Climate Change Brewing Up Record High Coffee Prices

This week, we dive into the latest trends in global coffee prices and their surprising links to climate change. Lavazza, a leading Italian coffee company, has recently reported that coffee prices are set to remain “very high” due to significant pressures on supply chains.

Fun Fact

Did you know that the coffee industry is worth over $500 billion globally? That's more than the GDP of some countries, making coffee one of the most valuable commodities in the world. So, each cup you enjoy represents a major slice of the global market! ☕💰

Current Affairs

Coffee Market Prices Rise To Record Highs

Coffee joins the likes of olive oil, wine and cocoa as another commodity to reach record highs in their markets.

Recently, the Italian coffee company Lavazza announced that coffee prices are set to remain "very high" until at least the middle of next year, reflecting significant pressure on supply chains.

Unprecedented Price Surge

Giuseppe Lavazza, the chairman of Lavazza, has highlighted an unprecedented spike in coffee prices. This surge has defied earlier predictions that prices would begin to fall this year. Coffee prices reached an astonishing $4,300 per tonne, marking a 15-year high.

Supply Chain Pressures

Major coffee-producing regions such as Brazil, Vietnam, and Colombia are experiencing worsening harvest conditions as a result of harsh conditions, largely as a result of climate change and the pressures it places on agriculture. These regions have been faced by more frequent droughts, frosts and irregular rainfalls. These adverse conditions are severely impacting coffee crop yields and quality, thereby reducing the supply of coffee and driving prices higher.

However, these cost drivers are compounded by global distribution and logistics issues spawning from conflicts in the Middle East where trade routes have been targeted as collateral damage. Ultimately driving transport along lengthier and more costly routes.

Points Of Interest For Aspiring Chartered Accountants

For companies dealing with commodities such as coffee, it’s imperative to have effective and on-point cost and management accounting expertise. We picked up on the following aspects for management accounting:

• Variable Cost Control: The surge in coffee prices will significantly affect the variable costs for businesses in the coffee industry. Effective management accounting practices will be necessary to track and control these costs and the relevant decisions related to them and their products.

• Standard Costing and Variance Analysis: Regular variance analysis can help businesses understand the differences between expected and actual costs, identifying the impact of rising coffee prices on overall financial performance.

• Budgeting: With high volatility in coffee prices, flexible budgeting approaches such as rolling forecasts will allow businesses to adjust their budgets more frequently in response to changing conditions.

• Strategic Decision-Making: Management accountants play a vital role in advising on strategic decisions, such as whether to pass increased costs onto consumers or absorb them to maintain market share. Break-even analysis and contribution margin analysis can inform these decisions, helping businesses understand the financial impact of different pricing strategies.

On the other hand, it is also important that these companies have efficient supply chain management skills taking the following into consideration:

• Just-in-Time (JIT) vs. Safety Stock: Businesses may need to reconsider their inventory strategies. While JIT can reduce holding costs, biting the bullet and investing in large-scale cold storage may prove to be a great long-term decision, allowing for the maintenance of safety stock to buffer against supply chain disruptions.

• Supplier Diversification: Relying on a single supplier can be risky. Diversifying suppliers and establishing relationships with multiple suppliers remains an evident point of importance, even if these suppliers are simply used as ‘back-ups’.

Roundup

The current spike in coffee prices underscores the importance of staying informed about global economic trends and their implications, particularly in this instance those related to climate change. As you progress through the SAICA program, continue to develop your analytical skills and deepen your understanding of market dynamics and cost management techniques. This knowledge will equip you to provide insightful advice and support to businesses facing similar challenges in the future.

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