This is an English adaptation of a FoodBud historical article originally published on September 19, 2021.
Image source: Pexels
Starbucks’ key protection against coffee-cost volatility was its hedging and procurement system: buying ahead and locking in prices before weather shocks, shortages, or logistics problems pushed raw-material costs higher.
On September 6, 2021, data from China’s General Administration of Customs showed that China’s coffee bean imports rose 104.3% year on year from January to June, while import value rose 76%.
Green coffee imports, defined as coffee that had not been roasted or decaffeinated, reached 54.483 million kilograms, up 123.1% year on year. Import value for green coffee rose 136% over the same period.
Extreme weather and Covid-19 disruptions helped push green coffee prices up by more than 40%.
China’s imported coffee mainly came from Vietnam, Malaysia, and Brazil. In 2020, their shares were 33.10%, 19.97%, and 7.77%, respectively. Even as global coffee prices continued to rise, China’s coffee bean imports kept expanding alongside the development of domestic coffee culture.
Industry sources said Brazil, a major producing region, had suffered severe drought and frost, sharply reducing output in coffee-growing areas. That tightened market supply, pushed global coffee bean prices significantly higher, and kept coffee futures elevated.
Brazil’s state-run National Supply Company expected the country’s 2021 coffee harvest to be no higher than 48.8 million bags. Each bag weighs 60 kilograms, implying a harvest below 3 million tonnes and a 22.6% decline from the previous harvest season.
Reuters reported that Brazil first experienced a major drought and then its worst cold wave since 1994, damaging both coffee-tree quality and yields. The harvest was expected to fall by 15 million bags versus the prior year, and some regions could take up to seven years to return to previous production levels.
Container shortages added further pressure. With uncertain arrival times, traders planned to hold more spot inventory to secure domestic-market supply. Global coffee prices rose from about 104 cents per pound the previous year to 152 cents per pound in July 2021, a 46% increase.
On September 14, Reuters reported that Brazil’s coffee shipments in August had fallen to their lowest level in the previous year because of global shipping disruptions.
Brazilian green coffee exports in August fell 27% year on year to 2.33 million 60-kilogram bags as it became harder to secure containers and vessel space. Brazil was the world’s largest coffee producer and exporter, accounting for nearly 40% of global coffee trade. In 2020, its coffee exports reached US$5 billion, around 16% of total global coffee exports.
Vietnam, the world’s second-largest coffee exporter, was also limiting global supply as lockdown measures to control Covid-19 restricted shipments. Fitch Solutions warned that coffee prices would remain “relatively high” into 2022.
Global coffee prices had risen about 50% in 2021, reaching their highest level since 2017. Lower Vietnamese exports and weaker output from other major producing countries pushed prices higher. Arabica coffee futures, one benchmark, rose about 45.8% in 2021, while Robusta futures rose 52.2%.
Vietnam customs data showed that the country’s coffee exports in August fell 8.7% from July to 111,697 tonnes. From January to August, Vietnam exported 1.1 million tonnes of coffee, down 6.4% year on year. Because prices had risen, however, total export revenue increased 2% to about US$2 billion.
Colombia and Vietnam had better harvest conditions than Brazil, but that was not enough to ease price pressure. The other key constraint was containers.
The Wall Street Journal noted that coffee has to move by container rather than bulk shipping. With containers scarce and transport costs sharply higher, Vietnam’s exports were hit hard. About one-third of the world’s Robusta coffee came from Vietnam, and prices for that bean had surged 30% over the previous three months.
The New York Times reported that coffee bean costs had risen nearly 43% since the start of 2021.
Large coffee chains such as Starbucks were less exposed in the short term because of procurement and hedging. Starbucks bought raw materials 12 to 18 months in advance to keep prices stable for the following 14 months. By locking in prices early, the company reduced the risk that weather, shortages, or other disruptions would later force up raw-material costs.
Starbucks president and CEO Kevin Johnson said the company had responded to rising coffee bean costs by purchasing ahead and locking in prices, allowing it to secure coffee beans at attractive cost levels and avoid raising menu prices. He said competitors that had not bought coffee as early as Starbucks would not have the same cost structure.
That purchasing strategy gave Starbucks sufficient inventory and allowed it to temporarily avoid the impact of higher coffee bean costs. In the short term, it did not need to risk raising coffee prices.
Smaller coffee operators faced a tougher situation as global coffee supply chains tightened and costs looked set to rise further. Their purchase volumes and bargaining power were lower than Starbucks’.
The New York Times interviewed one coffee shop owner who said the cheapest Brazilian Arabica beans he had previously bought were US$1.90 per pound, but by July 2021 the price had risen to US$2.49, an increase of more than 30%.
In high-demand coffee markets such as the Americas and Europe, some foodservice operators raised menu prices to pass higher procurement costs on to consumers.
The Financial Times reported that German roaster and retailer Tchibo, Japanese brand UCC Coffee, and U.S. food company JM Smucker had all been forced to raise retail coffee prices. Nikkei reported that several Japanese coffee manufacturers, including UCC Coffee and Ajinomoto AGF, planned to raise coffee prices by about 20% in October.
Note: Forward-looking price guidance and 2022 expectations are historical as of the article’s original publication date in September 2021.