Coffee, the drink that threatens to become a luxury in Europe

In recent months, the price of coffee has been rising across Europe. Although many coffee shops in Berlin have not increased their charges so far, that possibility is not ruled out, as most of them have seen their profit margins shrink lately.

Adverse weather events and increased demand, along with geopolitical and logistical issues related to the pandemic, have resulted in higher wholesale prices over the past two years. Soaring energy costs and a 100% increase in transport spending in the last 12 months add to inflationary pressure.

“Coffee was sold at US$ 1.90 a kilo in May 2019, the lowest level since 2004. At the end of the year, it rose to US$ 2.80”, compares Jordan Montgomery, Marketing manager at Fjord. Coffee Roasters Berlin.

“In Brazil, the world’s main producer, there were severe frosts in July 2021, raising the price to US$ 5.55 a kilo. In July 2022, the price reached US$ 5.80, before falling to US$ 4 .80 in August.”

The prices of forward contracts (futures) and the sale of Arabica coffee beans are dictated by the Intercontinental Exchange (ICE) in New York. This “C price” defines the global average prices of Arabica coffee.

Costs passed on to the consumer

As coffee is traded in dollars, a weak euro and yen could hurt consumption in Europe and Japan, a London trader told DW, requesting anonymity. Companies located in Germany also suffer from additional taxes, labor shortages and rising insurance costs.

“These factors force us to pass on some costs to our customers and accept lower profit margins for some products. The average increase in the last 12 months has been about 6%”, says Jordan Montgomery.

He adds that roasters have managed to get around the higher prices so far, especially during the pandemic, by passing the cost on to consumers who order online.

An exit that does not apply to coffee shops, which continue to be the most affected by the rise in coffee, also due to higher costs with rent and personnel. And in October the minimum wage in Germany rises to 12 euros an hour.

Fair deal?

Experts suggest that a cup of coffee in a coffee shop in Europe should cost between €5 and €6, especially in Germany, where a 17th-century tax on roasted beans remains in place.

“For every kilo of roasted beans sold on the German market, 2.19 euros goes to the state”, explains Montgomery. Apart from Germany, only Belgium, Denmark, Greece, Lithuania and Norway levy a similar tax on the continent.

Nicole Battefeld, current champion of German coffee baristas and a contender in the World Coffee Championship in September, argues that the product should also be sold more expensive in supermarkets, at at least 20 euros a kilo.

“In Germany, the price per kilo is often not more than 8 euros — we are simply usurping the money invested by the farmers. It is another form of colonialism: we never fully realize how much work is involved.”

Battefeld notes that fair trade coffee (produced and traded to fair trade standards), with contracts that offer farmers $3 per kilo, is only a partial solution.

“Fair trade helps maintain living conditions, but the opportunity is often lacking for producers to reinvest and modernize their farms.”

“He helps farmers when the crop isn’t high quality, but not when it is, because they lock them into the contract and they don’t get higher values.” Battefeld notes that fair trade prices have risen a measly 0.10 euros over the past 20 years.

Farmers suffer from rising costs

High energy prices have different impacts on farmers depending on the contract they have and the variety they produce, explains Karl Wienhold, who researches coffee and lives in Portugal.

“For most smallholder farmers in producing countries, the relationship between futures contract prices and revenues is strong, but not uniformly”: Labor costs have increased especially for Latin American farmers due to staff shortages.

In parts of Colombia, the world’s third-largest coffee producer, labor costs have nearly doubled. “I’ve even heard of small Colombian farmers working as harvesters instead of managing their own fields,” says Wienhold. On the other hand, large farms will be the most affected by the rise in fuel prices, as they are highly mechanized.

According to experts, many farmers signed fixed-term contracts with multinationals before the pandemic, so they will not profit from the higher prices currently adopted. Here, it is about non-standard derivative contracts, defining future selling prices.

Farmers also have to bear other increases in production costs: natural gas, for example, is used to produce nitrogen fertilizers, of which Russia is the main exporter.

“The worst fear, that Russia would stop exports, has not yet materialized. Trade data show minimal disruption to the flow of Russian exports to Brazil,” the London-based trader said.

Climate change disrupts cultivation

Coffee can only be grown outdoors and irrigation is often not used. The two main varieties, Arabica and Robusta, have different prices, reflecting different growing conditions.

Arabica, generally considered the best quality coffee, only grows under specific conditions, which are increasingly threatened by extreme weather events.

“In most of Colombia, where there are two blooms and two harvests a year, thanks to two rainy seasons, atypical periods of rain and sun have been altering the flowering schedules for some years now”, comments Wienhold. “Sometimes this delays production for months, causing financial stress to producers and workers, and threatening the ability to fulfill contracts.”

Lower production also translates into higher prices for lower quality coffee varieties, discouraging producers from investing in better crops as the price gap narrows.

Experts agree that climate change will increase price volatility and eventually exacerbate the traditional boom-and-bust cycle that has been going on for years, due to the long lead times needed to adjust production patterns to changes in demand and prices.