At the end of 2018, a bag of coffee cost the average UK coffee drinker €6.50 however coffee was selling at just $1 (0.89 cents of euro). So how come there is such a disparity between the market value and its retail price?
ADVERTISEMENTAt the end of 2018, a pound (0.45 kg) of coffee cost the average UK coffee drinker £5.95 (€6.50) yet the international market price for coffee was only at $1 (0.89 euro). So why is there such a disparity between the market value of coffee and its retail price?
Over the past two years, coffee production has been in crisis with historically-low market prices making it hard for many producers to make a living from their crop.
The price of coffee is — like many other raw commodities — moderated by supply and demand. If there is an oversupply, the price of coffee goes down, if there is more demand it goes up.
Jose Sette, the executive director at the International Coffee Organisation (ICO) — an intergovernmental organisation for coffee — explained to Euronews that an oversupply of coffee in the last two consecutive years is the reason why prices dropped.
Sette didn’t point the finger at any particular country for the production surplus but said that several countries have been increasing their production over time.
“I would note especially Brazil, Vietnam, Colombia, and Honduras but they are not the only ones,” he said.
What does this mean for coffee farmers?
According to the Fairtrade Foundation, more than 125 million people around the world depend on coffee for their livelihoods, with 25 million smallholder farms growing 80% of the world's coffee.
An ICO survey on the impact of low coffee prices on exporting countries revealed that a large portion of coffee growers face food insecurity due to the reduced earnings. An increase in household poverty was also reported in many countries where coffee was an income-generating activity.
The survey showed that an increasing number of coffee producers will be unable to cover their production costs and receive a decent living income from the crop.
The crisis is forcing many Central American farmers to abandon their coffee production for a better-paying crop or force them to seek asylum in the US — aggravating an already tense migration situation, said the survey.
Market price vs retail price
However, in recent years consumers in the European Union has seen the price of coffee rise even though farmers barely see any of the profits.
So why is the retail price or a cup of coffee much higher compared to the price of coffee in the market?
Sette explained that the retail price depends largely on:
- taxes
- margins of the retail sector
- margins of the roasting sectors
- other changes in the marketing structure
The price of coffee in the retail price is only a limited share, he added.
Sette said it was the same thing for the price of a cup of coffee.
“If you go to a coffee shop, the price of coffee is only one of the components in the cost structure,” said Sette, “and it’s quite a small part so things like rent, labour costs, health insurance, have a much larger impact on the price of a coffee cup than coffee itself.”
Will the situation get better soon?
The ICO chief said that even if prices have improved in the last two months, they are still at a very low level.
"We may have seen the bottom of this process, it’s still a bit early to be sure but we are still a long way from a price that growers would consider to be satisfactory," said Sette.
ADVERTISEMENTThe ICO itself is trying to reach out to the private sector to try and establish a dialogue and come up with good ideas to address the issue, though this Sette classified as a "long-term project".
"The prospects for short-term change are difficult," he said.