Understanding the prices behind your coffee

When we shop for our goods at the grocery store or order foods at our coffee shops or restaurants, we're often not aware of the different factors that go into determining the price for something like a cup of coffee.

Earlier in the year, there was a lot of news around the escalating prices for coffee, which have a lot to do with supply and demand.

The demand for coffee has always been high in developed countries like the U.S., but with several emerging economies —China, for example — the global demand for coffee has been growing. Some say this demand comes from the desire to emulate Americans and Europeans in their culture and beverages. Other countries that are showing rapid growth in demand for coffee include Brazil, India, Russia, and Latin America. The demand in Brazil has been growing so fast that it is expected to become the world's number one coffee consumer sometime next year.

While the demand for coffee has consistently been high, the supply will always be subject to a number of factors that can affect production. It takes a lot of work to grow coffee. Coffee plants themselves take five years to produce their first crop, and then will produce for about 15-20 years.

Coffee is typically grown in warmer climates, which proportionally, is where most developing countries are located. With the effects of climate change, farmers in these warmer climates have been impacted the most by climate change — a trend that is expected to continue. Examples of this were seen in the La Nina weather pattern in 2010 and continued into 2011 where coffee crops were affected throughout Columbia and Central America. Somalia is an example of an even more pressing concern right now around their food supply in general.

There are also a number of economic and social factors that can affect production. Due to real estate pressures in Kenya, many coffee farmers were pushed out of the business to make way for homes, which caused a spike in the price of premium Kenya AA Coffee.

With the current coffee market, even though prices are high, there is a wariness to invest in the industry. In a story by Daniel Harrington, he explains,

"In the current market there is a great wariness to increase investment in infrastructure and coffee planting programs due to a general distrust of the stability of the market and the current high coffee prices. These farmers and their associated governments are more often taking the approach that it is better to keep supply where it is to ensure continued high prices."

Encouraging this reduced supply to keep the prices high is not a safe course to take because it increases the scope of market fluctuation — and could potentially be all the more devastating in the case of economic downturn, or disruption in production.

Farmers must cope with these fluctuations in yield and in global market prices. While some farmers may benefit from increased prices, this often means that producers elsewhere in the world might suffer in the form of failed crops. And in the case that nobody's crops fail, the price for coffee will drop and every grower will suffer.

The effects of speculation further amplify this situation. As the demand for a commodity increases, distributors begin to overstock in fear of a shortage — which dramatically increases prices. The rising prices also attract investors who seek high returns. These investments create an artificial amount of cash that is invested in the commodity and creates prices that are altogether separate from the production process. Much of the increases in world market prices have more to do with investor behaviour, rather than producers. These artificial prices create huge risks on the marketplace for producers in that they are subject to volatile swings created by investors.

What's more is that during the high times, farmers are still unlikely to reap any benefit from the increase in price. Often, it is the middlemen and the brokers who make more money.

Read more on the economics of coffee.

As we work to build more responsible relationships however, we seek to mitigate these fluctuations and to create more stable incomes for producers. Not only do these practices seek to ensure that producers receive a fair wage for their crops, but they also work to reduce the effects of price fluctuations. In the case where there is an excess in funds, this money is invested in communities and production practices, to improve working conditions, ensure productivity, and to increase yields to meet increasing demands.

We see these economic practices and take them for granted in developed countries. In the form of agricultural subsidies, farmers in developed countries often receive a significant amount of money from their national government to mitigate for poor growing seasons, to support the nations agriculture industries, and to stay competitive in the world market. While these programs exist for many countries, there is no global system that provides these types of services for farmers in developing countries. Fair Trade aims to improve this.