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Cheap Coffee No More
Over the last few days, the beverage world has been buzzing with the early release of Starbucks’ Pumpkin Spice Latte (PSL).
The crowd favorite, which for many marks the beginning of Fall, sparked two debates this year:
Has the taste changed (for better or for worse)?
Will the drink’s early release cause a big shortage, just like back in 2012?
I am not sure how to express this in a kinder manner, but “Frankly my dear, I don’t give a damn!”
If you’re among those bothered by the potential shortage of PSL, then good for you, because apparently, coffee is not your “thing.” In fact, you might as well continue drinking this sugar bomb all-year-round, since it will alleviate the real coffee shortage that the rest of us are about to experience, which is the real concern.
A couple of weeks ago, the Wall Street Journal published an article on the coffee supply chain, and more specifically, on the impact the weather changes have had on it:
“A poor harvest in the world’s largest coffee producer threatens to push the cost of a cup of joe even higher. Farmers in Brazil are dealing with the fallout from freakish weather last year, where plantations endured first drought and then frost. Some say that their crop of higher-end arabica coffee beans will be less than half what it could be in a good year…Brazil matters to the global coffee market because it is by far the world’s biggest exporter.”
But it’s not only Brazil. Vietnam is suffering as well:
“The dwindling reserves and poor harvest outlook come at a time when global coffee consumption is recovering from a virus-induced slump. Benchmark robusta prices have surged 17% from a 10-month low...”
The same article points out that this is not an isolated issue:
“Colombia is struggling to recover from crop-damaging rains, while Honduras, Guatemala and Nicaragua are running out of supplies from the 2021-22 harvest. Costa Rica’s next-season crop is showing signs of stress, and a drought has cut robusta yields in Uganda.”
If you find the terms Arabica and Robusta confusing, we will revisit this point later, but the article clarifies:
“Robusta, used by instant coffee makers including Nestle SA or as a blend in espressos, has been making a comeback. The variety, normally cheaper than arabica, is in strong demand as people look for alternatives to mitigate the impact of rising inflation.”
If you’re wondering whether this is better or worse than the general inflation, the WSJ article makes it clear that coffee prices are rising faster than other products:
And future coffee prices are not looking much better:
“According to data compiled by Tasting Table, the average U.S. price for a pound of ground coffee was $4.17 in October 2019. By August 2021, its price had increased to $4.73 per pound, and in June of this year, the price per pound had leaped again to a whopping $5.79 — an increase of 38.8% since late 2019. A coffee habit is definitively becoming a luxury, and waning stocks of robusta beans in Vietnam aren't helping matters by pushing global prices even higher.”
The Coffee Supply Chain
In order to understand what impacts the retail price, we must first understand the entire value chain.
The following infographic illustrates it well:
The breakdown is simple:
Coffee is harvested by the growers, and then sent for processing (which may happen on the farm or at an independent processor), where the beans are processed either dried (natural) or wet (washed) depending on the method used for that specific grower/coffee. After green coffee beans are “created,” exporters ship them in bulk to roasters, who roast the beans to the desired level (light, medium, or dark*).
*If you prefer dark roast, you may stop reading here. The 80’s are calling you.
Some roasted coffee beans are then sold directly by the roasters, while some are distributed to local or national retailers.
The numbers in the infographic above are really static and fail to tell the full story, but if you are a grower, the picture is grim.
The numbers below are from the ICO website. According to the graph, over the last 30 years, coffee retail prices have been rising (probably not faster than inflation), and so have the payments to growers. But as you can see, the growers’ payment is a fraction of what consumers pay.
If you’re wondering what fraction: it varies quite a bit and, in fact, is decreasing.
I chose Ethiopia (my favorite coffee variety) and Brazil.
If we look at the fraction that goes to the grower, it’s quite volatile, but it’s definitely on a declining trend.
