Brewing Solutions: Securing Coffee’s Future Amid Supply Challenges

A conversation with expert Felipe Cabrera

Author

Ranjana Sundaresan
September 17, 2024

What if the only thing grinding in the morning was your teeth – because coffee’s off the menu? Grounds for concern, no? 

Not to add to your lack-of-coffee anxiety, but the industry is currently grappling with a multitude of challenges that are driving prices higher than ever before. Climate change, supply chain disruptions, and increased operational costs are just a few of the factors putting immense pressure on producers, brands, and consumers alike. 

At the same time, revenue from the global coffee market is expected to hit US$10.47 billion in 2024. And this revenue is projected to grow at a CAGR of 10.63% during 2024-29, hitting US$17.35 billion by 2029. As demand for coffee continues to surge worldwide, the industry’s issues are becoming more pronounced, raising concerns about the sustainability and accessibility of one of the world’s most beloved beverages. 

To get a better understanding of what’s happening and what to expect in the future, we reached out to our own Felipe Cabrera, the Founder and CEO of Ad Astra Consulting, which provides consultancy services for a wide range of topics related to the coffee market and F&B industry. 

Felipe delves into the complexities behind these rising costs and explores potential long-term solutions to help the industry navigate these turbulent times. His insights provide a deeper understanding of the current state of the coffee market and offer guidance on how businesses can adapt to ensure that coffee remains a staple in households and cafés around the world. 

Let’s dive right in.

GourmetPro: Coffee prices have been on the rise recently. What are the main factors driving these price hikes?

Felipe Cabrera: The primary factors driving the recent coffee price hikes are closely tied to climate conditions and logistical challenges. For instance, in regions like Vietnam and Brazil, unusual weather patterns – such as extended dry periods and insufficient rainfall – have significantly reduced coffee yields. When there's a forecast for lower yields, it triggers a reaction in the market where everyone wants to buy whatever stock is available, driving up prices. Additionally, economic and logistical issues in producing countries are compounding the situation.

The price rises have been quite noticeable. Arabica and Robusta prices have both seen significant increases. Since March, prices have steadily climbed, peaking in April, and we're seeing another peak now at the end of June. This trend is largely driven by supply issues. When one variety, like Arabica, faces challenges, it tends to push the prices of others, like Robusta, up as well.

Source: YCharts for Robusta and Arabica prices

GP: How do you anticipate these higher prices will impact the demand for coffee from brands?

Felipe: If prices continue to rise, it will certainly impact demand. In the coffee market, which operates heavily on futures contracts, buyers and sellers agree on prices months in advance. Even if the market prices drop later, the prices in those contracts remain binding. This benefits farmers and cooperatives if they’ve locked in higher prices. However, if prices are low when contracts are made, it can be detrimental, as they are forced to sell at those lower rates, which may lead to contract defaults in some cases. This can make supply of the commodity very uncertain. 

GP: What challenges do rising coffee prices present for the industry, and what opportunities might they bring?

Felipe: The challenges are primarily on the cost side – higher prices strain the margins for coffee roasters, especially those who are unable to pass these costs on to consumers. 

However, these price hikes also present opportunities, particularly for those who can innovate or diversify their offerings. Producers who can adopt more efficient practices, or who can capitalize on the growing market for specialty coffees, may actually benefit from these conditions.

GP: Who stands to benefit from the increase in coffee prices, and who might struggle?

Felipe:

Beneficiaries:

  • Farmers and cooperatives that have secured contracts at higher prices will benefit in the short term.

  • Companies involved in specialty coffee may also see a benefit as they can justify higher prices with premium offerings.

Strugglers:

  • Small-scale producers who haven’t secured favorable contracts could struggle with the fluctuating market.

  • Consumers, particularly in price-sensitive markets, may reduce their consumption as retail prices rise.

GP: What can coffee producers do to protect their profitability amidst this price volatility?

Felipe: Producers can focus on diversifying their crops and improving their farming practices to increase resilience. Exploring new coffee varieties that can withstand adverse weather conditions, like more Robusta farming in different regions, could help. Additionally, securing contracts early and maintaining strong relationships with buyers will be crucial to ensuring stable income during volatile times.

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GP: Are there any solutions or cost-cutting measures that companies are implementing to cope with rising costs?

Felipe: Yes, companies are adopting several strategies to reduce costs. 

One approach is to improve efficiency through better processing methods, like experimenting with Robusta coffee to mimic the flavors of Arabica. 

Flavors and spices added to the coffee can help elevate lower quality or bitter flavors. This was popular in Spain and Portugal after World War 2, when supply was very low. They would get low-quality beans that were very cheap and roast them very dark. During the roasting, they would add 15% to 20% of sugar which would create a coffee that is caramelized. In Vietnam, they use a mix of certain fats, sugars, and essences while roasting to combat the bitterness. 

The addition of ingredients like chicory and dairy/non-dairy powders would be ways for companies to reduce the amount of coffee used. This in turn could protect profitability, especially for larger companies. Though for medium-sized or small companies, this may not be a viable option. 

