Sunday, October 2, 2022

Explainer: why groceries, coffee in cafes may cost more

by Matt OTT

SILVER SPRING, MD (AP) — As if a cup of coffee weren’t expensive enough, a confluence of factors is driving up farmers’ cost of growing the beans and it could start to filter out at your local cafe before the end. Year.

After hovering around $1 a pound for years, coffee futures — the price large quantity buyers agree to pay for coffee in delivery months down the road — doubled in late July, the highest since 2014. Height not seen. Although prices have eased slightly, they remain high at around $1.90 a pound.

Coffee lovers already paying $8 or more for a bag at the supermarket or paying up to $5 for a cup may be disappointed by even higher prices, but the price of coffee in the international futures market is always on the rise. The consumer does not.

Here’s a look at some of the factors that could determine whether Americans will pay more for their morning jolts in the near future.

What happened?

Two July frosts blew a hole in Brazil’s coffee production after a persistent drought, sending wholesale prices for the popular Arabica bean immediately exceeding $2 per pound. Carlos Mera, who analyzed coffee markets at Robobank, said the frost would significantly affect the 2022-23 harvest.

Brazil’s frosts followed supply chain snares, shortages of shipping containers, labor shortages and other production hiccups related to COVID. Add in the rising costs for almost everything and you have a bitter cup of coffee for the coffee drinkers.

“This is unprecedented,” said Alexis Rubinstein, managing editor of Coffee & Cocoa for commodity brokerage StoneX Group. “It’s never been this perfect storm before. It’s usually just been a supply and demand scenario.

“We are never dealing with a supply and demand issue on top of a logistics issue, on top of a labor issue, on top of a global pandemic.”

Why can retail prices rise?

While the size of crop damage in Brazil is difficult to determine, Mera said estimates range between 2 million and 6 million fewer coffee bags. It accounts for about 12% of the production of the world’s largest Arabica producer, the bean used for most of the coffee sold around the world. A lower supply almost always means a higher price.

If consumers don’t see an increase in coffee prices by the end of this year, they certainly expect per capita demand to pick up in 2022, said Grace Wood, an industry analyst at market research firm IBISworld.

“It’s just going to contribute to higher demand which is going to further disrupt operations and make it more difficult for operators already facing supply issues,” Wood said.

Mera said people who buy coffee beans at the grocery store will see a more significant increase in prices because about half the price of that bag on the shelf comes entirely from the bean itself. However, in larger coffee shops, he said, the price of beans only represents about 5% of your cup of hot coffee, so roasters “may not need to increase that immediately.”

Is it certain that retail prices will go up?

It seems, however, that higher coffee prices in the international future market do not guarantee that the prices at your preferred roaster will go up. The damaged crop in Brazil is still more than a year away, plenty of time to reverse many factors.

Rubinstein said that higher prices in the international market can often stimulate production — farmers will have more money to invest in their crops — and if there is more coffee in the market, prices will backfire. But it will also depend on whether the big roasters have enough beans to get them, although prices remain high in the long run.

Starbucks, the world’s largest coffee retailer, suggested it would not need to raise its prices because of Brazil’s low production. On a call with investors at the height of the Arabica price spike, Kevin Johnson, president and CEO of the Seattle-based coffee chain, said his company has a 14-month supply, which he says it will receive by 2021 and most of fiscal 2022. .

What about my local roaster?

Even small, independent specialty roasters sign contracts to buy their beans well in advance, so that when Brazil has such a shortage, it doesn’t cripple them. They also source from countries around the world, so gaps from one location can often be filled by another.

Chris Vigilante, co-owner of Vigilante Coffee with stores in the Maryland suburbs of Washington, DC, said most specialty roasters don’t buy beans in the same international commodity market with big players like Nestle and Keurig Dr. Pepper. “So we are not affected by (Brazil), but we will feel the pressure of it,” Vigilante said.

Vigilante said he pays between $3.50 and $5.50 per pound for most of his beans, which are of high quality and produced by small farms. They have no plans to raise their prices, but if other small shops raise their prices, he said it is possible because the cost of other essentials has gone up.

Vigilante said, “I’ve seen other specialty coffee roasters talk about raising their prices, but I think it’s not because of the cost of the coffee itself, but perhaps the cost of some of our other supplies, like cups and equipment. is because of.”

Marcelo Silva de Sousa contributed to this report from Brazil.

Nation World News Desk
Nation World News Desk
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