The Financial Times reported last week (paywalled):
The price of coffee is set to rise from its current record high as climate change, shipping disruptions and new EU regulations drive up costs for roasters, Italian coffee giant Lavazza has warned...
However, Giuseppe Lavazza, chair of Lavazza Group, which owns Lavazza coffee, said the price of coffee on UK supermarket shelves, which is already up by about 15 per cent this year, could rise close to another 10 per cent by next year...
Coffee roasters such as Lavazza have been forced to put up prices and reduce profit margins as the cost of the raw material has surged, said Lavazza, who is the fourth generation to head the Turin-based coffee group...
“Climate change has affected the production in the most important robusta countries around the world, mainly Vietnam and Indonesia, reducing quite a lot the quantity available of these kinds of varieties.”
Weather forecasts suggest the next Vietnamese harvest will fail to replenish waning supplies of robusta coffee beans, which are used in espresso and for instant coffee.
To see what is going on in the coffee market, we can use the simple model of supply and demand (which I'm covering in my ECONS102 class this week). Consider the coffee market, shown in the diagram below. Last year, the market was operating at equilibrium, where the demand curve D0 intersects the supply curve S0. The equilibrium price of coffee was P0, and Q0 coffee was traded. The poor coffee production due to climate impacts decreases the supply of coffee from S0 to S1. As a result, the equilibrium price of coffee increases to P1, and less coffee (Q1) is traded.
Some consumers may be tempted to switch from coffee to tea (coffee and tea are substitutes). However, there is little respite from the higher prices to be found in tea. Even putting aside the fact that there might be negative climate impacts on tea production, the higher price of coffee, and the switching of consumers from coffee to tea, will likely drive up the price of tea as well.
To see why, consider the market for tea, shown in the diagram below. Last year, the tea market was operating at equilibrium, where the demand curve DA intersects the supply curve SA. The equilibrium price of tea was PA, and QA tea was traded. Consumers switching from coffee to tea increases the demand for tea from DA to DB. This leads to an increase in the price of tea to PB, and an increase in the quantity of tea traded, to QB.
Climate change has a lot to answer for, and now it's coming for your morning caffeine fix.
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