Tariffs are Gone – High Prices are Here to Stay

So if you’re looking the price of your coffee to drop at the grocery store… Don’t.

By Bob Fish

There is no doubt that tariffs were a pimple on already high coffee prices, adding up to 20% to the total cost of coffee to the consumer. But coffee prices are driven by actions from the past, and broad conditions on the ground today. Speculators will take advantage, and continue to bet up.

Bob in the field on the coffee farm of Salomon Demeza, a small producer in Chiapas, Mexico.

I spend 200 days a year in coffee country, boots on the ground.

Here are the top reasons why green bean coffee prices will stay high.

1. No Labor
Since the Pandemic nobody wants to pick coffee anymore. The workers that are left have half the skill, and charge twice as much. This leaves crops either unpicked (reducing yields) or picked at a high cost. Farming costs go up.

2. Dependency on Petrochemicals
With no labor comes a higher use of petrochemicals (fertilizers, herbicides, pesticides, fungicides). This denudes the soil and the ecosystem, creating a circular dependency on the same chemicals, while destroying the multi-generational future of farming. Similar to a drug addiction, it starts off slow and reasonable, but before you realize, you can’t live without it. They will charge you whatever they want. And you will have to buy, because you will have ruined your soil. Farming costs go up.

3. Brazil and Vietnam.
They deforested to plant coffee. Now their micro-climates have changed. Brazil suffers droughts, Vietnam suffers floods. Both are equally devastating to yields, and long-term production predictability and viability. It is a downward spiral. Problem is, combined they produce 60% of world supply. Supply is restricted.

4. Inflation
Not just a problem in the U.S. Coffee farmers all over the world are experiencing higher prices on all their farm inputs. Farming costs go up.

5. Not Planting More
In the past when coffee prices went up, coffee farmers responded by planting even more, eventually bringing supply up to meet demand. Not this time. They are sitting tight, not confident that planting more won’t just be met again with prices that are below the cost of production. Supply is restricted.

6. New Technology
There isn’t much. Besides containerization, Grain-Pro bags, new plant varieties to fight disease (now they struggle too), and petrochemicals (see item 2), not much has changed in coffee production. Perhaps mechanization in Brazil is a bright spot, but that only works because of their terrain and their access to resources. Irrigation has been presented, but that only has a 19-year shelf life. Supply is restricted.

7. Demand Curve Rise
Demand is driven by world-wide population growth, and the conversion of tea drinkers to coffee drinkers all throughout the near and far east. So far, cost-driven demand destruction is only 2%, which means 98% of consumers are still buying in spite of higher prices. Demand rises.

8. Supply Curve Stagnation
Because of our lack of concern in the past for human and environmental consequences, many coffee farmers have just stopped farming coffee so that they can do something better. Supply restriction.

9. Currency Fluctuations
Coffee is traded internationally in U.S. Dollars (and Euro). There is chaos in the currency exchange of all economies right now. Predictability and uncertainty creates higher prices.

10. The Cupboard is Empty
Coffee producing countries no longer have stores of coffee in reserve. Those have all been used up, with none likely to accumulate in the near future. So no more spot buying. Supply is restricted.

11. Speculators Speculate
Looking at all of the above and if I was a speculator, I would bet up, not down, not yet. Prices go up.

12. Tariffs
From the beginning, everything about U.S. tariff policy as it relates to coffee has been chaotic, ever changing, and unpredictable. Although they are gone for now, there is no certainty, yet, that it will stay that way. Uncertainty keeps prices high.

In spite of the tariff elimination, high coffee prices are here to stay. Demand has not been tamped down by high prices and continues to grow. Supply is restricted by events in the past. Cost of production continues to rise. Speculators, currency exchanges, and the risk of tariffs returning, only exacerbate chaos.