The coffee industry is currently experiencing a whirlwind of price increases, igniting concerns among producers and distributors alikeAs the chief representative of the Colombian Coffee Producers Association in the Greater China region, Wu Jiahang has found himself at the heart of this brewing upheavalCustomers, ranging from retail coffee sellers to coffee processing factories, are seeking advice amidst soaring prices that have shaken the market.

Over the past year, the prices for Arabica coffee on the Intercontinental Exchange have surged more than 70%, while Robusta coffee prices on the London futures market have skyrocketed by over 80%. These unprecedented highs have prompted urgent discussions about price adjustmentsClients pour into Wu's office, armed with questions: Should they raise prices to absorb costs or risk losing customers? If prices inflate, how will they navigate the potential fallout? Such dilemmas have become commonplace in conversations regarding coffee economics.

As coffee futures reach record levels, the market dynamics become increasingly challenging

The acquisition prices for coffee beans are closely linked to these futures markets, with variations depending on coffee quality and origin but overall reflecting movements in the futures pricesCoffee beans are primarily categorized into two types: Arabica, which makes up 60-70% of the global market, and Robusta, representing 20-30%. Arabica beans are prized for their lower caffeine content and delicate flavors, while Robusta beans, with their higher caffeine and strong bitterness, are typically used in instant coffee productionMajor producing countries for Arabica include Brazil, Colombia, and Ethiopia, whereas Vietnam and Indonesia dominate Robusta productionTogether, Brazil, Vietnam, and Colombia are the world's leading coffee bean suppliers.

Wu points out that adverse weather conditions have led to diminished outputs in Brazil and Vietnam, the two top coffee producersIn addition, geopolitical and economic factors have created volatility in the market

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Current futures prices are notably impacting small to medium-sized coffee companies as they typically purchase raw beans at market rates, while larger businesses often secure their supplies at predetermined prices through contracts established earlier in the yearHowever, Wu notes that if high futures prices persist, these costs will inevitably trickle down the supply chain, affecting even those who locked in prices months agoThe trend among major corporations has shifted from bulk buying to smaller, more reactive purchases in response to immediate market needs.

Founded in 2012, Shafei is a company specializing in the production and sale of freeze-dried coffee powder, importing a significant percentage of Colombian coffee beansCFO Peng Chao highlights the firm’s vision to provide high-quality coffee at accessible price pointsAs such, raw materials represent a hefty portion of Shafei's cost structure, making the recent price hikes a pressing concern.

In anticipation of future procurement challenges, Shafei proactively developed a strategic approach to mitigate risks associated with rising material costs

Already in August, they had initiated discussions with Colombian Arabica coffee growers regarding supply plans for 2025. Together with partners, they collected forecasts from various markets concerning potential futures price fluctuationsCrafting these procurement strategies involves meticulous calculations, as specification varies not only by product but also by the sourcing of coffee powder from different countries, each with its unique blending requirementsShafei’s detailed planning at the product level extends to quarterly sales projections, taking into account import cycles and production timelines, all while leaving room for fluctuating market dynamics.

Peng emphasizes that effective communication between the origins, processing factories, and branding components is paramount for executing these plans successfullyThroughout this process, Shafei remains vigilant about the price predictions from partners, particularly regarding whether they anticipate further increases or a stabilization in costs

Interpreting this collective intelligence enables Shafei to derive a well-informed procurement strategy.

In the event of continued price escalations, Shafei aims for collaborative negotiations with suppliersWith significant purchasing power, they hold sway over pricing discussions, enabling cost-sharing adjustments with primary coffee factoriesAdditionally, advancements in freeze-drying and extraction technologies could offer avenues for reduced production costs, further easing Shafei's financial burdens as partners pass such savings down the line.

However, challenges extend beyond mere raw material pricingA highly competitive environment is emerging within the coffee industry, characterized by aggressive price warsOne anonymous executive from a coffee roasting and processing company notes the influx of low-cost instant coffee brands entering the market, often using subpar ingredients, which dilute the quality of traditional coffee offerings.

Last year, this industry executive found their company grappling with the ramifications of a price war

Instances of instant coffee being sold at mere cents per cup left many bewilderedThey questioned how brands claiming to utilize pure Arabica coffee manage to consistently undersell competitors while remaining financially viableTo uncover this secret, they convened with partners to reconstruct underlying cost models, only to leave the meeting without answers.

After conducting field research, clarity finally emergedIt turns out that some low-priced coffee products consist of blends that do not adhere to pure Arabica standards, often incorporating grainy fillers to replace coffee's inherent bitterness and flavor, leading to a lower-quality product lacking the distinct aroma of coffeeThis unfortunate scenario marginalizes dedicated producers striving for quality while contending in the same arena as lesser products without a transparent composition.

This deception is not new; it has reportedly been pervasive for about three years

Current legislation on coffee ingredient labeling lacks specificity, allowing brands with inferior ingredients to label themselves as using genuine coffee powder—leading to consumer misperceptionsThe aforementioned company expressed frustration about competing against such practices that muddle consumer choice and undermine their commitment to quality.

Meanwhile, Shafei reported adverse effects from the intensifying price competition, which placed pressure on their market share as wellThe pressures of e-commerce platforms engaging in their own discount-spurring battles meant Shafei had to participate in frequent promotional events, further stretching their marginsUltimately, after considerable deliberations, Shafei established a guiding principle of resisting the pull into price wars blindly.

By honing their developmental strategies, Shafei aims to enhance their position by crafting products that emphasize value rather than competing solely on price