Quick Look:
- Coffee prices hit record highs due to climate change, shipping disruptions, and new EU regulations.
- Lavazza warns of potential further increases of 10% on top of an existing 15% rise in UK supermarket coffee prices.
- Poor harvests in Vietnam and Indonesia lead to reduced robusta bean supplies, increasing prices by 70% annually.
- Market speculation and increased shipping costs due to Red Sea route changes exacerbate price surges.
- Lavazza faces $800 million in extra costs, and profits and EBITDA will significantly drop from 2022 to 2023.
The price of coffee is brewing up a storm, set to rise from its already record highs due to climate change. Shipping disruptions and stringent new EU regulations are also driving the price increase, compounding the challenges faced by the industry. Lavazza, the Italian coffee giant, has raised the alarm, cautioning that these factors will inevitably drive up costs. Coffee roasters will need to adapt to the rising costs as coffee prices continue to climb.
The coffee industry, particularly in the UK, feels the heat from these challenges. London robusta futures, the global benchmark, reached a high of $4,844 per tonne recently. This marks a staggering 70 per cent increase over the past year, significantly impacting the market. This surge is primarily due to poor harvests in southeast Asia, the central region growing robusta beans.
The Supply Chain Under Pressure
Giuseppe Lavazza, the chair of Lavazza Group, highlighted that the price of coffee on UK supermarket shelves, already up by about 15 per cent this year, could climb close to another 10 per cent by next year. Lavazza pointed out that the coffee supply chain is under unprecedented pressure, with roasters being forced to raise prices and cut their profit margins as raw materials costs continue to soar. The coffee industry has traditionally weathered fluctuating prices of higher-end arabica beans, but the recent spike in the cheaper robusta variety is causing more significant disruptions.
Climate Change and Harvest Woes
Climate change has hit coffee production hard, particularly in robusta-growing countries like Vietnam and Indonesia. The impact has been severe, with reduced quantities of robusta beans available. Weather forecasts could be more optimistic, suggesting that the next Vietnamese harvest will fail to replenish the dwindling supplies. This prolonged shortage means that roasters now face sustained high prices, a scenario that has persisted for many months and shows no signs of easing. Lavazza remarked that this sustained pressure is a new and challenging reality for the industry.
Speculation and Shipping Challenges
Adding to the complexity, hedge funds and other speculators have flooded the market, further driving up futures prices. Lavazza pointed out that speculation is a significant factor in the current price surge. On top of this, shipping costs have escalated. Since October of the previous year, vessels have been forced to take longer routes around Africa to avoid attacks by Houthi rebels in the Red Sea. This logistical hurdle is particularly challenging for coffee companies sourcing beans from Asia and East Africa, compounding the financial strain on the industry.
Financial Impact and EU Regulations
The financial toll on Lavazza has been substantial. Since 2022, the company has incurred an extra $800 million in costs, which equates to 2.5 times its earnings before interest, taxes, depreciation, and amortisation (EBITDA). Higher shipping costs have significantly contributed to this burden. The Italian coffee maker’s net income dropped to €68 million in 2023, down from €95 million in 2022, while EBITDA fell from €309 million to €263 million over the same period.
New EU Rules and Future Prospects
The introduction of new EU regulations adds another layer of complexity. These regulations will come into force at the start of the following year, barring imports of coffee and six other commodities. Farmers growing these commodities in deforested areas will no longer be allowed to sell them in the bloc. Coffee companies must precisely geolocate the land plots where they produce their commodities. Only 20% of coffee farmers are prepared to meet this requirement.
As a result, European coffee roasters may have to source almost all their beans from Brazil. This is because Brazil is the only country ready to implement the new regulations.
The Road Ahead
The future of the coffee industry looks challenging. With the possibility of European elections altering the makeup of the EU parliament, there might be a chance to amend these stringent regulations. However, with such changes, approximately 8 million coffee farmers could be able to sell their produce to Europe. This situation underscores the need for the coffee industry to adapt rapidly to these evolving challenges, balancing sustainability with economic viability. As consumers, we must brace ourselves for even higher coffee prices, a reality becoming as specific as our morning cup of coffee.
