As inflation rates, as measured by the consumer price index, have fallen from over 9% in mid-2022 to under 3% recently, the prices of most individual goods and services have dropped sharply. Energy prices have collapsed, along with the prices of cars and many foods. However, the price of coffee has set records and is going higher, and higher.
24/7 Wall St. Key Points:
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Drought has decimated coffee crops, and the price of a cup of coffee is at record levels.
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Rising prices threaten margins at Starbucks Corp. (NASDAQ: SBUX) and others.
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Americans drink 146 billion cups of coffee a year. The only beverage they drink more is water. A few companies, led by Starbucks Corp. (NASDAQ: SBUX), rely on coffee drinkers.
Why the Surging Price?
The price of a pound of Arabica beans, the most often used bean in American coffee, recently hit $3.50. That is the highest price in the past 50 years. It is also triple the price from one year ago. A recent White House plan to put 25% tariffs on imports from Columbia threatened to push prices up again. The country is among the largest suppliers of beans to America. The threat was dropped, but it does show that disruption in supply can push coffee prices higher quickly.
The most recent increase in coffee prices is due to the environment. Brazil is the world’s largest exporter. Drought there has decimated the coffee crop. The problem probably will not end soon. According to The New York Times, “But a severe drought there this summer devastated the harvest, which typically runs from May to September, and it could threaten next year’s crop as well.” Drought and rainstorms have cut coffee production in Vietnam, which is another of the world’s largest coffee exporters.
Rising coffee prices threaten Starbucks margins. Since it buys 3% of the world’s coffee beans, it is as good a proxy as possible for how the price spike can affect the food and beverage industry in the United States. Starbucks has started to invest in coffee farms in Central America to lock in supply. The farms are being used as test tubes to see if new bean types can be more “climate resilient.” The effort certainly will not pay off in the near term.
The price of a cup of coffee is at record levels, and odds are that price is about to get higher.
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