Production crisis and new regulations threaten to send coffee prices to unprecedented highs

Making coffee is essential to many people’s social lives, a formula that involves meeting someone, chatting and, if appropriate, drinking a cup of coffee. But this activity is expected to become more expensive than it is today in the near future.

The rise in coffee prices cannot be attributed to a single factor, but one factor has had a profound and clear impact: global crop failures. Coffee, like cocoa, must be grown outdoors in tropical regions, and has been severely affected by extreme weather events such as long droughts and heavy rains. In part, it is the result of El Niño-Southern Oscillationa climate phenomenon that affects tropical and subtropical latitudes. But climate change has also led to an increase in its frequency.

he VietnamThe world’s second-largest coffee producer and the world’s largest producer of Robusta, reported an 11.4% drop in coffee exports. And the outlook is even worse. The worst drought in years has caused “irreversible damage” to coffee plants. The season that begins now is expected to be the worst in thirteen years.

Poor harvests are not limited to Vietnam, but bad weather has also affected other producers, such as Brazil, Colombia, Central American countries or Indonesia, meaning that this year’s surplus is practically non-existent. Meanwhile, in the case of the Robusta variety, which is commonly used in espresso blends and instant coffee, the decline in production has been accompanied by a strong increase in demand, as many roasters have promoted coffee blends that include this variety, which are cheaper, due to theArabica Prices have been kept consistently high over the past two years.

Robusta coffee hit a record price worldwide on July 9 at $4,667 per tonne on the London-based ICE Futures Europe market. Growth is steady and yes indeed. increased By 58% in 2023, this year it became 63% more expensive.

All this suggests that coffee will follow the pattern of rising cocoa prices. Inflationary pressures have also been exacerbated by the ongoing conflict in the country. The Red SeaWith ships being refused passage, this has affected coffee deliveries from Indonesia, the world’s fourth-largest producer, and Vietnam, which must travel via southern Africa, a much longer and more expensive route that causes delays in the supply chain.

Giuseppe LavazzaThe boss of Lavazza, a coffee maker, claimed last year that coffee prices would moderate this year, but he has now admitted to the Guardian that he was wrong. “We have never seen such a strong increase in prices as we are seeing now,” he said. He is not much more optimistic about the future: “There are very strong headwinds and I don’t see any reason why coffee prices should fall.”

In specific data, he explained that a British consumer started paying 15% more for a one-kilo bag of coffee beans in one year, and his expectations are that over the next year it will rise by 20% and 25%. If there are such expectations in the UK, there may be a similar trend in the EU, or much worse.

Coffee War and Accusations of Imperialism

And if the general scenario does not seem very comfortable, there is an additional factor in the European Union: new legislation that, according to producers, could have disastrous consequences.

In December 2022, the European Union Deforestation Regulation (EUDR) was approved, with the aim of combating deforestation caused by economic sectors such as coffee, cocoa, soy, wood or cattle. From December 30, these products will no longer be sold in Europe unless companies can prove that their goods are not linked to deforestation. Small businesses have until July 2025.

The key question is how to prove it. The answer is that coffee farmers around the world will have to use satellite coordinates to digitally map the size of their farm and clearly define its boundaries, in order to check whether any part of it has been cut down “as of 2020.” Or a satellite image will have to be provided with every delivery; otherwise the entire container could be rejected. Given that many farms are in developing countries, this is likely to be a real headache, to put it mildly.

Orders have already fallen sharply in Ethiopia, where coffee accounts for a third of export earnings. The country has yet to figure out how to compile data on millions of small farmers and deliver that information to buyers. Peru directly He does not have the ability to provide The information needed for coffee grown in the Amazon. In addition, with weak governance and thousands of small farmers, most of them do not have title deeds. In this regard, Giuseppe Lavazza expects the consequences to be “terrible” and that the new regulation will impose significant restrictions and a very strong distortion of the market. “For all European roasters, this is very difficult,” he says. “Let’s take the case of Central American farmers; I think very few people are willing to comply with this regulation. In many states, land parcels have not had clear boundaries for generations, which means that many farmers do not know their exact size and therefore cannot provide the information needed for satellite mapping.”

Vietnam, despite the support of foundations, has half a million small farmers who produce about 85% of the country’s coffee, and it is an important call to be able to collect and present data that proves their farms have not caused deforestation. Building the infrastructure to identify whose land they own and then go ahead and photograph it would be expensive and complicated, if not simply impossible for many to achieve. In this regard, Indonesia’s economy minister said, Airlangga HartartoHe said it was “inherently discriminatory and punitive” legislation against the weakest, and accused the EU of “regulatory imperialism”. Thousands of small farmers, who lack the technical expertise to do satellite mapping, are dependent on states to respond, with national systems in place to help small farmers ensure traceability of exports. Otherwise, everything could become concentrated in large holdings, which could complicate the rules.

Producers are looking for alternatives.

The negative effects could go beyond harming farmers and concentrating production in the hands of a few large companies. Other crop options could be promoted, such as durian, a tropical fruit mainly exported to China, which already competes strongly with coffee in Vietnam.

Another possibility is that large companies can simply sell part of their shares in Europe, and what does not meet the requirements is taken elsewhere. In this regard, some traders in Ethiopia are looking for different markets, such as the Levant or China, where Ethiopian coffee is thriving. But changing today’s market for tomorrow’s is difficult. And there is another related factor that could have a greater impact on prices. Coffee has become a trendy drink in many parts of the world, such as in China, where its consumption has doubled in just a decade. And also in India or in producing countries – such as Indonesia or Vietnam – which have recorded an increase in domestic coffee consumption, representing tens of millions of potential new consumers.

This could also lead to higher prices if it is not accompanied by more supply. Last year, before the regulations and the more severe drought, the effects were already noticeable. If a coffee in Barcelona cost €1.16 on average five years ago, according to one report City Hall SurveyIn 2023 it already costs 1.37. All this suggests that the increase is not temporary, and that it is the beginning of a continuing trend that does not seem to have stopped yet.