Coffee prices won’t fall anytime soon: Why roasters can’t rely on price drops

perfectdailygrind.com | July 18, 2024

Price volatility in the coffee industry has been impossible to ignore in recent years. Earlier this month, arabica prices edged over a two-year high – largely the result of growing supply shortages in Vietnam and Indonesia.

Robusta futures have also reached record highs over the past few months, driven by rising demand, unfavourable weather conditions in Brazil and Vietnam, and ongoing conflict in the Middle East.

The situation is complex to say the least. Moreover, Lavazza chairman Giuseppe Lavazza recently stated that the impending European Union deforestation legislation (EUDR) is set to keep prices high for the foreseeable future.

With this in mind, banking on price drops won’t be an effective short or long-term solution, so roasters need to be attentive to market movements as much as they can. Philip von der Goltz, Managing Partner at List + Beisler, and Yousef Alzayer, founder of Leanitai Coffee, explain why in today’s article.

You may also like our article on why robusta prices in particular aren’t likely to fall soon.

Port workers unload coffee from a cargo ship.
ROASTERS SHOULD EXPECT PRICE VOLATILITY FOR THE FORESEEABLE FUTURE
In the years since the pandemic, there have been a number of interconnected logistical challenges which have impacted the coffee industry. In addition to forced business closures during the height of lockdown, roasters have grappled with shipping container shortages, frost in Brazil (the world’s biggest producer of coffee, which therefore has huge influence over the international market), and conflict which has led to bottlenecks and supply chain issues.

“Price volatility is not exclusive to the coffee industry, but a part of most globally traded commodities,” says Philip, who has worked at List + Beisler in Hamburg, Germany for almost nine years, and is also an international consultant for the United Nations’ International Trade Centre. “Cocoa, cotton, orange juice, sugar, timber, and other commodities such as metals and grains face the reality of a complex and highly interconnected and interdependent world.”

While he explains that traders and roasters have been well aware of market movements for some time now, data indicates that prices are likely to remain volatile and high for some time – and there are a plethora of reasons why.

“Global demand has outpaced production and export levels, which puts stress on the supply chain,” he tells me. “Funds and managed money holding are near record-high positions, and there is still geopolitical uncertainty following Russia’s invasion of Ukraine and the war in Gaza.”

Conflict in Ukraine spiked food and energy costs in many countries in early 2022, which naturally has affected roasters and coffee shops. What’s more, the Israel-Gaza war has resulted in significant shipping delays and reroutes after a series of attacks along the Suez canal.

“The Red Sea crisis has forced shipping lines to navigate around the Cape of Good Hope, which has resulted in shipment delays from producing countries in East Africa and Asia Pacific,” Philip explains.

Why climate-related issues are impacting price
Philip says climate-related problems are exacerbating market volatility. Low water levels in the Panama canal, hurricane season in Central America (which is predicted to be the strongest in the last 20 years), severe weather conditions at the Cape of Good Hope, dry weather in Vietnam, and the frost period in Brazil (although there is currently little risk) are contributing to the complicated web of issues.

Weather conditions in certain producing countries have been a driving force behind price increases in recent years.

“Weather has a direct influence on production and we can see that in Vietnam the most,” says Yousef, who founded Saudi Arabian specialty importer Leanitai Coffee in 2018. “Dry conditions have impacted yields and resulted in a decline in robusta production.”

In January 2024, the price of robusta had reached a 29-year high. As of early May, however, this shot up to a record 45-year high as both demand and exports continued to rise.

“When the price of robusta started going up, demand didn’t drop and consumers started to buy more arabica, so that also drove prices up,” Yousef tells me.

Political problems also continue to pose challenges
But the situation is more complicated than we initially think, as Yousef adds.

“Migration has been a big factor, but it’s unfortunately not receiving enough attention in the media,” he explains. “It creates a lot of challenges for producers to find coffee pickers, so to continue providing employment, they need to pay higher labour costs.”

EUDR has also been a big focus point in the coffee industry and beyond over the last couple of years. While the objective of the new legislation is undoubtedly positive, many have criticised the neocolonial implementation of the regulations – largely because smallholder producers are set to be hit the hardest.

“There is a lack of clarity about the EUDR framework,” Philip explains. “Market uncertainty remains high, and price volatility will continue to be part of the game. Speculative elements and managed money will always push prices to higher or lower levels.”

Two men assess aroma during a coffee cupping.
NOW IS THE TIME TO REMAIN ADAPTIVE
“Coffee is a seasonal natural product, it can’t be manufactured,” Yousef says. “Weather impacts production, and sometimes supply can’t cover demand. Farmers also plan ahead for the upcoming harvest and purchase equipment and fertilisers, which are also vulnerable to price changes.

“Multiple factors that are mostly independent dictate end prices, and since many are seasonal, coffee prices are difficult to accurately forecast,” he adds.

With this in mind, roasters need to stay flexible to cope with current challenges, as well as any unforeseen issues. But both Philip and Yousef emphasise that waiting for coffee prices to drop isn’t the answer.

“If business owners want to stay in business, they have to adapt,” Yousef explains. “They need to understand that they can’t control coffee prices. Dropping quality just to save money is a route that business owners can take, but it only creates bigger problems. Buying coffee with care and attention to detail and receiving ongoing market updates is the best solution, even if the market is not offering the best prices.”

Meanwhile, Philip says: “From a business perspective, it’s always good practice to buy when prices are low or falling. But timing is often critical. There is no guarantee for falling prices, so a ‘wait and hope’ strategy could turn out very expensive for roasters.”

So how can you best prepare?
Managing green coffee stock is already a big part of roastery operations, but Philip and Yousef emphasise that it’s now become even more important.

“Roasters need to consider how to best position themselves in the market with their coffee offerings, prices, and marketing strategies so that repeat customers will understand why prices might need to change,” Yousef says. “Also, ensuring fair pricing will help during these hard times. Unfortunately, many businesses play the price war game, so when prices shoot up, they struggle to find affordable coffees without sacrificing quality.

“By being flexible and staying up to date with market movements, you can be realistic,” he adds. “Set reasonable prices and be unique to give yourself a competitive advantage. Be transparent with customers and build relationships so they can better understand why prices might change in the future.”

Philip also recommends sourcing a wider variety of coffees to navigate market fluctuations.

“Roasters can adjust blends and test out new components,” he tells me. “Source different coffees with similar quality and cup profiles to create a consistent product at a more affordable price.

“If possible, include a security margin into your pricing structure, which can help to buffer momentary price peaks,” he adds.

A cupping spoon surrounded by coffee cupping bowls.
Price volatility is an inevitable part of the coffee industry. With recent spikes in both arabica and robusta prices, roasters have to figure out the best ways to adapt and stay agile.

Ultimately, switching up coffee offerings and sourcing from different origins – while still maintaining quality and flavour profile – will help roasters find success when dealing with unstable market conditions.