New York (Trends Wide Business) – Not even coffee is immune to the powerful forces of extreme weather and inflation.
Coffee futures rose this Thursday to the highest level since January 2012. It is just the latest rally for a commodity that has seen its value rise more than 80% so far this year.
Unfortunately, this means that coffee drinkers will pay higher prices in supermarkets and coffee shops in the coming months. And that will only add to the inflationary pressures currently causing anxiety for millions of Americans.
The blame for the coffee rebound lies largely in severe drought and unusual frosts in Brazil, the world’s largest supplier of coffee beans.
This extreme weather has threatened the coffee supply and set off alarms in financial markets.
“It created a panic in the market,” said Carlos Mera, head of agricultural products research at Rabobank.
Coffee inflation is the latest example of how extreme weather, at least in part driven by the climate crisis, is creating nightmares for farmers around the world. And that, in turn, makes food more expensive for Americans and people around the world. In August, world food prices soared 31% over the past year, according to the Food and Agriculture Organization of the United Nations.
Like many parts of the planet, Brazil’s coffee growing regions have been hit by a prolonged drought that could be the worst dry spell in the country in nearly a century.
And then, in July, Brazil was hit by the worst frost since 1994, dealing another blow to coffee and other crops.
“The weather has been dire for coffee, especially in Brazil,” Mera said.
At the same time, analysts pointed to the ongoing supply chain turmoil that is causing problems around the world, including a lack of shipping containers.
Covid-19 has not affected the demand for coffee
Demand, on the other hand, has remained robust despite the changes caused by the pandemic. People still drink a lot of coffee, although consumption changed during COVID-19 from offices and coffee shops to home.
“We were all very scared. But the demand is very constant, surprisingly,” said Jorge Cuevas, coffee director for Sustainable Harvest Coffee Importers.
The National Coffee Association, the industry’s trade group, also said the covid did not make a dent in demand.
In a statement to Trends Wide, the trade group blamed rising coffee prices on changes in supply.
“For many years, the world grew more coffee than we drank, but the US Department of Agriculture predicts that this year we will consume more coffee than farmers grow,” said the National Coffee Association. “We do not expect current conditions to change the status of coffee as America’s favorite beverage.”
Price hikes ‘imminent’ for coffee drinkers
Retail prices for coffee are increasing, but they have not risen as dramatically as many other items.
Coffee prices rose 4.7% in the past 12 months, according to the October consumer inflation report. That’s below the general level of inflation, which hit a 30-year high in October.
This is because Starbucks and other coffee companies buy coffee well in advance and have hedging strategies in place to set prices. That allows them to defend their profit margins and keep prices under control, cushioning the blow of swings in the futures market.
The bad news is that if prices stay high, they will eventually translate into higher prices for coffee drinkers.
“It’s imminent,” Cuevas said.
Indeed, citing “rapid inflation” linked to logistics, raw materials and labor costs, Starbucks said last month that it plans to exercise its “pricing power” in a “very thoughtful” way.
“But we are taking the price and we will continue to take the price in an inflationary environment,” Starbucks Chief Executive Kevin Johnson told analysts during a conference call.
JM Smucker, owner of the Folgers and Dunkin ‘coffee brands, said in August that rising costs will hurt his business.
The industry also faces the same inflationary pressures that affect other companies, including higher wages and high transportation and energy costs.
“It is absolutely inevitable that the costs have to be passed on to consumers,” Ceuvas said.