The days of enjoying an espresso for €1 in Europe seem like a distant memory. Coffee prices have soared across the continent, with a typical espresso now costing around €1.20 in Italy, according to Politico. This price hike is a consequence of a perfect storm, a confluence of geopolitical events, climate change, economic factors, and new regulations that have significantly impacted the coffee market.
One of the most unexpected contributors to the rising coffee prices is the increased activity of Yemen’s Houthi rebels in the Red Sea. These militants have been targeting cargo ships, disrupting shipping routes crucial for the global coffee supply chain. As a result, shipping routes have been forced to detour around the Cape of Good Hope, significantly increasing transport times and costs. The rerouting has led to a 150% jump in container freight rates on the Asia-Europe route, with delays of up to three weeks for bean deliveries from major robusta coffee producers like Vietnam and Indonesia. The impact is evident, with a Vietnam coffee exporter expressing concern over the drop in new orders from Europe due to the increased shipping costs.
The ongoing war in Ukraine has exacerbated the situation. The conflict has disrupted fertilizer supplies, essential for coffee cultivation, and driven up energy costs, affecting the roasting process. The cost of raw green coffee has soared, with Arabica prices on the New York International Commodity Exchange rising from $1 per pound in early 2020 to over $2.50 by June 2023. Similarly, the London-based index for robusta coffee has climbed from $1.28 per kilogramme in February 2020 to $4.45 per kilogramme today.
Beyond the geopolitical disruptions, climate change has also played a critical role. Coffee crops are particularly sensitive to climate variations, and recent years have seen adverse weather events affecting production. In Brazil, the world’s largest coffee producer, heavy rains and pest infestations have reduced yields. Vietnam, the leading producer of robusta coffee, has faced prolonged droughts and higher temperatures, further constraining supply.
Adding to the burden on coffee prices are new regulations from the European Union aimed at combating deforestation. The EU’s regulation on deforestation-free products requires coffee producers to certify that their production processes do not contribute to deforestation. This has created additional costs and uncertainties for businesses, further driving up prices. The extensive data-gathering process required to comply with these regulations has made it more challenging and expensive for producers to bring their products to market. Businesses are still unsure how the rules will be enforced, adding to the uncertainty and potential for further price increases.
Despite the current challenges, there is some optimism for the future. Experts like Oran van Dort of Rabobank believe that the current spike in prices may moderate in the medium term as farmers are incentivised to bring more supply to the market. Coffee production is expected to be in surplus next year, which could help alleviate some of the supply constraints. However, the long-term outlook remains uncertain. Climate change continues to pose a significant threat to coffee production, with experts warning that half of the land currently used for coffee cultivation could become unsuitable by 2050. In response, organisations like World Coffee Research and companies like Nestlé are investing in developing new coffee varieties that are more resistant to both temperature extremes and diseases.
