Global coffee prices have reached their highest level in almost 50 years due to poor weather conditions in Brazil and Vietnam, forcing roasters such as Nestlé to raise prices and consumers to seek cheaper drinks in the context of the cost of living crisis.
The price surge will benefit farmers with this year’s harvest, but it will pose a problem for traders, who will face crushing hedging costs in stock markets and a rush to receive the grains they have purchased in advance.
WHAT DRIVES PRICES TO RISE?
Production problems linked to bad weather conditions in Brazil and Vietnam have meant that global supply has been lower than demand for three years. As a result, stocks were depleted and benchmark prices on the ICE exchange reached a peak of $3.36 per pound.
The last time coffee traded this high was in 1977, when snow destroyed swaths of Brazilian plantations. However, the shock to consumers was much greater at the time. Adjusting for inflation, $3.36 per pound in 1977 would be equivalent to $17.68 today.
Meanwhile, experts predict another year of lackluster coffee production.
Brazil, which produces nearly half of the world’s arabica – premium beans used mainly in roasted and ground blends – this year experienced one of the worst droughts on record.
Although the rains finally arrived in October, soil moisture remains low and experts say the trees are producing too many leaves and too few flowers that turn into cherries.
In Vietnam, which produces about 40% of the robusta beans typically used to make instant coffee, a severe drought at the start of the year was followed by excess rain since October.
Consulting firm StoneX forecasts that Brazilian arabica production will fall 10.5% to 40 million bags next year, which will be offset by an increase in robusta production, reducing the country’s overall harvest of 0.5%.
In Vietnam, the harvest could decline by 10% by the end of September 2025, worsening the global shortage of robusta.
WHY ARE TRADERS CONCERNED?
Brazilian traders Atlantica and Cafebras are seeking court-supervised debt restructuring due to soaring coffee prices, crippling hedging costs and delivery delays.
Debt restructuring under court supervision precedes bankruptcy if negotiations are unsuccessful.
Traders who purchase beans from Atlantica and Cafebras typically take short positions in the futures market to hedge their exposure to the physical market.
Fearing that they will no longer receive their physical coffee from Atlantica and Cafebras, many traders are liquidating their short positions on the futures market, which have become loss-making.
Liquidating short positions involves buying or acquiring long positions in the futures market, which has the effect of driving prices even higher.
Rising futures prices then lead to increased margin calls or deposits that traders must pay to protect against trading losses, increasing stress in the industry.
IMPACT ON ROASTERS AND CONSUMERS
Rising coffee prices are a problem for roasters.
The boss of Nestlé, the world’s largest coffee company, was ousted earlier this year after the board became unhappy with weak sales and loss of market share due to increases prices, which encouraged consumers to turn to cheaper brands.
Roasters tend to purchase coffee several months in advance, meaning consumers will likely see the price increase in 6 to 12 months.
Consumers who shop outside will feel less of the effects of today’s price increases.
Roasters like Starbucks, which sell primarily to coffee shops, are expected to fare better because the overall price of coffee is only about 1.4 percent of the total price of a typical $5 cup of coffee at a coffee shop.
