I got into a dispute with one of my coworkers over the economics of coffee a few months ago. He did not understand why someone (he meant me) would spend so much on coffee. “Coffee shouldn’t be so much,” he said. “It’s just coffee.” I tried to explain that coffee is gourmet commodity. Ergo, it will cost more to get a good quality cup of coffee. Coffee falls into the same realm as fine wine or craft beer. You pay for the skill it took to make it. You also pay for it’s growth, transportation, and distribution. This is called the supply chain. There are also many other variables that contribute to the price of coffee. At the end, the economics of coffee is complex and there is a very good reason why we pay so much for it.
Coffee is a multi-billion dollar industry and a heavily traded global commodity. It takes a lot of effort to move it. The movement of coffee from the farm to your cup is called the supply chain. There are a lot of different components within the supply chain.
The supply chain starts with the farmer growing and cultivating the crop. The coffee is then harvested. The coffee beans are processed after the harvest (i.e. wet method, dry method, etc.). Next the coffee is moved to a mill, cooperative, or other centralized location. This is where the coffee is furthered processed and graded. The coffee is then transported to a shipper. Next, the coffee is exported out of the country of origin. Government authorities inspect the coffee while at the port. It then goes to a broker who sells it to a roaster. The roaster sells it wholesale to a retailer. Finally, the retailer sells it to you.
The crazy thing about the above explanation is that I over simplified it. There is a lot more involved in the supply chain (i.e. processing types, commodity trading, international trade laws, types of grading, logistics, etc.).
Below is a simple visualization of the supply chain.
Money is used to ensure that the supply chain is in constant motion. There is also a lot of time and labor involved in the supply chain. Money isn’t everything; yes? The farmers have to get paid. So do the cooperative operators, the shippers, the brokers, the roasters, and the baristas. Essentially that $2.35 you spent on that cup of Sumatra trickled down the supply chain in order to keep it moving.
Anything coming into the country will be inspected. This is done to ensure consumer standards and safety. This also takes time to do. Coffee coming into the country is subject to duty rates based on a classification system. In other words, taxes are collected on the coffee. The burden of that tax will eventually fall on the consumer.
Yes, you are paying for quality coffee too. Paying more money for a better product is part of consumerism. We pay a little more for better quality cars, clothing, food, and/or entertainment. Coffee follows the same principle. A coffee with little defect will be graded as a better quality. This means that it will cost more.
Hint: Grade 1 coffee = more expensive coffee
I’ve said in previous postings that coffee can fall in the same realm as art. I’ve also said that roasting coffee is a science. Therefore, you are also paying for the art and science of making coffee. Good quality roasting will cost money. The roasting machines also do not come cheap. Some of them can go for $20,000. Besides, don’t you want your coffee to be roasted properly? The answer is yes because no one wants to pay for bad coffee.
Here are other variables that affect the price of coffee
Coffee leaf rust aka “La Roya” is a devastating fungus that can destroy an entire crop. The Central America coffee industry took a nasty hit due to La Roya. This has had an impact on the price of coffee from Central America in the last few years.
War or political turmoil can also cause great harm to coffee economy. There are countries that rely on coffee exports to sustain their economies, such as Nicaragua. There are also countries that have excellent and sought out for coffee, such as Yemen. These countries can see a complete shut down of their coffee industries making their coffee either very expensive or difficult to find.
Another contributing variable that affects the price of coffee is the decline in crop yields due to a bad harvest, climate change, and/or the coffee growing cycle. It usually takes one to three years for a coffee plant to begin producing the harvestable cherries. Additionally, the coffee tree yield is finite. The coffee tree will exhaust its yield after about 30 years. These cycles can cause a stagnation or decline in the market. Climate change can harm coffee production as the warmer weather and/or shifting weather patterns can destroy a crop.
The economics of coffee is complex. There are a lot of variables that affect the price of coffee. Coffee is a billion dollar industry with an intricate supply chain. There are many components to the supply chain that requires a lot of money to make it move. In short, these are all reasons why we spend so much on coffee. But let’s be honest. The major reason why we pay so much for coffee is because we love it!