January 2025
2024 is the hardest year on record for the global coffee industry, and in our 20 years of roasting and selling coffee, 2024 was the most difficult.
If you believe the predictions for 2025, it will keep getting more challenging in the first half of this new year.
Beyond that, it's anyone's guess.
Coffee prices rose a staggering 77% during calendar 2024, with about 25% of that in the final 6 weeks of the year.
That might bring a surprise around February with wholesale and retail prices edging up further.
But it's not just the high prices making things tough for us and every other coffee brand; there's an extreme shortage of raw coffee in Australia.
The importers are so low on inventory that many cannot trade normally, and we are not quite sure how they are still in business other than mothball mode.
Every origin we look at has dire shortages or zero availability.
So, how did the coffee industry get into such a pickle?
Brazil and Vietnam, two of the largest producers of coffee, experienced adverse weather conditions that resulted in dramatically lower harvest volumes. Brazil and Vietnam produce almost a third of the world's coffee supply.
We are not talking about 5-10% here, but numbers around the 30+% range.
These adverse weather events also affected coffee-growing countries in different ways, like Colombia and Indonesia, which are experiencing excessive rains, and India and Africa suffer years of drought.
For Central and South American coffee-producing nations, there have been various reasons, such as Roya (coffee leaf rust), excessive rains at the wrong times, drought, frosts, heatwaves and adverse weather that negatively affect the agricultural growing conditions.
However, these weather events are not isolated to a season, as some countries have endured many years of harvest cycles of inferior weather conditions.
The bottom line here, folks - there has not been enough coffee supply to meet global demand.
And now you all know what happens when something falls into deficit - prices rise.
Coffee is a commodity traded both in a physical sense, as in actual coffee, and in virtual contracts called futures.
These futures have also fuelled the fire underneath the coffee prices as hedge funds and big money traders bet vast amounts of funds to guess or predict the future pricing for raw coffee.
These transactions occur without any physical inventory trading hands. While it might seem strange to think a futures contract is affecting the price of coffee today, these speculators are trading the coffee price up and down to profit on the differences.
Great news if you own a coffee farm - like winning the lottery.
But in the middle of these supply chains - where exporters, importers, distributors and roasting brands play- it's been like a war zone.
Contracts breached as owners of raw coffee turn greedy to chase high prices. It's breaking down, or more accurately smashing to smithereens, traditional trading models built up over long "relationship" business periods.
Australian importers of raw/green coffee have been so scared to buy coffee for such a long time, thinking the record high prices will fall when raw coffee arrives in Australia, leading to a very real risk of instant losses.
Historical cycles in the price of coffee generally tracked up and down over months, but this last 12 months, it has been a consistent uphill climb with little, if any, reversion or correction.
What does all this mean to my cup of coffee here in Australia?
In previous price rise cycles, roasting brands could switch or pivot to source an alternative at more economic metrics.
But this last year, that has not been possible - there is no cheap or easily available coffee.
Inevitably, the roasting coffee brand needs to lift its selling prices, whether wholesale or retail.
Often, these price adjustments on the wholesale and retail side will be spaced out over a longer period, in months instead of days or weeks, like fuel that jumps 20% overnight.
This buffering effect undertaken by the coffee roasting brands is where margin squeeze has been hurting the most.
Will coffee prices keep rising?
On average, raw coffee has increased by $6 per kilo during calendar 2024.
This $6 excludes any other input cost increases from energy, packaging, labour, rent, distribution, marketing or selling charges.
There is talk of another $2 per kilo before May 2025.
An $8 per kilo increase in roasted coffee translates to another 20 cents per cup - more likely 25 cents per cup.
An interesting behavioural shift has occurred with owners of raw coffee - mostly the farmers, exporters and sellers at origin.
They have the stuff you want, and with this prolonged period of high prices and the constant talk of even higher prices, they become reluctant sellers, holding out for a better deal.
The power is well and truly in the hands of those with physical raw coffee - today, they name their price - take it or leave it.
If you don't take it (the raw coffee), someone else worldwide will, and then you are left with nothing to add value for selling and your business stops.
Sometimes, when a product or service gets too heavily influenced by speculation, it becomes governed by price bubbles.
Coffee is experiencing a price bubble similar to how bubbles affect real estate.
You can't escape the fundamentals of high demand and short supply, but the behaviour of those with inventory under their noses is rather alarming.
Coffee farmers and exporters continue to talk up prices by another 33%, and like any price bubble, when it gets hot, silly and wild deals happen.
Big coffee brands are holding back from securing large contracts, which will inevitably lead the raw/green coffee side to eventually move into a surplus and force a market correction in price.
What other factors play out in this high-priced environment?
It's not only the shortage of coffee and high prices that are afflicting the global coffee industry; quality appears to have been abandoned as buyers trade on price and desperation instead of the traditional fundamentals of taste.
The sudden drop in quality has had the most profound impact on the coffee universe.
Quality reversing for the first time in 30 years. Wow.
Sure, there are still excellent coffees to trade, but they are now in a shrinking segment that barely anyone can afford to play in.
What can we do to obtain better value in our coffee purchasing?
On the consumer side, the best advice is to buy 1kg of coffee instead of the smaller packs that are more expensive to make and sell.
On our roasting side, we spend much time each week trying to source good quality at great value. Often, it seems like a pointless exercise when the choices are limited, but we continue to push harder for the best deals.
We are also trying our best to hold prices, which means we earn less for our work - just like deflation.
You will see that prices will continue to be adjusted as we balance the overall factors at play, but we don't increase our prices when the market moves, only when the fundamentals are impossible to manage.
