What are the reasons for the drop in coffee prices, who is affected, what should be done when coffee prices are falling?

The decline in coffee prices can occur over a short or extended period, depending on the extent to which market forces are impacted by various factors:

1. Supply Exceeds Demand

When supply exceeds demand, coffee prices come under downward pressure. Exporters and traders must lower prices to sell off the surplus coffee. Particularly in today’s global market, the continuous increase in production from major coffee-producing countries such as Brazil and Vietnam has created fierce competition. This causes coffee prices to drop quickly, sometimes within just a few weeks if demand doesn’t change.

In reality, Arabica coffee prices fell by about 30% from early to mid-2023 due to abundant supply from large producing countries. However, when production increases significantly while demand remains unchanged, coffee prices can drop sharply. While increased production can help stabilize supply in the long term, without a significant rise in demand, the downward price trend may persist and create challenges for farmers and exporters.

As production increased sharply while demand remained unchanged, coffee prices fell sharply

2. Climate Change

Climate change can cause short-term fluctuations in production, but its impact on coffee prices can last depending on how quickly producing countries can adapt. Some major producing countries like Brazil and Colombia have seen increased production in years with favorable climatic conditions. For example, in 2022, Brazil’s Arabica coffee production increased by 14%, leading to a supply surplus and a sharp price drop. However, when climate change creates conditions like drought or excessive rainfall, production can decrease rapidly, pushing coffee prices up. Conversely, climate change can also cause sudden production drops, such as drought or frost in regions like Brazil and Vietnam in 2024, leading to reduced output and rising prices.

3. Impact of the USD

Coffee is primarily traded in USD on international exchanges. When the USD strengthens, coffee-exporting countries like Brazil and Vietnam face a drop in the value of their local currencies. This forces importers to spend more to buy the same amount of coffee, applying downward pressure on prices.

When the USD strengthens, coffee can become more expensive for consumers in countries using weaker local currencies. This can reduce demand from importing countries, especially when shipping and production costs remain stable, leading to price reductions in the market. The DXY (Dollar Index) rose by 5% in 2023, putting downward pressure on coffee prices in 2024 because international consumers have to spend more to buy coffee. Many major consuming countries, like those in Asia, reduced coffee imports due to these price increases. The impact of exchange rate changes in the USD often leads to short-term price reductions, but if the USD continues to strengthen over time, this trend could persist.

The DXY (Dollar Index) has increased by 5% in 2023, putting downward pressure on coffee prices in 2024 as international consumers have to pay more for coffee

4. Impact of Derivatives Trading

The derivatives market is often influenced by speculative factors and short-term price fluctuations. When large investors engage in short selling, coffee prices can drop sharply in a short period. According to Bloomberg, in the first half of 2023, short-selling volumes on ICE Futures increased by 20%, contributing to a sharp decline in coffee prices in just a few weeks. Investors responded to uncertain signals from factors like climate change and global economic conditions.

The volatility in derivatives trading is one of the reasons why coffee prices can suddenly drop even when the fundamental supply and demand conditions remain largely unchanged. However, if the market fundamentals stabilize, prices will gradually recover.

5. Competition Between Suppliers

Intense competition between coffee-exporting countries such as Brazil and Vietnam has led to a significant price drop. When suppliers lower prices to maintain market share, prices are driven down. This competition not only impacts major consuming markets but also reduces profit margins for producers and exporters, making it difficult for small-scale coffee farmers.

According to the International Coffee Organization (ICO), in 2023, the average global coffee price dropped by 7% compared to the previous year due to fierce competition between major producing countries. The price reduction trend could persist in the face of ongoing competition between exporting countries and may only stabilize once the situation normalizes.

Fierce competition between coffee exporting countries such as Brazil and Vietnam has caused coffee prices to fall sharply

Farmers are the group most heavily impacted by the decrease in coffee prices, as their incomes drop significantly, making it difficult for them to invest in the next harvest. According to the International Coffee Organization, more than 70% of coffee farmers in developing countries face incomes below the poverty line.

Lower prices mean reduced profits and increased financial risks. This can lead to losses for exporters and businesses, as their profit margins shrink. In 2023, coffee exporters in Vietnam reported an average profit drop of 15% compared to the previous year. Smaller businesses, which rely on value-added products from the supply chain, have had to close or shift their business models. In Africa, many companies have faced this fate.

