Breaking Down the Economics of Coffee

What goes into your morning cup of coffee, and what makes it possible?

The obvious answer might be coffee beans, but when you start to account for additional costs, the scope of a massive $200+ billion coffee supply chain becomes clear.

From the labor of growing, exporting, and roasting the coffee plants to the materials like packaging, cups, and even stir sticks, there are many underlying costs that factor into every cup of coffee consumed.

The above graphic breaks down the costs incurred by retail coffee production for one pound of coffee, equivalent to about 15 cups of 16 ounce brewed coffee.

The Difficulty of Pricing Coffee

Measuring and averaging out a global industry is a complicated ordeal.

Not only do global coffee prices constantly fluctuate, but each country also has differences in availability, relative costs, and the final price of a finished product.

That’s why a cup of 16 oz brewed coffee in the U.S. doesn’t cost the same in the U.K., or Japan, or anywhere else in the world. Even within countries, the differences of a company’s access to wholesale beans will dictate the final price.

To counteract these discrepancies, today’s infographic above uses figures sourced from the Specialty Coffee Association which are illustrative but based on the organization’s Benchmarking Report and Coffee Price Report.

What they end up with is an estimated set price of $2.80 for a brewed cup of coffee at a specialty coffee store. Each store and indeed each country will see a different price, but that gives us the foundation to start backtracking and breaking down the total costs.

From Growing Beans to Exporting Bags

To make coffee, you must have the right conditions to grow it.

The two major types of coffee, Arabica and Robusta, are produced primarily in subequatorial countries. The plants originated in Ethiopia, were first grown in Yemen in the 1600s, then spread around the world by way of European colonialism.

Today, Brazil is far and away the largest producer and exporter of coffee, with Vietnam the only other country accounting for a double-digit percentage of global production.

How much money do growers make on green coffee beans? With prices constantly fluctuating each year, they can range from below $0.50/lb in 2001 to above $2.10/lb in 2011.

But if you’re looking for the money in coffee, you won’t find it at the source. Fairtrade estimates that 125 million people worldwide depend on coffee for their livelihoods, but many of them are unable to earn a reliable living from it.

Instead, one of the biggest profit margins is made by the companies exporting the coffee. In 2018 the ICO Composite price (which tracks both Arabica and Robusta coffee prices) averaged $1.09/lb, while the SCA lists exporters as charging a price of $3.24/lb for green coffee.

Roasting Economics

Roasters might be charged $3.24/lb for green coffee beans from exporters, but that’s far from the final price they pay.

First, beans have to be imported, adding shipping and importer fees that add $0.31/lb. Once the actual roasting begins, the cost of labor and certification and the inevitable losses along the way add an additional $1.86/lb before general business expenses.

By the end of it, roasters see a total illustrated cost of $8.73/lb.

When it comes time for their profit margin, roasters quote a selling price of around $9.40/lb. After taxes, roasters see a net profit of roughly $0.44/lb or 7.1%.

Retail Margins

For consumers purchasing quality, roasted coffee beans directly through distributors, seeing a 1lb bag of roasted whole coffee for $14.99 and higher is standard. Retailers, however, are able to access coffee closer to the stated wholesale prices and add their own costs to the equation.

One pound of roasted coffee beans will translate into about 15 cups of 16 ounce (475 ml) brewed coffee for a store. At a price of $2.80/cup, that translates into a yield of $42.00/lb of coffee.

That doesn’t sound half bad until you start to factor in the costs. Material costs include the coffee itself, the cups and lids (often charged separately), the stir sticks and even the condiments. After all, containers of half-and-half and ground cinnamon don’t pay for themselves.

Factoring them all together equals a retail material cost of $13.00/lb. That still leaves a healthy gross profit of $29.00/lb, but running a retail store is an expensive business. Add to that the costs of operations, including labor, leasing, marketing, and administrative costs, and the total costs quickly ramp up to $35.47/lb.

In fact, when accounting for additional costs for interest and taxes, the SCA figures give retailers a net profit of $2.90/lb or 6.9%, slightly less than that of roasters.

