As our alarm buzzes each morning, millions of us reach for one thing to start our day: a warm cup of coffee. But have you ever stopped to think about what goes into the cost of your daily caffeine fix?
Several factors determine the price of coffee beans, such as brand value, quality, production, price elasticity, and economic policies, such as import tax duties, which add to the price consumers pay.
This article considers what goes into the price of a cup of coffee. After reading this post, you will be more informed about how to optimize the value you receive when you purchase your Java.
Production/Supply Chain
Multiple stages are integrated into the cost of coffee production, from planting and harvesting to processing and roasting.
The supply chain starts with farmers who operate in large plantations with machines that are used for harvesting.
A processing station is used for workers to test quality and to access export markets. Most exporters buy beans from various farmers and then sell them to international buyers.
Roasting coffee beans transforms them into a form suitable for brewing coffee. The cost for roasted beans ranges from $5 to $6 per pound.
Coffee suppliers in North America purchase coffee from several growing areas in Ethiopia, Guatemala, Columbia, and Brazil. They usually deal in large quantities and foster long-term relationships with roasters.
Farming costs plus import, and export fees influence your coffee price at this point in the production chain.
Price Elasticity
The concept of price elasticity, how sellers respond to price changes by adjusting the amount of supply on the market, is a critical aspect of the coffee supply chain.
According to the law of supply in economic theory, when the price of goods rises, suppliers tend to offer more of that product, and when the price drops, they offer less, ideally leading to a market equilibrium. This dynamic of supply adjustment is guided by price changes and influenced by a range of other fluctuating factors.
However, this isn’t the case in the coffee industry, which deals primarily with tree crops. High prices motivate farmers to plant more trees to boost supply, but this doesn’t immediately affect the market. Coffee trees take about 3-5 years to mature, meaning there’s no immediate impact on price reduction even with increased planting.
Conversely, reducing supply would be the logical step to drive prices up when prices drop. Yet, producers are reluctant to cut down their trees, a move that would negate their investment. They prefer to wait, hoping to recover costs in the coming years.
Therefore, coffee markets often experience failed or delayed self-regulation. This is due to several factors, including the slow response of tree crops to market signals.
Transportation Fees
The journey of coffee beans from fields of the coffee belt spanning Latin America, Africa, and Asia to our cups is shaped by several fees and taxes.
While it might be surprising, whole coffee beans travel duty-free. However, U.S. producers are subject to a merchandise processing fee and a harbour maintenance fee, calculated at about 0.3464% and 0.125% of the cargos value, respectively.
On the other hand, Canadian producers can import coffee beans tax-free under Canadas Excise Tax Act.
Despite these fee structures, another unpredictable factor has a more sudden impact on coffee prices. Extreme climate conditions, such as cold frost or wildfires, can destroy crops, leading to price surges due to the large demand.
Due to the increasing frequency of unfavourable weather events, the land viable for cultivating coffee will decrease by approximately 54 percent by 2030.
Quality
If you live in North America, you most likely consume arabica beans, typically sold by major companies such as Starbucks. They are used worldwide due to their sweet yet smooth flavour. Its coffee plant needs careful pruning to maintain its sweet flavour, which is why it tends to be more expensive. Other popular beans include robusta, liberica, and excelsa, mainly consumed in Europe or East Asia.
On the other hand, organic coffee beans are nearly twice as expensive as other commonly used beans. This is because of the strict guidelines in which they are produced, prohibiting employers from exploiting workers and the use of harmful chemicals. Organic beans tend to be healthier for consumers and farmers exposed to them.
Brand Impact on Coffee Pricing
Whether a local café or a retail giant, the prices you pay for a cup of coffee aren’t just about the coffee. They cover operational costs such as labour, marketing efforts, and rent. The markup on your coffee, often reflected in its price, is also influenced by the brand’s reputation, the strategic location of the shop, and the quality of service it promises.
As a student at York University, I’ve navigated our campus coffee spots, all competing coffee sellers. To give you a sense of how brand value translates to what we pay, here’s a breakdown of what you might spend for a large black coffee:
– Tim Hortons: $2.07
– Starbucks: $3.36
– Aroma: $3.42
– La prep: $3.55
– Schulich Market Café: $3.62
Each venue’s pricing strategy teaches how brand value, location, and calibre of the coffee experience can affect how much you pay for your daily pick-me-up.
Final Thoughts
In wrapping up, your morning coffee’s price results from a complex journey influenced by diverse factors. From the coffee farms in regions like Ethiopia and Brazil to local cafés and international chains, each step adds to the cost.
We’ve explored how labour-intensive cultivation, global transportation fees, and climate change’s impact on harvests contribute to what you eventually pay.
Each purchase at Tim Hortons or Starbucks is more than a routine and connects to a worldwide process. With this knowledge, we can better understand the value behind our choices and enjoy our coffee with a deeper sense of awareness and gratitude. It’s a reminder that our simple daily ritual is a small part of a much larger, intricate world of coffee production and economics.
About the Author:
Ethan R:
I am pursuing a degree in Economics at York University, with a strong aspiration to be an entrepreneur dedicated to positively impacting people’s lives. Additionally, I have a deep passion for fitness and nutrition.