Price of coffee plunges to 13-year low — but maybe not at your local coffee shop

It may be hard to believe based on how much you shelled out for your morning cup of joe, but the price of coffee has fallen to its lowest level in more than a decade.

The price of a pound of arabica coffee has dipped below $1 US this year on the world's biggest commodities exchange in New York. That's about half of what it was as recently as 2016.

The reasons are complex, but broadly they boil down to what is happening in Brazil, the world's largest producer of coffee beans. Brazil's coffee farmers produced almost 70 million bags of coffee last year — nearly 40 per cent of the world's supply.

Brazil has dominated the world market for more than a century, but in recent years the country has been cranking out even more beans than usual, as the world's demand for coffee shows no sign of slowing. Every second of every day, some 35,000 cups of coffee are consumed around the world, according to the UN. Naturally, other countries aren't content to simply let Brazil fill all of that demand. 

Normally supply imbalances are temporary as the market adjusts. But 2018 was the second year in a row of major global overproduction of coffee, which is pushing down wholesale prices to their lowest level in years. The main arabica futures contract price hadn't dipped below $1 since 2006.

The imbalance is even more acute because the bumper crop has come in lockstep with a plunge in the value of Brazil's currency, the real, which has lost almost half of its value in the past five years.

Right now, about 61 per cent of all the arabica being grown in the world is sold for less than what it costs to make it, according to Kona Haque, head of research at London-based commodities firm E D & F Man.

"The 13-year low prices are sending a clear signal to inefficient growers to decrease production to correct the oversupply," the firm said in a recent report on the coffee market. But that could take a while, since farmers tend to plant trees based on a 10-year plan to harvest them "and typically avoid uprooting during the first or second year of negative returns."

Not every coffee maker is taking it on the chin, of course. Brazil dominates the coffee market by cranking out a lot of low-end coffee blends that are destined to be sold on the cheap in grocery stores and other mass market sellers. The margins on that coffee tend to be lower, but other regions have homed in on higher-margin blends that cater to independent coffee roasters with a more discriminating clientele.

Different blends can fetch more or less than the basic arabica price, of course, with lower grade robusta-based coffee selling for even cheaper, while higher-end artisanal mixes going for significantly more.

Historian and author Stuart McCook, who has studied the history of coffee, says other coffee-producing nations have always been at the whim of the Brazilians. Oversupply is a global problem, but the recent slump in the real "gives Brazilian producers every incentive to release more coffee onto the market and that exacerbates the problem," he said in an interview.

Central America, in particular, has made great strides in recent years by eschewing cheaper grades of coffee and targeting high-end, fair trade and organic beans that fetch higher prices. But a coffee disease known as "coffee rust" hit the region hard several years ago and is contributing to their problems now. It's a fungus that degrades the quantity and quality of coffee crops.

"You can manage it with chemicals ... but they cost money and [coffee] prices are low," McCook said. Farmers who don't spray risk being hit by rust, which means less coffee for them to sell.

"Not only are you getting a lower price for your coffee, but your production is also down," he said. "Farmers get caught in this devastating, vicious cycle."

Many are fed up. He points to a recent video that went viral in the coffee community of a Brazilian coffee farmer angrily chopping down his trees with a machete because he's losing money on every bean he sells.

Waiting for savings to filter down

Wholesale prices are down, which is bad news for farmers, but that hasn't filtered down to big savings for consumers.

The competitive pressures of the coffee market have yet to trigger widespread price adjustments at the retail level.

In fact, according to Statistics Canada, the retail price of roasted or ground coffee hasn't budged much in the past five years — 93.6 cents worth of coffee in April 2014 would cost you about 94.1 cents today.

For major multinational coffee chains, the wholesale price of beans is a fairly small part of their operational costs, behind things such as employee salaries, rent, marketing and other expenses. But McCook says the ability to pocket those savings on coffee while keeping their prices the same is certainly helpful.

"It's a fair guess to say they're just happy," he said.

The current low wholesale price for coffee has its fair share of winners and losers, but over the long run it's bad news for just about everyone, McCook said.

"Low prices are great for traders, but periods of sustained low prices can really be catastrophic, because a lot of farmers are just going to leave."