Farmers are the most affected group as their incomes have dropped sharply, making it difficult to invest in the next crop

The reduction in income may result in layoffs or cuts to welfare-related expenses. A report from the International Labour Organization (ILO) showed that the global coffee industry lost more than 50,000 jobs in 2022. Additionally, consumers may also be affected when coffee prices drop, as retail prices may not decrease significantly despite lower raw material costs, due to high operating and production costs. In the U.S., the price of a cup of coffee only dropped by 2%, while raw material costs fell by more than 10%.

For Farmers

When coffee prices drop, farmers should diversify their products by switching to high-quality or specialty coffee varieties and joining cooperatives to increase the value of their products and have a stronger voice in the market.

Product Diversification

Transition to producing high-quality or specialty coffee to increase market value. For example, farms in Ethiopia have succeeded by focusing on specialty coffee, which sells for 200% more than regular coffee.

– Technology Application: Improve cultivation and processing techniques to increase efficiency and reduce costs. Initiatives such as using drones for agricultural monitoring have helped reduce labor costs in Colombia.

– Strengthen Cooperation: Join cooperatives or alliances to gain a stronger market voice. The Fairtrade Coffee Farmers Association has helped over 1 million farmers increase their average income by 15%.

As coffee prices slide, farmers should diversify their products by switching to growing high-quality or specialty coffee varieties and joining cooperatives to increase the value of their products and have a stronger voice in the market

For Exporters

– Seek New Markets: Promote trade activities and expand into potential markets such as the Middle East or East Asia. According to an ITC report, coffee exports to China grew by 30% in the past year.

– Supply Chain Transparency: Enhance sustainable certifications like Rainforest Alliance or Fair Trade to attract premium customers.

For the Coffee Industry in General:

– Invest in Research and Development: Create drought-resistant and pest-resistant coffee varieties. The International Coffee Research Institute developed a new drought-resistant Arabica variety, increasing yield by 20% compared to the old variety.

– Boost Promotion: Strengthen marketing strategies to raise consumer awareness of high-quality coffee. The “Coffee Next” campaign in Europe has helped increase specialty coffee sales by 10%.

The Role of Governments and International Organizations:

– Financial Support: Provide preferential loans or subsidies to farmers and businesses affected by the downturn. The Brazilian government launched a USD 1 billion support fund to help small farmers weather the crisis.

– International Negotiations: Assist in reducing trade barriers and establishing a mechanism to stabilize coffee prices. The 2024 World Coffee Conference will focus on building a global cooperation framework to stabilize prices.

Creating more drought-resistant and pest-resistant coffee varieties and promoting marketing strategies to raise consumer awareness of high-quality coffee are urgent tasks to stabilize coffee prices

Conclusion

The decrease in coffee prices presents a major challenge to the entire industry, from farmers and exporters to businesses and consumers. To overcome this difficult period, there needs to be close coordination among stakeholders, from improving supply chains and increasing product value to support from governments and international organizations. Implementing coordinated solutions will not only help stabilize the coffee industry but also promote sustainable development in the future.

Image collected by XLIII Coffee

1. What are the main reasons for the decline in coffee prices in recent years?

The decline in coffee prices is due to several factors, including an oversupply when global production increases, fluctuations in the US dollar, the impact of derivatives trading, climate change, and intense competition between exporting countries like Brazil and Vietnam.

2. How does climate change affect coffee prices?

Climate change, such as the El Niño phenomenon, can reduce coffee production during harsh years, but in favorable weather conditions, a sudden increase in production can lead to surplus and drive prices down. For example, in 2022, Brazil’s coffee production increased by 14% due to favorable weather, contributing to the decline in prices on the international market.

3. Who is most affected when coffee prices decrease?

Small-scale farmers are most severely impacted because they have low profits and are highly dependent on the sale price. Additionally, exporters and processing businesses are under pressure due to reduced profits and increased competition.

4. What should farmers do to mitigate the impact of falling coffee prices?

Farmers should diversify their products by focusing on high-quality or specialty coffee, apply technology in farming to reduce costs and improve efficiency, and join cooperatives to increase the value of their sales and have a stronger voice in the market.

5. What can governments and international organizations do to stabilize coffee prices?

Governments can provide preferential loan packages, financial subsidies, and negotiate to reduce trade barriers. International organizations can establish mechanisms to stabilize prices and promote sustainable development programs, such as supporting research into drought-resistant coffee varieties and improving yields.