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.
|Country||Coffee Production (60kg bags)||Share of Global Coffee 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.
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.
|Net Profit (%)||7.1%|
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%.
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.
What’s Behind The Rise Of Food Prices?
Many variables contribute to the rising cost of global food. Let’s take a look at two major factors influencing food prices in recent years.
The Rise Of Food Prices
The World Food Price Index reached an all-time high in March 2022 before gradually falling for nine months to December 2022. But what caused this surge?
There are many variables contributing to the rising cost of global food, but supply chain disruptions and climate change are two major drivers for the spike in prices over the most recent years.
The above graphic from Brazil Potash explores how these two factors are contributing to the most recent rise in food prices.
1. Supply Chain Disruptions
The COVID-19 pandemic and Russia’s invasion of Ukraine have caused major disruptions to global food systems, altering trade patterns, production, and consumption of commodities.
The pandemic placed unprecedented stress on global food systems through a variety of factors, including a change in consumer food consumption, workforce restrictions, and trade pattern disruptions, causing food prices to rise.
Then, on February 24, 2022, Russia invaded Ukraine, blocking vital exports of commodities for international food systems, and causing a sharp spike in food prices.
Ukraine was the fourth largest global exporter of cereals before the invasion. Combined, Russia and Ukraine export around 28% of the world’s wheat and 15% of its maize.
Simultaneously the fertilizer industry has also felt the strain, with the trade of essential fertilizers for crop production impacted by both the COVID-19 pandemic and the war in Ukraine.
2. Climate Change
As global temperatures rise and weather patterns become more unpredictable, we are seeing an increase in extreme weather events that are having a devastating effect on crops around the world.
India’s rice crop fell by around 8% in 2022 due to a lack of rainfall, while drought conditions in the EU have resulted in grain yields that are approximately 16% below the five-year average.
According to NASA, if greenhouse gas emissions continue to rise at the current rate, maize yields are projected to decline by 24% by 2030, in contrast, wheat may rise by around 17%.
The below video details NASA predictions for maize yields.
Weather conditions have a direct impact on crop production, which in turn affect food prices.
The Role of Fertilizer
Rising food prices are a concern as they directly impact food security. When prices rise, it becomes more difficult for people to afford enough food to meet their needs. This can lead to hunger, malnutrition, and social and political instability.
There are steps that can be taken to mitigate the effects of rising food prices, such as increasing and diversifying the global fertilizer supply. Diversifying the fertilizer supply can alleviate pressure caused by supply chain disruptions.
Additionally, using fertilizers that improve plant resistance to environmental stress factors such as drought and can help to increase crop yields.
Brazil Potash will produce a vital crop nutrient that improves plant resistance to environmental stress factors such as drought, enabling greater yields to feed a growing population.
Click here to learn more about fertilizer and food production in Brazil.
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