A recent cold snap in Brazil, which produces around a third of the world’s coffee – 70 percent of which is Arabica coffee – has sparked concerns about supply shortages.

The freezing weather in Brazil was preceded by months of drought in Vietnam, the world’s largest Robusta producer, resulting in a shortage of this bean variety for the fourth year in a row.

Rising shipping costs are also putting pressure on the market.

Attacks by Houthi militias in the Red Sea since November have forced ships traveling between Asia and Europe to take the longer route around the Cape of Good Hope instead of going through the Suez Canal.

Roasters are feeling the pressure. Anna Manz, chief financial officer at Nestlé, told investors in July that “the input costs for coffee and cocoa” would put pressure on the food giant’s profit margins over the next six months.

These costs are also passed on to consumers.

In Italy, cafe-goers can no longer enjoy their morning espresso for 1 euro (NZ$1.80). The average price in the country’s cities has risen 15% since 2021, to 1.20 euros this year, according to consumer group Assoutenti.

Consumers may also notice a change in taste.

When Arabica bean prices were high and Robusta bean supplies were plentiful between mid-2021 and early 2023, roasters began adding more of the cheaper bean to their blends, says Charles Hart, senior commodity analyst at BMI, “which in turn led to a drawdown of inventories in Vietnam and Brazil, laying the groundwork for the rise in coffee prices in 2024.”

With the cost of both beans rising, roasters are now trying to protect their shrinking profit margins by sourcing Arabica beans from cheaper producers, primarily in Brazil, and adding more lower-cost beans to their blends.

“Normally, the spread between New York (Arabica) and London (Robusta) is only small when prices are low,” says Judy Ganes, a veteran coffee analyst. “Now that prices are high, roasters are using more lower-quality beans, mostly from Brazil.”

Despite the upward pressure on prices, the coffee market is still “not as much of a Wild West as the cocoa market was at the beginning of the year,” Butler said.

Prices for the key ingredient used to make chocolate skyrocketed, causing extreme market volatility as hedge funds and other speculators rushed to exit their losing bets.

While coffee has not seen comparable volatility so far, the high prices are leading to a “battle” between traders who took short positions in late June or early July when the market was falling and those who were betting on prices continuing to rise, Butler added.

Written by: Susannah Savage in London

© Financial Times