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Will coffee prices hit European cafes?

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Berlin, Aug 24: Over the past few months, coffee prices have been going up across Europe. Many cafes in Berlin for instance have not hiked prices so far, but they don't rule out doing so. The majority of cafes in the German capital have seen their margins shrink of late.

Adverse climate events and increased demand, coupled with geopolitical developments and pandemic-related logistics snarls, have translated into higher wholesale prices over the past two years. Spiraling energy prices and a 100% increase in shipping costs in the last 12 months added inflationary pressures.

Will coffee prices hit European cafes?

"Coffee traded at $0.85 ($0.84) per pound in May 2019, the lowest level since 2004. At the end of the year, the price rose to $1.25," Jordan Montgomery, marketing manager at Fjord Coffee Roasters Berlin, told DW."Severe frosts in Brazil, the world's main producer, occurred in July 2021. Two hard nights pushed the price to $2.5. It reached $2.6 in July 2022, before retreating to $2.16 in August."

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Prices for futures contracts and the sale of Arabica coffee beans are dictated by the Intercontinental Exchange (ICE) in New York. The price determined by the ICE, known as the 'C Price', determines average global prices for Arabica coffee.

European roasters and cafes

Since coffee is denominated in dollars, a weak euro and yen could hurt consumption in Europe and Japan, a London-based trader, who spoke on terms of anonymity, told DW.

Businesses located in Germany also lament additional taxes, staff shortages and increased insurance costs.

"These factors forced us to pass some of our costs on to our customers and accept lower margins for some products. The average increase over the past 12 months has been around 6%," Montgomery told DW.

He added that roasters had managed to cope with higher prices so far, especially during the pandemic, passing the cost on to consumers ordering online. That's not the case for cafes. They remain the most affected, also due to higher staff costs and higher rents. As of October 2022, the minimum wage in Germany will reach €12 per hour.

Will coffee prices hit European cafes?

A fair deal?

Some experts suggest that a cup of coffee in a café in Europe should cost around 5-6 euros, especially in Germany, where a 17th century tax on roasted beans has remained in place. "Of a kilogram of roasted beans sold in the German market, €2.19 go to the state," said Montgomery. Only Belgium, Denmark, Greece, Lithuania, and Norway levy a similar tax on the Continent.

Nicole Battefeld, the reigning German coffee champion preparing for the World Coffee Championship in September, explains that coffee should be more expensive also in supermarkets, at least €20 per kilogram. "In Germany, often, the price for a kilo isn't more than €8 — we are simply stripping farmers of investment money. It is another form of colonialism. We never completely realized how much work is involved."

Battefeld explains that fair-trade coffee, with contracts offering 1.36$ per pound to farmers, is just a partial solution.

"Fair trade helps maintain living conditions but often lacks the opportunity to reinvest and modernize the farms," she said. "It helps farmers when their crop is not top quality, but not when it is of high quality, as farmers are stuck with the contract and can't get higher prices."

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Battefeld added that fair-trade prices had only risen a meager 10 cents over the past 20 years.

Farmers and pickers

High wholesale energy prices have different impacts on the farmers, depending on their contract and the variety they produce, explains Karl Wienhold, a Portugal-based coffee researcher and author.

"For the majority of smallholders in most producing countries, the link between futures contract prices and revenues is strong, but not uniformly so," Wienhold told DW.

He underlined that labor costs increased for farmers, especially in Latin America, because of a labor shortage. Labor costs in certain parts of Colombia, the third-largest coffee producer in the world, have nearly doubled.

"I've even heard of small farmowners in Colombia working as pickers instead of tending their own fields," said Wienhold.

Nonetheless, large farms will be most affected by higher fuel prices, as they are typically highly mechanized.

Experts explained that many farmers signed forward contracts with multinationals before the pandemic, meaning they cannot profit from higher prices now. Forward contracts are nonstandardized derivative contracts defining future selling prices.

Farmers also have to shoulder other increases in production costs. Natural gas is used to make nitrogen fertilizer. Russia is the leading fertilizer-exporting country.

"The worst fears about Russia stopping exports have not materialized yet. Trade data show minimal disruption in the flow of exports from Russia to Brazil," the London-based trader said.

Climate change

Coffee is only grown outdoors, often not irrigated. The two main coffee strains, Arabica and Robusta, have different prices reflecting different growing conditions.

Arabica coffee, broadly considered as the better quality, can only grow in specific conditions, which are being increasingly threatened by extreme weather events.

"In most of Colombia, where there are two flowerings and two harvests per year thanks to two rainy seasons, uncharacteristic periods of rain and sun have been altering flowering schedules for a few years, sometimes delaying production for months, causing producers and workers financial stress and threatening the ability to deliver on contracts," said Wienhold,

Lower production also translates into higher prices for lower-quality coffee, creating a disincentive for producers to invest in higher-quality crops, as the difference between the two prices reduces.

Experts agree that climate change will increase price volatility and eventually exacerbate the traditional boom-and-bust cycle, which has been going on for years because of the long periods needed to adjust production patterns to changes in demand and price.

Source: DW

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