How climate change and inflation are affecting coffee prices

Inflation has touched nearly every aspect of consumer spending this year, and that morning cuppa joe and afternoon pick-me-up latte are likely to be next.

Wholesale coffee prices have been perking upwards all year due to a confluence of factors that have taken a toll on supplies, including bad weather in top growing regions and the pandemic-related supply chain challenges that have fueled overall inflation. By mid-November, coffee futures were up 80% from the beginning of the year.

Weather took a toll on coffee crops in Brazil and Colombia, two countries that together supply nearly 75% of the world’s arabica beans. Additionally, higher prices on fertilizer and soaring costs for shipping and the current supply chain crisis are also driving up the price of coffee beans from those countries and others that produce coffee beans including Vietnam and Costa Rica.

Retail prices, meanwhile, rose a more modest 4.4% from October 2020 to October 2021, according to the Consumer Price Index. That’s largely because big companies like Starbucks and Nestle have the ability to lock in prices in advance and stock up on beans, making it easier for them to minimize price increases as markets stabilize.

Thus far, those minimal price increases haven’t driven coffee lovers to cut back on their favorite beverage and it’s not clear that even larger jumps would quell their passion for java.

Consumers love their coffee

Coffee has long been at the top of the list of most-popular beverages. A September report from the National Coffee Association found that 60% of US consumers reported drinking coffee within the past day, more than any other beverage including tap water. That percentage rose to 65% among people aged 25 to 39, according to the trade group’s annual survey.

Consumers kept up their coffee drinking habits during the pandemic, though many shifted to brewing their own at home as they stayed away from offices last year. That trend started shifting back this year. Although home remained the most popular place for grabbing a cup of joe, coffee consumption at the office grew 55% from January to September as workers started getting back to their normal routines, and out-of-home coffee consumption overall grew 16% during that period.

“As COVID restrictions ease, coffee drinkers are returning to pre-pandemic routines but also keeping their favorite new coffee options like drive-through and app-based ordering,” NCA President and CEO William “Bill” Murray said in a news release.

By country, the US is the biggest importer of coffee from around the world, bringing in between 2 million and 3 million 60-kilo bags each month, according to data compiled by the International Coffee Organization.

Arabica beans are by far the most in-demand, with major chains including Starbucks, Dunkin’ and McDonald’s sourcing the coffee known for its smoothness and flavor.

Brazil, the world’s biggest producer of arabica beans, felt the pinch of climate change as it endured several years of drought. An unseasonal July freeze took a further toll on this year’s crop.

Colombia, the second biggest arabica producer, saw yields begin to fall several years ago as low prices spurred some growers to stop cultivating the crop and changing climate conditions cut into yields.

In 2019, the country’s National Federation of Coffee Growers reported that Colombia’s coffee cultivation had shrunk by 20% over more than three decades. More than 4% of that, or about 100,000 acres, was removed from cultivation in the 18 months ending in July 2019.

A balancing act on pricing

While wholesale coffee prices are on the rise, some big US coffee players have an advantage when it comes to minimizing the effect on retail prices.

Major chains with buying power can lock in prices well in advance. In an October earnings call with analysts, Starbucks President and CEO Kevin Johnson reported that the chain was well-positioned for the near future.

“We’re 14 months price-locked on coffee with several months of inventory in the warehouse,” Johnson said in the call.

That said, inflationary pressures could drive menu price increases and the company sees room to raise prices if necessary, but it’s also balancing that with the need to maintain its market share lead.

“Part of this is, how do you take the right amount of price at the right time and not have customer attrition? We’re the share. We want to grow share of customer occasions right now, and so that’s the balance that we strike,” Johnson said.