Global prices for coffee are surging as severe weather events hamper production in key regions, raising questions over the long-term damage climate change could have on this much loved and relied on commodity.

Coffee is one of the most widely consumed hot beverages all over the world. Brazil, the top coffee-producing country, accounted for almost 40 percent of the global coffee production in 2023. Vietnam, was the second largest coffee producer, accounting for 17 percent in that same year according to the US Department of Agriculture

The Global Coffee Landscape: Key Producers and Growing Conditions

Coffee growers raise two species of coffee bean: Arabica and Robusta. Arabica Coffee is cultivated in high-altitude regions, typically between 1,200 and 2,200 meters above sea level.  These beans thrive in cooler, subtropical climates with moderate rainfall and plenty of shade. Countries like Ethiopia, Colombia, and Costa Rica provide the ideal misty, mountainous terrain Arabica feels best at an average Temperature of 21°C

Robusta Coffee grows at lower altitudes, usually below 800 meters. This type of coffee plant is more resilient and can thrive in hot, humid environments with direct sunlight. Countries such as Vietnam, Brazil, and Uganda offer the tropical, lowland conditions that Robusta coffee prefers. The robustness of these plants means they are more resistant to pests and can handle a wider range of growing conditions, which makes them easier and more cost-effective to cultivate.

Climate Change and Its Devastating Effects on Coffee Production

The world has seen a steady increase in coffee prices, and all indicators suggest that this trend will continue. Coffee is becoming more expensive due to a complex interplay of factors that impact its production and supply.

Climate change is one of the most significant threats to coffee production. Coffee plants are highly sensitive to temperature and precipitation changes, and the increasing frequency of extreme weather events is taking a toll on coffee yields.

Fears of global shortages of coffee due to weather challenges in Vietnam and Brazil have sent prices soaring to record highs in recent weeks. Both Robusta (+50%) and Arabica (+25%) commodity prices have been rising since the start of the year.

The El Nino weather phenomenon is hailed as one driver, resulting in a prolonged heatwave in Vietnam, one of the world’s largest producers of Robusta beans used in instant coffee and espresso. The Vietnamese agriculture department projected that the 2023/24 coffee production could plummet by 20% to 1.472 million metric tons (MMT), marking the smallest crop in four years. This has prompted buyers to flood the markets over fears of long-term shortages.

And because the hot and dry weather in Vietnam has not improved as originally anticipated, there was already caution in forecasts for the next crop at the end of the year, which could further push commodity prices up later in 2024.

Rising Demand and Supply Chain Challenges: Fueling Coffee Price Increases

The COVID-19 pandemic exposed vulnerabilities in global supply chains, and coffee was no exception. Lockdowns, transportation delays, and labour shortages disrupted the movement of coffee beans from growers to consumers. Even as the world slowly recovers, these disruptions continue to affect the coffee supply chain, contributing to higher prices. Furthermore, geopolitical tensions and logistical challenges add to the complexity of maintaining a steady coffee supply.

Early stockpiling of Asian-outbound goods like coffee has intensified since the Red Sea attacks, which forced vessels using the Suez Canal to take the longer and costlier route around the Cape of Good Hope, contributing to the higher demand for beans since the start of the year.

While supply-side issues are significant, the demand for coffee is also on the rise. As developing countries become wealthier, coffee consumption is increasing. Additionally, the growing popularity of specialty coffees and coffee culture in developed nations fuels demand. When demand outpaces supply, prices naturally rise.

On the demand side, about 3 billion cups of coffee are drunk around the world every day, according to the International Coffee Organization (ICO). If current increased consumption trends continue, this number is expected to double by 2050. A study by the Columbia Centre on Sustainable Investment suggests that we will need 25% more coffee by 2030.

The United States Department of Agriculture sees China using 5 million bags of coffee in the new season (2023/24), which would make it the world’s seventh-largest consumer.

Chinese coffee consumption still pales when compared to top consumers the United States and Brazil that use more than 20 million bags per year. But the growing demand signals China is undergoing a cultural change similar to other tea-loving Asian countries including Japan and South Korea.

Italian coffee maker Lavazza recently announced a 14.9% drop in its 2023 core profit due to “a sharp increase in the cost of coffee beans and its decision to limit price increases”, according to Reuters.

‘Coffee roasters have been forced to raise their prices and reduce their profit margins as the cost of raw materials has surged,’ said Lavazza, attributing this to falling supplies as a result of climate change.

“The coffee supply chain is dramatically under pressure,” said Guiseppe Lavazza Chair of the company that bears his name in comments reported by the Financial Times. “Coffee prices are not going down … [they’re] going to stay very high.”

Worsening harvest conditions in its major production areas of Brazil, Vietnam and Colombia, and shipping disruption caused by the Middle East conflict have exacerbated inflationary pressures, helping prices reach 15-year highs, he continued.

“We have never seen such a spike in price as the trend right now.”

For investors looking to gain exposure to this coveted commodity there are several options to explore. One option for European investors is the WisdomTree Coffee – USD (COFF), which is a UCITS-eligible Exchange Traded Commodity (ETC) designed to provide exposure to coffee futures contracts. It boasts an expense ratio of 0.49%. Return YTD 26.54%  Yield 0.00%  Additionally, WisdomTree offers another product, the WisdomTree Coffee – EUR Daily Hedged (ECOF), which provides exposure to coffee futures contracts while hedging against currency fluctuations in EUR. Return YTD 23.04% Yield 0.00%