Coffee shops are looking at additions to their menus in terms of food or even alcohol (depending on licenses) to reduce their dependence on coffee revenues.

Some are also turning to automation to cut labor costs, like using automated machinery in processing and packaging. Cafés too use fully automatic coffee machines to reduce reliance on staff and still ensure consistent products. 

However, this last measure comes with its own set of challenges, particularly in regions where labor is a crucial part of the economy. In price-sensitive markets, coffee companies often can't pass higher costs onto customers transparently, so they absorb the extra expenses themselves. 

Take Manner Coffee, a well-known specialty coffee brand in China, as an example. Unlike Starbucks or Luckin Coffee, which use fully automatic machines, Manner Coffee uses semi-automatic machines from a well-known brand, La Marzocco, and offers a mix of commercial and specialty coffee.

As coffee prices continue to rise, companies like Manner Coffee face challenges. Recently, there was a scandal involving baristas from Manner Coffee who got into altercations with customers. This happened because baristas are under immense pressure to produce 300 to 500 cups per day per store, but with rising costs, the company has cut back on staff, relying more on part-time workers. Despite the smaller workforce, the daily targets remain high, creating significant stress for the baristas.

In China, customers are particularly demanding, and this led to a situation where the baristas, under pressure and stress, reacted poorly to customer complaints. This is one of the less obvious impacts of higher coffee prices – corporations often cut staff and increase workloads to maintain profitability, which can lead to such problems. Independent coffee shops, on the other hand, might handle things differently, focusing more on fair practices without imposing excessive targets on their employees.

GP: How is climate change affecting traditional coffee-growing regions, and what steps are being taken to address this?

Felipe: Climate change is causing significant disruptions in traditional coffee-growing regions, leading to unpredictable yields and increased risk. To combat this, there is a growing interest in identifying new regions suitable for coffee cultivation. 

For example, areas in southern Japan and parts of Africa, like South Africa, are being explored for their potential to grow coffee due to favorable elevations and emerging climate conditions. Some are even predicting that California may have the right conditions to grow coffee in the future. Saudi Arabia is investing heavily in creating their own coffee industry as well. And there is also work going on in reviving forgotten coffee-growing countries, like Yemen.

These shifts could help mitigate some of the risks posed by changing weather patterns over the next few decades.

Bean belt: Top coffee producing regions at present are highlighted in the image, but this belt could see a shift upwards as global warming impacts production. Source: NOAA Climate.gov 

GP: What role do sustainability initiatives play in the future of the coffee industry?

Felipe: Sustainability will be a cornerstone of the coffee industry moving forward. Consumers are increasingly demanding ethically sourced products, and companies must respond by ensuring their supply chains are environmentally friendly and socially responsible. This includes everything from reducing carbon footprints to ensuring fair wages for farmworkers. Those who can successfully integrate sustainability into their business models will likely gain a competitive edge.

At the same time, sustainability initiatives need to be well-thought-out and actually have a positive impact, without affecting quality. 

I recently spoke with someone in the coffee business who works for an international company. She’s responsible for sustainable initiatives aimed at helping farmers get fair prices and meeting ESG (Environmental, Social, and Governance) goals. However, she’s currently facing a big challenge. 

The local government is pushing hard for sustainability, which sounds great in theory. But officials are pressuring coffee farms to use less water during processing, without fully understanding farming practices. As a result, many farms are being forced to recycle water during the coffee washing process. This means that after the first wash, they reuse the same water, slightly purified, for the next batches.

The problem is that the recycled water becomes dirty, and after a few washes, it's like washing your dishes repeatedly with the same water – it just doesn’t get clean. This leads to coffee cherries that aren't properly cleaned, which affects the quality of the coffee during fermentation and other processing steps. 

She’s frustrated because the push for sustainability is compromising the quality of the coffee beans. If the beans are dirty and low-quality, she can’t sell them abroad, no matter how sustainable the farming practices are. Her main concern is finding a way to balance sustainability with maintaining product quality, but she’s struggling to get this point across to those making the decisions.

 

GP: How are companies diversifying their product offerings in response to market challenges?

Felipe: In response to the challenges, companies are exploring various ways to diversify their product lines. This includes developing ready-to-drink coffee beverages, coffee-based snacks, and even beauty products that use coffee extracts. By offering a wider range of products, companies can tap into new revenue streams, helping to stabilize income during uncertain times. 

Learn more about the latest coffee market trends:

GP: Looking ahead, what are the key trends that will shape the coffee industry in the coming years?

Felipe: The future of the coffee industry will be shaped by several key trends. 

First, there will be a greater focus on quality over quantity, with an emphasis on coffees with suitable prices for the average end-customer as well as specialty coffees for connoisseur and niche markets. 

Second, technological advancements will continue to play a significant role, particularly in farming and processing. 

Third, the industry will see more collaboration between producers, researchers, and governments to address global challenges like climate change and sustainability. 

Lastly, consumer education and engagement will be critical, as informed consumers are more likely to support brands that are transparent and ethical.

Want Felipe’s support to future-proof your coffee business?

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