But why are retail prices and costs (meaning the growers’ payment) not completely coupled (and on the contrary, are inversely proportional)? There’s the aspect of bargaining power that consumers may have over distributors and farmers, but the reality is a bit more complex. The book Cheap Coffee makes the point that most consumers don’t have the skills to identify subtle differences in quality.
In Italy, between 1994 and 1995 (and then again in 1997), when green coffee prices spiked, roasters simply bought lower quality beans, and sales weren't really impacted. When prices dropped, they didn't return to the previous quality, they just increased the prices back again and widened their margins.
Remember the discussion on Arabica vs. Robusta?
Another angle to the differential between retail price and growers’ payments is that while overall consumption (of both varieties) has been steadily increasing, production has fluctuated.
Who absorbs the risk? The growers.
The Future of the Coffee Supply Chain
The main issue is that climate change will have a significant impact on coffee production.
“The Arabica bean, a native Ethiopian species used to make most high-quality brews, is one such threatened species: According to Helen Briggs of BBC News, the team behind the Global Change Biology study found that Arabica’s population could fall by around 50 percent by 2088.”
So your coffee will become more bitter (since Robusta is less finicky) and more expensive.
But I don’t really mind more expensive coffee if it also means better quality.
In fact, over the last few years, we have seen people like YouTubers James Hoffman and Lance Hedrick pay more attention to good quality coffee, and with a long discussion on the Physics of Coffee with Jonathan Gange and Scott Rao.
This also lends itself to a much shorter supply chain that stops at the roaster. This allows for two things: 1) a much higher percentage of the retail price staying with the growers, and 2) much better conditions for coffee storage and logistics.
It also creates more transparency as to where our money is going. Here is Onyx outlining how the “Onyx price” is allocated to each step.
The price to consumers of this specific variety is $26 for 10oz.
But note, such a supply chain loses most of its economies of scale, as well as many efficiencies: you need better storage and logistics, and the reality is that coffee can be ruined at any point in the value chain.
So this is a supply chain that trades off quality for cost, and given there is willingness to pay a higher price for green beans, suppliers will ultimately have access to better quality beans, and more reliable growers.
Onyx is not the only one addressing the more coffee-conscious consumers. For those who want better coffee, well roasted (in small batches), and to support the growers, there are several good roasters, such as Passenger and Vibrant, who are local to Pennsylvania. As usual, I am not affiliated with any of these roasters, I am just a very satisfied customer.
In fact, one would hope that restaurants would start adopting a similar approach to coffee as they have for wine: let the customer decide what coffee quality they want to pair at the end of their dinner or lunch and charge accordingly. Maybe even airlines. Austrian Airlines offers an extensive coffee menu, although they focus on different preparation styles, and not on different varieties.
The Next 50 Years
The future is even grimmer:
“In a separate study, Davis teamed up with other researchers from Kew and the Environment, Climate Change, and Coffee Forest Forum in Addis Ababa for an in-depth look at wild arabica, which was at low risk in the global analysis. Their new study, unlike the old, factored in climate change, using remote sensing data and computer modeling. It proved to be crucial: They found that climate change could cut the population of wild arabica in half by 2080, the researchers report this month in Global Change Biology. The finding suggests that other seemingly low-risk wild coffee species could in fact be at even higher risk, Davis says.”
But people (and Aaron Davis who is quoted above is among them) are looking for solutions. Here is a short video by James Hoffman on Cafea Stenophylla, an “Arabica-like flavour in a heat-tolerant wild coffee species.” But this will require significant investment in growing it and adapting the supply chain to it.
The coffee supply chain is not very complex, and because of that, shortening it, can create a higher quality supply chain, and one that will potentially allow the growers to better prepare for the future.
In the meantime, if we want to cut down on our own costs, we will need to start getting used to drinking less coffee. If we don’t, we can pay a little more for better coffee which will allow more money into the supply chain, and will allow growers to invest in better growing conditions, which overall, will potentially create a much more regulated supply chain and room for investment in the future.
But the Pumpkin Spice Latte from Starbucks is always an option…