Cost of coffee: Climate change, shipping woes, and EU regulations send prices soaring

The global coffee market is experiencing unprecedented turbulence, driven by a confluence of factors including climate change, shipping disruptions, and new EU regulations.

Italian coffee giant Lavazza has highlighted these issues, warning of significant price increases for consumers.

London robusta futures, a global benchmark, have reached a record high, reflecting the mounting pressures on the coffee supply chain.

Climate change and its impact on coffee production

Climate change has emerged as a critical factor affecting coffee production worldwide. The world’s main robusta coffee-growing countries, Vietnam and Indonesia, have faced severe weather conditions, leading to poor harvests.

Giuseppe Lavazza, chair of the Lavazza Group, emphasized the significant reduction in robusta coffee bean availability due to adverse weather patterns.

Climate change has affected the production in the most important robusta countries around the world, mainly Vietnam and Indonesia, reducing quite a lot the quantity available of these kinds of varieties.

The upcoming Vietnamese harvest is not expected to replenish the dwindling supplies, exacerbating the already strained situation. Historically, roasters have dealt with short-term price hikes for robusta beans, but the current situation, characterized by prolonged high costs, is unprecedented.

Lavazza pointed out that the coffee industry is accustomed to fluctuating prices of higher-end arabica beans, but the sustained spike in robusta prices presents a unique challenge.

Shipping disruptions and increased costs

Another significant factor contributing to rising coffee prices is the disruption in shipping routes. Since October last year, vessels have been forced to navigate around the southern tip of Africa to avoid attacks by Houthi rebels in the Red Sea.

This longer route has increased shipping times and costs for coffee companies that source beans from Asia and East Africa.

Lavazza highlighted that the higher shipping costs have added considerable financial strain.

The company has incurred an additional $800 million in costs since 2022, which is 2.5 times its earnings before interest, taxes, depreciation, and amortization (EBITDA).

These increased costs are inevitably passed on to consumers, contributing to the overall rise in coffee prices.

Speculation and market dynamics

The speculative activities in the coffee market have further fueled the price surge. Hedge funds and other speculators have capitalized on the tight supply conditions, driving up futures prices.

Lavazza pointed out that speculation is one of the significant factors exacerbating the situation. As supplies have dwindled and prices have risen, the market has become more attractive to speculators, creating a feedback loop that pushes prices even higher.

EU regulations and their implications

The new EU regulations aimed at curbing deforestation-related imports add another layer of complexity to the coffee market. Starting next year, the regulations will bar imports of coffee and six other commodities that have been grown in deforested areas from being sold in the EU.

Food companies operating in the EU will also be required to geolocate the plots of land where their commodities are produced.

According to Lavazza, only 20% of coffee farmers are prepared to meet these stringent regulations. This means European coffee roasters will need to source almost all their beans from Brazil, which is currently the only country ready for the new rules.

The regulations could potentially cut off around 8 million coffee farmers from accessing the European market, further tightening the supply and driving up prices.

UK supermarket coffee prices up 15%, expected to rise another 10% next year

Lavazza warned that coffee prices on UK supermarket shelves, already up by about 15% this year, could rise by another 10% by next year.

Coffee prices are not going to go down, [they’re] going to stay very high.

The broader market trends indicate a sustained increase in coffee prices. Since the start of the year, coffee prices have risen by over 30%, with a staggering 62.96% increase since November 2023.

This upward trend reflects the compounded effects of supply chain disruptions, climate change, and regulatory challenges.

Kanica Goel, a senior analyst at The Smart Cube, commented on the primary factors driving the price hike.

The primary factor driving this price hike is supply concerns in the key coffee-producing regions – Brazil and Vietnam – which together account for 55% and 50% of global coffee production and exports, respectively.

Goel highlighted that extreme weather conditions in Brazil and drought in Vietnam have significantly impacted coffee production.

The Minas Gerais region in Brazil, responsible for roughly 30% of the country’s arabica crop, experienced 235% higher rainfall in March 2024 compared to historical averages, followed by a period of extreme dryness.

In Vietnam, drought conditions could lead to a 20% year-over-year drop in coffee production, marking the smallest crop in the last four years.

The rising cost of coffee is a multifaceted issue driven by climate change, shipping disruptions, speculation, and new regulatory challenges. As the global coffee market navigates these complexities, consumers are likely to see continued price increases.

Lavazza’s warnings and the broader market trends indicate that the pressure on the coffee supply chain will persist, with significant implications for both producers and consumers.

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