Coffee Prices Plunge Even Though We Can’t Stop Drinking the Stuff

A pound of wholesale arabica beans, the premium variety favored in most coffee shops, has been selling for less than $1 since early March on the Intercontinental Exchange in New York, below what many producers say it costs to grow and process. Coffee drinkers might not have noticed any difference in price, given the prevalence of the $5 latte.

What has enabled the world to be awash with coffee? Factors include major advances in coffee production and a collapse in the value in the currency of the world’s largest producer, Brazil.

All About Brazil

Arabica coffee production

Prices have sagged under the weight of what is expected to be another surplus world-wide coffee crop this year. More than any other, the country behind that glut is Brazil, which has expanded its already-leading share of the world’s coffee crop.

Brazil has stolen market share from Central America because of state-sponsored research and development—including phasing in mechanized harvesting over handpicked methods still used elsewhere.

“The problem is that [other countries] are not able to withstand the tide that is Brazilian coffee supply,” said Keith Flury, the head of research at ED&F Man-subsidiary Volcafe Coffee Research, until 2018.

The Real Deal

When Brazil’s currency, the real, is cheap, so is the coffee that Brazil sells in dollars to the rest of the world. And the real is 60% less valuable compared with the dollar than in 2011. It has fallen 12% against the dollar over the past year.

“The root causes of the low dollar coffee prices are the high productivity of Brazilian production, the strong dollar and the weak Brazilian real,” said economist Jeffrey Sachs, director at Columbia University’s Center for Sustainable Development, which is undertaking a farmer welfare study backed by the intergovernmental International Coffee Organization. “Basically, Brazil is undercutting global costs,” he said.

Cecafé, Brazil’s coffee export association, didn’t respond to a request for comment.

Caffeine High

Global arabica coffee consumption

Global arabica consumption is set to break records for the fifth straight season in 2019-20, Rabobank forecasts.

Yet despite the demand, the fall in prices has exposed a dichotomy between “the haves and the have-nots” in producer countries, said David Brooks, managing director of U.K.-based coffee-roasting company Percol.

When futures prices fall below $1 a pound, some farmers cope by slashing spending on fertilizers and pesticides, according to Greg Meenahan, partnership director at World Coffee Research, an industry-funded group.

“Their crops become weak and next year’s crops have a higher incidence of failure,” Mr. Meenahan said. “They’re just getting beaten up.”

In April, Colombia, another major coffee exporter, increased emergency aid to its coffee farmers.

“You see coffee products all over the shelves saying they’re sustainable, but people forget about economic sustainability,” said Roberto Vélez, chief executive officer of the National Federation of Coffee Growers of Colombia.

“You have Central Americans immigrating to the U.S. and Africans moving up to Europe because coffee prices are too low,” Mr. Vélez added.

What Coffee Drinkers Pay

Average consumer price of roasted coffee

Weaker arabica prices at the wholesale level have passed through to supermarket shelves, but they remain well above where they were a decade ago. The average price of a supermarket can of coffee has come down in recent years. U.S. Department of Labor data put the average price of coffee sold to U.S. consumers at $4.34 a pound.

As for a cup served in a shop or restaurant, a 2018 UBS study found the price in many major cities around the world was around $3. Cafe prices remain high because of strong demand and because beans are only part of the cost of producing a drink, alongside things such as rent, overheads, labor, milk and sugar.

Price of a cup of coffee in major global cities

Can prices go lower? Some analysts point to a small global deficit between supply and demand in the season ending 2020, since it is technically an “off-cycle” season in Brazil, with production falling as plants recover.

However, “the husbandry the farmers give the trees is excellent and that’s decreased the cyclicality of the crop,” said Carlos Mera, senior commodities analyst at Rabobank.

Source: The Wall Street Journal