A Massive Global Industry

Coffee production is a big industry for one reason: coffee consumption is truly a universal affair with 2.3 million cups of coffee consumed globally every minute. By total volume sales, coffee is the fourth most-consumed beverage in the world.

That makes the retail side of the market a major factor. Dominated by companies like Nestlé and Jacobs Douwe Egberts, global retail coffee sales in 2017 reached $83 billion, with an average yearly expenditure of $11 per capita globally.

Of course, some countries are bigger coffee drinkers than others. The largest global consumers by tonnage are the U.S. and Brazil (despite also being the largest producer and exporter), but per capita consumption is significantly higher in European countries like Norway and Switzerland.

The next time you sip your coffee, consider the multilayered and vast global supply chain that makes it all possible.

MegaMilk: Charting the Consolidation of the Dairy Industry

Today’s dairy industry looks very different to how it did just 30 years ago.

Milk production in the U.S. has increased by a whopping 50% over that time frame—yet, the total number of dairy farms has dropped by three-quarters.

Fewer and larger farms now have the lion’s share of all U.S milk cow inventory. While they have the ability to produce more competitively priced dairy products and provide more value to consumers, it is causing financial devastation for small farmers.

The graphic above uses data from the USDA to chart the rapid consolidation of the American dairy industry between 1992 and 2017.

The End of the Small Dairy Farmer?

In the U.S., the dairy industry is one of the fastest consolidating industries in comparison to almost all other agricultural sectors.

Between 1992 and 2017, small commercial farms with 10-99 cows saw an average decline of 70%. These farms accounted for 48.5% share of all U.S. milk cows in 1992. In 2017, that number stood at just 12.2%.

Over time, small farm production has been replaced by that of bigger and more consolidated “megafarms”—a move that can be attributed to the many benefits that scale brings, such as lower costs of production and the potential to compete in the international market.

The Need For a Survival Strategy

While small dairy farmers simply cannot keep up with larger farms encroaching on their turf, they also have fluctuations in dairy prices to contend with. Milk prices fell in 2018, narrowing the gap between milk prices and feed costs so much that another wave of farm closures ensued.

To make matters worse, many small dairy farmers are close to retirement age, and according to the USDA, exits are more likely if the farm operator is 60 or older.

Despite the hardship facing small dairy farmers, analysts suggest that consumer backlash against large-scale production could present opportunities for small dairy farmers to create premium artisanal products. However, such initiatives would be entirely dependent on the state of the economy and where consumer’s values lie.

The Wider Implications

With milk production shifting to larger farms, a range of both direct and indirect impacts are being felt across the country.

For example, milk production is now predominantly focused in fewer states such as California and Wisconsin, which together accounted for almost 33% of all U.S. milk production in 2018.

In larger farms, the herds are typically confined to tight spaces— rather than grazing in pastures—making animal welfare an issue for many of these farms. Concern over waste contamination and air pollution also brings the environmental sustainability of larger farms into question as they come under more pressure to reduce their impact on the planet.

Changing Tastes

Looking beyond the production of milk, changing consumer preferences could result in the most transformative effects on both large and small scale dairy farmers.

While rising populations are increasing the demand for dairy, per capita milk consumption declined by 24% between 2000 and 2017 in the United States. Consequently, the largest dairy producer in the country, Dean Foods, filed for bankruptcy in 2019, followed by another major milk producer, Borden Dairy, just two months later.

Experts claim that changing consumer preferences, along with competition from other beverage categories, are responsible for 90% of the total dairy decline.

No Country for Old Farms

The confluence of changing economics and an aging population of farmers has brought the U.S. dairy farming industry to a tipping point, and the near future is likely to bring a fresh wave of dairy farm closures.

I don’t see anything that would give them hope at this point. The best advice I can give to these folks, dairy farmers, is to sell out as fast as you can.

– Joe Schroeder, Farm Aid

As smaller farms continue to disappear from America’s rural landscape, the impacts of consolidation will not only affect dairy farmers, but entire rural communities too.