Coffee: a commodity before a beverage
This blog dips into the economics of coffee, looking at the potential implications of the Brazilian and Vietnames drought of 2024 and speculates on what the effects may be.
We drink coffee because we enjoy its taste and we may also enjoy the stimulating effect of its caffeine. Some of us drink instant coffee and some of us drink specialty coffee. However, there is a limit to how much we are willing to pay for a cup of coffee. Just like any good, the price of coffee must be justifiable to the consumer for them to part with their money and purchase it, and this can be down to quality and down to marketing influence, or a combination of both.
Moving from the consumer to the producer of the coffee, the farmer, coffee is not a beverage but a crop which begets income. In economics, this fungibility makes coffee a commodity, like oil and gold. Quite like oil and gold the price of coffee is determined by numerous variables which dictate the market. Some variables directly influence the demand for coffee production, like increased consumption, perhaps driven by innovation – like the advent of instant coffee, or a highly effective marketing campaign; some variables directly influence supply, like weather events. A general and simplified rule could be: when supply exceeds demand, prices fall, whereas when demand exceeds supply, prices rise. This would suggest that scarcity increases the value of a commodity. Colloquially, these variables are loosely encapsulated in the phrase ‘the market’. So, when an important person in a sharp suit declares something like: “the bottom has fallen out of the market”, this isn’t as messy as it sounds, it simply means that a variable or set of variables have undergone change causing prices of the commodity or good to be impacted. Markets are characteristically unstable; I suppose this is why someone can ‘play the stock market’. Yes, economics may seem relatively stable for a given period of time, but over the last 100 years chaos has been a regular visitor: recessions, invasions, wars, natural disasters etc have been numerous. Of course, the experiences of the consumer and producer are determined by the market.
Several weeks ago, on November the 29th, this was a Reuters headline: “Coffee prices at 47-year high on Brazil crop concerns”.[1] Similarly, 2024 was a bad year for coffee production in Vietnam due to extreme weather. This is particularly concerning as Vietnam is the largest producer of Robusta coffee, and Brazil the second largest producer of Robusta and largest producer of Arabica (for the difference please see my earlier blog on naming conventions for coffee). The coffee industry has experienced numerous ups and downs over the past 50 years, as can be seen by the graph below,[2] most notably the slipping of prices in the late eighties, the bottoming out of prices in 2001 and the peak of 1976/7.
The decline in prices in the late eighties is attributed to the collapse of a pricing agreement, The International Coffee Agreement; the bottoming out in 2001 has been attributed to oversupply; [3] and the peak of 1976/77 followed a weather event in Brazil, a severe frost which destroyed much of the crop of the then leading coffee exporter. The price on December 10th was the highest price green coffee has been traded at for 47 years, as the earlier Reuters headline states. Factors other than the climate may also be contributing to the current rise in prices, but for brevity, they wont be discussed here.
So, what does 2025 hold for coffee consumers and retailers? Well, this is conjecture only as I am not an economic forecaster, but perhaps it isn’t audacious to suggest that:
- Green coffee prices will remain high following the drop in production by Brazil and Vietnam.
- Smaller coffee producing nations less effected by climate may benefit from the diminished competition from Brazil and Vietnam.
- The increased green coffee price will be reflected in retail prices.
- Micro-roasters may have to specialize to weather the storm. Small roasters do not have the capacity to increase volume due to their limited infrastructure (they are micro and are limited by their roaster capacity and ability to distribute their coffee). Accordingly, micro-roasters may seek to stock more specialised and rare coffee and sell it for a higher price, targeting a more exclusive clientele.
- Customers may reach their limit with increasing prices and accept lower quality for a lower price.
- Perhaps flavoured coffee will become more common.
Contrary to the doom-mongering here, a recent article suggested that there is some hope of a recovery.[4] Whether good tomes or bad times await in 2025, economic forecasting is conjecture only and haphazard at best, so as a consumer of coffee it is often best to forget that coffee is a commodity before a beverage.
Blog by Ali Love
[1] Hunt. N, reporting for Reuters. 29/11/2024. Last accessed 15/01/2024. Accessible at:Last accessed 15/01/2024. Accessible at: https://www.reuters.com/markets/commodities/coffee-prices-47-year-high-brazil-crop-concerns-2024-11-29/
[2] Macrotrends [WEB]. Last accessed 15/01/2024. Accessible at: https://www.macrotrends.net/2535/coffee-prices-historical-chart-data
[3] Boydell. H. 25/09/2018 . A web blog from The Daily Grind. Last accessed 15/01/2024. Accessible at: https://perfectdailygrind.com/2018/09/what-should-we-have-learned-from-the-2001-coffee-price-crisis/
[4] Asplund. R. 14/01/2024. A web blog for barchart. Last accessed 15/01/2024. Accessible at: https://www.barchart.com/story/news/30438190/coffee-prices-slip-as-supply-concerns-ease