The Question Is Not Whether Coffee Will Become More Expensive, But Whether There Will Be Enough on the Market

Due to poor harvests and disrupted supply chains, as well as the influence of funds, the prices of raw coffee on the stock market are skyrocketing. Coffee stocks among producers in Europe are dwindling, while production costs are rising. Given the constant increase in raw coffee prices on the exchanges, consumers are also feeling the consequences as producers cannot bear this burden alone. Additionally, in Croatia, the special tax on coffee is higher compared to neighboring countries, which has led to a decline in profits for the largest Croatian coffee producer, Franck. However, regardless of the high coffee prices on the exchanges, which will sooner or later be passed on to the final product, a shortage of certain types of coffee could also be a problem, although producers do not explicitly mention this.

– The prices of raw coffee are significantly rising for several reasons: the poor harvest of robusta in Southeast Asia, which has led to an imbalance between supply and demand in the global market, historically low stocks of raw coffee in Europe due to major disruptions in supply chains and a deficit of raw coffee in the 2022/2023 and 2023/2024 seasons, security challenges in the Red Sea that have redirected cargo ships around the Cape of Good Hope and extended delivery times by about three to four weeks, as well as significantly increased transportation costs, and speculation in the markets by funds, or a larger influx of fund assets into the soft commodities segment, which is pushing the exchanges upwards – says Ivana Tavra, Director of Corporate Communications at Franck.

She adds that coffee producers have been operating in extremely challenging market conditions for the past few years as raw coffee prices on the global market have been constantly rising since the beginning of 2021, reaching the highest levels in the last decade. The negative trend has continued with other cost shocks – from significant increases in energy prices to other raw materials – which have significantly impacted production costs.

– Despite the rise in all these costs over the last nearly three years, we have tried to minimize the effect of market disruptions on consumers, which is why we have absorbed a larger part ourselves. Considering the price increases of food products that consumers are facing and the consequent decline in purchasing power, we consciously opted to reduce our profit margins, which ultimately reflected in a decline in our profitability. The macroeconomic scenario for the entire coffee industry has been extremely complex due to the sharp rise in raw material costs, with prices, especially for raw coffee, reaching record levels. Despite this, we decided to limit the increase in prices of our products to protect consumers, maintaining volumes but sacrificing our profitability – says Tavra.

Producers Seek Tax Abolition

Operating in an environment of high raw material and service prices, low coffee availability on the market, and the involvement of funds in the exchanges is also Atlantic Group, as well as other coffee producers. According to Gabrijela Kasapović, Director of Corporate Communications at Atlantic Group, the delivery of arabica coffee has been delayed since the end of 2023 due to logistical problems in sourcing coffee from Brazil, which has been exploited by funds.

– Funds have short-term exploited the coffee shortage in consumer countries and raised the stock level, thus increasing the price of arabica to high levels. For robusta, there is also the challenge of insufficient availability in 2024 due to unfavorable weather conditions in the countries of origin. The two largest coffee producers, Vietnam and Indonesia, have underperformed in their harvests due to unfavorable weather conditions, and high prices due to transportation challenges; attacks on transit ships, doubling transit times – says Kasapović. She adds that, although it is impossible to offset movements in global raw material exchanges through internal savings, Atlantic Group has so far maximally taken care to ensure that the burden of price increases throughout the entire business chain is not passed on, certainly not to a greater extent, to the consumer.

The crisis could be partially alleviated by reducing the special tax on coffee, which Franck, according to Tavra, has been pointing out for several years within the Coordination of Producers, Processors, and Traders of Coffee. Because the unfavorable tax treatment of coffee, which is in Croatia up to 30 percent higher compared to neighboring countries, leads to encouraging cross-border purchases, discourages personal consumption, and thus negatively affects GDP, resulting in Croatia’s lack of competitiveness compared to comparable countries in the region. At the same time, EU member states that have abolished this tax are recording an increase in coffee sales and consumption.

– Reducing the tax would minimally impact the state budget as the revenue from the special tax on coffee of about 16.2 million euros is negligible, accounting for only 0.65 percent of total revenues from excise duties and special taxes, but it would significantly ease the business operations of coffee producers and distributors in Croatia under such challenging circumstances without the need for a significant correction of product prices that would align with the increase in the costs of the main raw material. We hope that the authorities will accept these arguments, and during the first amendment of tax regulations, we expect the abolition of the special tax on coffee – says Tavra. She adds that protecting consumers from drastic price increases of many people’s favorite beverage is more than a good reason for the state to react by correcting this tax injustice.

– So far, the greatest burden of the enormous rise in stock prices of raw coffee has been borne by the producers themselves, but this is not sustainable in the long run – concludes Tavra.