Coffee Bean Prices Hit Decade High, Strengthening the Position of Large Chains

This is an English adaptation of a FoodBud historical article originally published on December 1, 2021.

Coffee bean prices reached their highest level in nearly a decade in late 2021, with tight supply expected at the time to persist into 2023. For coffee chains, the question was whether higher green-coffee costs would flow through to menu prices, and whether larger operators would be better protected than smaller players.

According to Reuters, the December coffee contract closed Monday at $2.34 per pound. The previous Thursday, ICE coffee futures rose to $2.46 per pound, the highest since 2011, when coffee prices had broken above $3 per pound.

The International Coffee Organization benchmark price was $2.07 per pound on Friday, up 85% year on year.

Bloomberg reported that Arabica futures rose as much as 4.8% on Friday to $2.235 per pound, more than 90% higher than a year earlier and the highest level since October 2014. The market was facing a serious shortage of Arabica beans, described not as a short-term issue but as one the industry would need to consider for years.

Arabica Shortage Pushes Roasters Toward Trade-Offs

Roasters, suppliers and retailers had to decide whether to raise prices or use more Robusta, Arabica's close relative. Robusta prices had also risen in 2021, but by less than Arabica, and remained less than half the price.

Some coffee brands focus on one variety, while many use blends of Arabica and Robusta to create specific flavor profiles. Arabica is sweeter and commonly used in drinks such as cappuccinos and lattes. Robusta has traditionally been popular in Italy and is used in espresso and freeze-dried instant coffee.

Vietnam, the largest exporter of Robusta beans, was expected to have a second strong harvest that year, but shipping delays made it difficult for exporters to move beans out of the country. Unlike Arabica, however, the issue was viewed as timing: Robusta was still expected to reach the market.

Why Large Chains Had More Protection

Bloomberg noted that over time, surging bean prices could raise costs for Starbucks and Peet's Coffee, potentially passing through to consumer prices.

On Starbucks' latest quarterly earnings call at the time, CEO Kevin Johnson discussed pricing and said the company was considering increases, though he declined to specify how much prices might rise. He said Starbucks was still analyzing pricing, but that prices would continue to rise under global inflationary pressure.

Johnson also said large coffee chains could lock in prices in advance. For Starbucks, coffee bean prices were locked for 14 months, and the company also had several months of inventory in warehouses. The implication was that smaller operators would face greater pressure because they would be less able to absorb rapid cost increases.

For operators, the key challenge was securing the right price at the right time while avoiding customer loss and market-share decline.

Weather, Logistics and Input Costs Added Pressure

Brazil, a major coffee-producing country, was dealing with the aftermath of prolonged drought and crop-damaging cold weather. In Colombia, another major supplier, excessive rainfall affected the coffee harvest. Supply uncertainty was also rising because of instability in Ethiopia and a surge in COVID-19 cases in Vietnam.

Ole Hansen, head of commodity strategy at Saxo Bank, told CNBC that extreme weather had lifted coffee prices over the previous year. Severe drought and frost in Brazil, the world's largest coffee producer, reduced supply. Hansen added that those weather conditions would affect output in 2022 and even 2023.

Coffee dealers told Reuters that the price surge was also driven by higher demand, falling Arabica inventories, high fertilizer costs and labor shortages.

Coffee prices had previously surged to $3 per pound in 2011 because of reduced supply from Brazil. Hansen said prices could return to that level, and that if Brazilian production fell in the coming months, prices would undoubtedly rise.

Beyond adverse weather, global supply-chain disruption had a major impact on the coffee market. Transportation was especially important because producers and roasters process and ship beans across countries before they reach consumers.

Maximillian Copesteck, executive director of European coffee sales at Marex Spectron, said the coffee market was in a price competition driven mainly by freight issues. Supply was already tight, and supply-chain disruption pushed prices higher.

Copesteck added that coffee production takes about two years to respond to price changes, so bean prices were expected to remain high.

Note: forward-looking supply, pricing and production expectations in this article are historical, based on reporting from 2021.