady supply of reasonably priced goods, coffee producers should also consider using artificial intelligence (AI) as part of their business strategies. The technology enables firms to analyse vendor information and establish which is the best fit for their business, based on a range of factors including price, quality and quantity.

Businesses can leverage AI tools to process this data in real time, providing up-to-date information on production trends, further improving demand forecasting. In this way, manufacturers can select the most cost-effective solution, mitigating the impact of rising prices on consumers further down the supply chain.

Overall, coffee prices are predicted to remain elevated in the short to medium term at the very least – with the potential for these price hikes to last for an extended period – due to supply constraints and declining production, as well as an increasingly uncertain global climate. While market consensus might suggest that coffee producers need to pass the burden of rising ingredient costs onto consumers, there are several alternative strategies available to mitigate these costs.