Your Morning Coffee is in Jeopardy – But Why?
Just when we thought we’d seen it all in the global supply chain, another threat looms – a shortage of coffee. Learn the facts here.
If you feel overwhelmed with dealing with shortages and rising prices for everything from microchips to chicken wings to cardboard boxes, at least you can find solace in your morning cup of coffee, right?
Sorry to be the bearer of bitter news. Add coffee to the list of products facing rising prices and shortages in 2021 and beyond. You’ll likely be paying more for your morning brew, whether you make it a home or buy it from your favorite coffee shop.
So far, the world price of coffee has surged 21.6% this year to $3.65 a kilogram, according to IBISWorld. Indeed, coffee futures surged from $1 a pound to twice that and have settled down to about $1.90 per pound, according to the LA Times.
What’s the cause?
Well, there isn’t one sole answer, but we can blame lousy weather in Brazil, pandemic lockdowns in Vietnam, rising costs for roasting and packaging machines, and the ongoing supply chain disruption for higher coffee prices and looming scarcity.
Brazil, the largest producer of arabica coffee beans, has been hard hit by drought and frosts. The BBC reported that the damage was so bad that some farmers might have to replant trees, which take up to three years to produce beans. Prices for unroasted beans have reached the highest level in seven years.
Pandemic lockdowns in Ho Chi Minh City have delayed exports of all kinds, and the robusta beans grown in Vietnam are among the products caught in the crunch. You’ll find the bitter taste of robusta beans in instant coffees and some espressos.
Whether you’re working from home or back in the office, coffee is in high demand as a small comfort during times of stress. But it’s pretty much a sure thing you’ll be paying more for your caffeine fix.
What happens next?
Big chains like Starbucks may not have to raise prices. Kevin Johnson, CEO of the world’s biggest coffee retailer, noted on an investors’ conference call that the company has a fourteen-month supply of beans and can likely ride out any pricing surges.
But smaller importers, roasters, and retailers may have to pay higher prices that are passed on to consumers. Some roasters have long-term contracts that will protect them from price hikes, but those buying without contracts on the spot market will pay more for beans and shipping due to increased freight rates. However, rising prices could incentivise producers to build capacity faster, lowering pressure on existing supplies.
Alternatively, coffee sellers could source lower-quality beans from other locations. So, if your regular drink tastes a bit off, that may be the reason.
You’re most likely to see the price hikes if you buy bags of coffee to grind at home. About half the cost of a bag of coffee on the shelf comes from the price of the beans, so there’s less room to absorb the hit on margins. For coffee sold by the cup, the cost of beans is only about 5%, so your favourite shop may not pass on the cost. However, small businesses are being rocked by higher costs for practically everything, and even a slight price increase could be fatal.
If you’re involved in sourcing coffee beans at an enterprise scale, good luck. While the particulars are different, the advice to reduce supply chain risk is similar to those dealing with the microchip shortage. Look for alternative sources and lock in pricing with contracts when possible. You may have to decide when and how much of the higher cost to pass on to your customers.
How is the coffee shortage and price hikes affecting you? Let us know in the comments!
