How Much of the Cost of a Cup of Coffee Are the Beans?

How much of the cost of a cup of coffee are the beans? This question comes to mind as the price of Arabica coffee goes up again. We wrote previously that the Brazil drought drives coffee prices higher. But if the price of coffee beans goes up ten percent does the cost of your coffee go up by the same percent or the same number of cents? The United States Department of Agriculture published an article about the cost pass-through in the coffee industry. We found it published at Colombia.edu.

A rich data set of coffee prices and costs was used to determine to what extent changes in commodity costs affect manufacturer and retail prices. On average, a 10-cent increase in the cost of a pound of green coffee beans in a given quarter results in a 2-cent increase in manufacturer and retail prices in that quarter. If a cost change persists for several quarters, it will be incorporated into manufacturer prices approximately cent-for-cent with the commodity-cost change. Given the substantial fixed costs and markups involved in coffee manufacturing, this translates into about a 3-percent change in retail prices for a 10-percent change in commodity prices. We do not find robust evidence that coffee prices respond more to increases than to decreases in costs.

Thus there is an eventual thirty percent pass-through in the cost of green coffee beans to a bag of roasted coffee beans. This tells us how much of the cost of coffee are the beans.

Organic versus Regular Coffee

The price of coffee is going up because of the drought in Brazil. The bountiful harvest in Colombia is not enough to pick up the slack. But, other factors come to bear on the price of organic coffee and the market price of healthy organic coffee beans. The problem with organic coffee production is not drought but heat. Coffee leaf rust usually does not infect coffee grown at altitudes higher than 6,000 feet. This is because the fungus cannot tolerate the low nighttime temperature usually found at that altitude. But, as temperatures climb just a few degrees in the nighttime in Central and South America the fungus is creeping up the slopes to where organic coffee is commonly grown. The issue with organic coffee is that there is a lot less of it than regular coffee. Although the cost to put a bag of organic coffee on the shelf of a store in North America only goes up thirty percent of the percent rise in the cost of coffee beans the scarcity of organic coffee will tend to drive prices higher. This is the age old law of supply and demand. Eventually other producers will catch on to what Colombia has done. They will replant with leaf rust resistant strains. This will allow coffee production and especially organic coffee production to rise again and help bring down prices. In the meantime expect to pay more for organic coffee beans.


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