From commodity to luxury: Coffee prices explained

The Coffee Commune

You’re not imagining things – your cup of rocket fuel in the morning is likely to be getting more expensive, as global price hikes hit the local industry. Here’s why you’re going to see the price of coffee going up, and how that could affect Australia’s coffee culture.

Why is coffee getting more expensive?

There are a variety of factors behind the rising price of coffee, but the most important one is the price of green coffee beans.

“I think it’s taken for granted that coffee has to grow on a plant,” says Raihaan Esat of International Coffee Traders. “It’s an agricultural product – a coffee bean is a seed that’s harvested from a fruit. They’re grown in farms, and they’re subject to weather conditions.”

Brazil, the world’s largest coffee producer and the second largest importer of coffee products to Australia after Switzerland, has suffered through extreme weather events – including drought and severe frost – that have destroyed roughly 20 per cent of the country’s coffee plants. That’s caused the world price of coffee, based on averaging the monthly prices of arabica and robusta green coffee beans, to surge 21.6 per cent this year.

“Brazil is experiencing a shortfall in production,” explains Raihaan, “because of weather conditions that have affected the harvest. Unfortunately, these weather events have caused damage that will also affect next year’s harvest, so the market is speculating that there’s going to be a shortage next year as well, which causes prices to go up further.”

Coffee beans are also subject to the same global supply chain issues that have been plaguing so many other products, from cars to computer chips, as the worldwide logistics and transportation network struggles with port congestion and supply shocks caused by the pandemic.

“The shipping industry is finely tuned, and it’s not designed to handle disruptions like we’ve seen over the last year and a half,” Raihaan says. “The transport companies are now adding premiums onto the cost of freight, which is another major factor that’s causing the price of green coffee beans to go up.

“Green coffee beans are like sugar, or cotton, or wheat – they’re a commodity. If the price of wheat goes up, the price of bread has to go up, too, because wheat is the major component in bread. Well, it’s the same with coffee. Green beans are the major component of coffee, so if the price of them goes up, that has to flow through to the end consumer. Otherwise, the production process becomes unsustainable.

“Cafe owners have had a rough couple of years with the pandemic, and the last thing they want is for the cost of coffee to go up. But cafe owners buy coffee from roasters, who are having to pay more for green beans, so they can’t keep their prices where they are. I’m expecting that we’ll see the price of coffee for cafes go up by about $2 to $3 per kilogram, on average.

“Let’s say the cost of roasted coffee goes up by $2 a kilogram. A cafe owner gets about 35 cups of coffee out of that kilogram, so they’re spending 5.7 cents more, per cup, to produce a cup of coffee. That cafe owner now needs to make a decision – do they increase the price of each cup by 10 cents, or do they try to find savings somewhere else so they don’t have to put their prices up?”

But finding those savings can be difficult, because it’s not just the shortage of beans from Brazil and rising freight costs that are adding to cafe owners’ expenses. Raihaan points to other trends that predate the pandemic and recent weather events, including the sheer amount of options that cafe owners are expected to provide their patrons with.

“A cafe has to carry seven times the variety of milk that it did five years ago,” Raihaan says, “and carrying a wider variety of stock to satisfy the customer’s demands is an added expense. But it’s not just about stock, because this also affects workflow.

“Think back to five years ago, when the only choices of milk were full cream and skim. You could produce lots of cups of coffee quite efficiently, because you could steam a big jug of full cream milk, and be confident that you could quickly produce four or five coffees with that jug. But today, you see the docket orders on the coffee machine, and every single one is different.

“Every single one has a modification to the milk, or to the sugar, or to the strength, so each one is more of a specialised product, and requires individual preparation. They can’t be bulk-prepared like they used to be. At the same time, nobody wants to wait more than five minutes for a cup of coffee, so you have to keep the speed up, even though we’re dealing with an infinitely more complex product – and the only way to do that is usually to put another barista on.”

With wages for those baristas going up, as well as the cost of utilities like gas and electricity, the real question isn’t why coffee prices are going up – it’s why they aren’t going up more.

How do rising prices affect coffee culture?

While the price of green beans will plateau eventually, we should expect them to remain high for the foreseeable future.

“Those prices are not going to go back to where they were, so coffee is going to become more expensive for the everyday person drinking a cup at a cafe,” Raihaan says. “You’re going to see little increases in the price of a cup of coffee over the next year to two years. That begs the question if coffee, which has been an everyday expenditure for most consumers, will start to become viewed as a luxury.”

But if coffee is a luxury, it’s a relatively affordable one – shelling out for a flat white to kickstart your morning isn’t exactly the same as spending thousands on a Louis Vuitton handbag, or even the cost of a beer at the pub.

“You can probably buy a carton of that beer for $50,” Raihaan says, “but then you’ll happily pay $10 for a bartender to crack the bottle open for you and pour it into a glass. Now, that beer is not necessarily a luxury product. But it is priced in the upper range, just because someone opened the bottle and poured it into a glass for you. So I think some of the cost will be associated with the service that comes with it.”

Rather than giving up their cup of joe altogether, Raihaan expects that the everyday coffee drinker will simply become more choosy about where they buy it from. And just as craft beers have become mainstream, we can expect specialty coffees to become more popular as consumers take more of an interest in their coffee’s origin, and the nuances and subtleties of its flavours.

“Right now, I think convenience drives coffee buying behaviour, if we’re talking about your everyday coffee drinker,” Raihaan says. “If someone drinks a coffee in the morning and another one after lunch, most of the time, their choice is based on convenience – they’ll go for whatever’s close by and reliable.

“But if we gradually raise the price by $2, or even $3, then eventually we hit a tipping point where people choose quality and value over convenience, because people can justify any purchase as long as they see the value in it. At that point, the question people ask themselves won’t be, ‘Should I drink coffee or not?’ It will be, ‘Where do I go to ensure I get the most value for my $6 or $7?’

“For cafe owners, that means the challenge is going to be delivering value for the $6 or $7 you charge. You can’t just bump your price and not give the customer any extra perceived value for it. I’m not talking about giving things away for free – I’m talking about providing great service, remembering customers’ names, and giving them good human interactions.

“If there’s something special about your coffee, let your customers know. If you put your prices up slightly because you buy coffee from a more ethical supply chain, for instance, then you should educate your customers about the benefits of that in your face-to-face interactions, instead of being worried that your customers will complain because they’re just there for cheap coffee.

“At the end of the day, if I’m going to spend $6 on a cup of coffee, I’m going to go the place where they remember my name, I get great service, and I know I’m drinking a good cup of coffee, as opposed to the place that might be slightly more convenient, but I know the quality isn’t there.”

Despite the rising cost of green beans, there are plenty of things cafe owners can do to stay profitable. Check out our list of 10 ways to increase your cafe’s profits.

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The Coffee Commune