Coffee Prices Surge: Supply Disruptions and Demand Push Costs Higher

Global coffee drinkers who’d hoped the price of their daily fix would soon stop rising are due for a bitter wake-up call: it’s about to get even worse.

Both the high-end arabica beans favoured by coffee chains like Starbucks and the more budget-friendly robusta variety have spiked in price, thanks to major supply disruptions from Vietnam to Brazil. Up and down the supply chain, sellers have been raising prices and scrapping discounts to protect their margins, and many warn of more increases ahead.

JM Smucker, whose brands like Folgers and Café Bustelo dominate the US’s at-home coffee market, hiked its prices this summer. Restaurant chain Pret A Manger scrapped its UK coffee subscription that gave customers as many as five drinks per day. Variety Coffee Roasters in New York City just raised its retail prices by about five per cent in its first hike in five years, and other corner coffee shops say they’re next.

When it comes to price hikes, “we’ve always triple second-guessed ourselves before we pulled the trigger,” said Patrick Grzelewski, director of coffee for the eight-location Variety chain. “But it’s just not something anyone can avoid anymore.”

Prices for robusta beans, a favourite for instant coffee, have soared to the highest since the 1970s. Higher-quality arabica beans earlier this month were priciest in more than two years. Some of that run-up is tied to bad weather: Droughts in robusta powerhouse Vietnam are putting the world on track for a fourth straight year of deficits, while dry weather in Brazil has shrunk the size of its arabica crop as damaged trees churn out smaller beans. The gap between futures prices for the two varieties is near the narrowest it has ever been, leaving companies scrounging for any poorer quality arabica beans instead of the usual cost-effective robusta variety to keep down costs.

“The strategy of trying to find cheaper, less expensive components for a blend — I never thought it was the right strategy in the first place — but now it’s a strategy that just simply doesn’t work anymore,” said Michael Kapos, vice president for sales and marketing at Downeast Coffee Roasters, a family-owned retailer and wholesaler based in Rhode Island.

“There’s nothing left to do than for coffee shops to raise their prices.” His company rolled out a five per cent increase earlier this year.It’s not just weather, though, that’s driving up prices. Emerging demand in markets like China promises to keep supplies tight.

There’s also a growing recognition that coffee traders and roasters have long been underpaying farmers, a trend some buyers are trying to reverse to make the industry more sustainable. Higher profits incentivize producers to keep planting coffee instead of other crops and allow them to reinvest in making their trees more resilient to disease and climate risks. If coffee prices don’t go up for growers, there won’t be any reason for them to maintain long-term production.

That’s what happened in the cocoa market, which jumped to never-before-seen prices this spring as production plummeted following decades of underinvestment. Some cash-strapped commodities traders were even forced to exit their coffee positions amid pressure from rallying cocoa futures. Exacerbating everything is the fact that roasters importing coffee into Europe will soon have to prove the beans weren’t grown on recently deforested land. Few countries are fully prepared to comply with the European Union Deforestation Regulation requirements, meaning supplies will be tight.

“Buyers are looking earlier than they usually would and in more quantities because they need to get that coffee to Europe now before EUDR kicks in. That’s making everything worse,” said Tomas Araujo, trading associate at StoneX.

“I’ve never been as glued to the commodity price index on coffee as I’ve been in the last few months, every day,” said Hazel de los Reyes, co-founder of Gumption Coffee in Sydney and New York. Some coffee bean traders “are even not wanting to tell me a set price because it could change any day.” The chain raised prices about ten per cent last year and may have to do it again in the coming months, she said.

Although consumers don’t easily give up their caffeine fix, more will opt to brew at home if coffee out gets too expensive. Grocery-store sales volumes of espresso and coffee concentrate have jumped sharply in the US, data from NIQ show, suggesting some buyers are trying to recreate their favorite coffee treats at home. As price-conscious consumers look for deals, Brazil’s coffee industry group ABIC has been warning shoppers to be wary of unknown brands of cheap beans, which sometimes contain husks, branches and waste from other plants in an effort to dupe households looking for a deal. The country’s agricultural ministry recently identified 19 fraudulent coffee brands on shelves.

Meanwhile, stores trying to appeal to more consumers are touting menu innovations like energy drinks and even coffee imitations. Gumption, for one, now carries drinks at some locations using Seattle startup Atomo Coffee’s “beanless” grounds, which are made with recycled ingredients like date seeds.

The product’s price is currently “within the range of premium coffee,” but will become a “more cost-effective solution” once Atomo increases volumes, said chief operating officer Ed Hoehn. The company launched a new Remix product last month, combining its own grounds with arabica. Other stores are consciously taking a loss on coffee at the moment, knowing a cheap brew will attract price-conscious customers who’ll also buy higher-margin items like sandwiches. Still others are pushing another hot beverage: tea.

“If you become more price-sensitive around coffee, maybe your second cup during the day, you’ve optioned for something else,” said Andrew Stone, the chief brand and culture officer at coffee chain Bluestone Lane, which operates several dozen locations from Boston to Los Angeles. “To have two cold brews in a day might be too expensive.”