With 400 billion cups served and enjoyed every year, there’s a chance you’re drinking
coffee right now.
As you sip your delicious drink, you’ve probably wondered about the process it took
to get to you.
How many people have handled the beans that eventually turned into your cup of coffee
in the morning?
As it turns out, your coffee is actually extremely underpriced and in this video we’ll see
why you should be paying over $25 for every cup.
This video is brought to you by Skillshare.
Watch my investment courses for free by registering with the link in the description.
You may have noticed that coffee is starting to get more expensive.
Just this year, Starbucks announced a price rise of 10-20 cents per cup across all their
stores for the base drip coffee they serve.
But that price rise has very little to do with how much coffee actually costs and has
more to do with the inequality involved in producing it.
In fact, coffee trading prices have actually declined over the last 40 years.
It costs less per kg of coffee in 2019 than it did in 1975, even after accounting for
inflation.
So, how can the price of coffee be going up for consumers when commodity prices are going
down?
To find the answer, we have to take a journey to some of the poorest countries in the world
where coffee is grown.
In other words, we have to understand the production side.
The coffee plant needs a very particular climate in order to mature and produce its valuable
fruit and this climate happens to be found most often in the developing world, so much
so that 90% of all coffee produced comes from developing nations.
From seed to harvest, the plant takes 4 years to mature, grown in shady conditions under
trees and on mountainsides.
These conditions make harvesting coffee one of the most labour-intensive processes and
usually requires hand-picking to get the ripe fruits while leaving unripe berries on the
bush.
The harvest is so intensive that it usually represents 40% of a farmer’s total budget
for growing coffee.
Once harvested, the berry is sorted and dried to get to the bean inside.
Fun fact, the word “bean” is a bit of a misnomer, as it’s actually the seed of
the fruit, but I digress.
When the beans are at the correct moisture levels, they are packed into standardized
60kg canvas bags which help regulate moisture levels and can be stored for up to a year.
Now, this is a very demanding process as you can imagine, but at the end of the day the
farmers don’t really make a lot of money from it.
In Colombia, for example, the recent price drops actually mean farmers are selling their
60kg bags for just over half of what they need to break even on labor, fertilizer, and
administration costs.
If that sounds extreme, you can see the numbers: an average 3-hectare Colombian farm that costs
about $15,000 to maintain can produce about 75-90 of those 60kg bags per year.
They can sell them for 30 million colombian pesos, which when you convert into dollars
amounts to less than $10,000.
Even at the current Colombian minimum wage, the commodity price of coffee is too low to
sustain both the farmers and the labourers who work in the fields, which is why you often
hear about forced labor and modern slavery being uncovered at the more unethical farms
out there.
For those farmers who are ethical, however, the only winning choice ends up being to simply
walk away from their plantations.
Interestingly enough, this problem is not actually new.
Back in the 30s and 40s, the US was concerned that the price of coffee was too low and that
coffee-producing countries would turn to the Communist block for help.
As a countermeasure, they created the Inter-American Coffee Agreement to sustain exporting levels
from these producing countries into the Western world.
This evolved into the modern International Coffee Agreement to help stabilize prices.
The Agreement has 42 exporting members and 7 importing members in a bid to try and keep
coffee production stable and regulated.
But even with the agreement in place, coffee trading prices have fluctuated greatly.
In the late 1980s, the Agreement couldn’t reach a consensus on quotas and from Nov 1988
to Nov 1992, the price dropped to just a third of its value.
Basically, to avert such extreme price fluctuations, importing members like the US, Japan, and
the EU have to step in and guarantee certain quotas.
That might come as a surprise to you considering just how much coffee is being consumed worldwide.
But the problem isn’t a lack of demand; no there’s plenty of that.
The true issue stems from the whole chain of industries that separate the plantation
from your mug.
Your coffee has to go from farmers to middlemen exporters and importers, then to roasters
and retailers before it can finally come to you.
And at each stage, the market is saturated with companies competing for the same beans
that they’re trying to sell to the same retailers.
The unfortunate loser is the quality of the coffee that we see on our shelves today.
Even good beans can be roasted impurely just because wholesale roasters compete on razor-thin
margins.
And of course, if one farm demands more money per bag, another one will happily undercut
it.
You might be thinking, but what about fair trade coffee?
Does that help the industry’s lagging prices?
Hardly.
Fair Trade only ensures that working conditions and local minimum wages are appropriately
maintained, without really looking at the big picture.
Ethically, it feels good to consume “fair trade” coffee, but it really doesn’t do
anything to fix the underlying issue, which is that the coffee we buy today shouldn’t
be as cheap as it is.
As developing nations advance, so too will their wage standards and economic opportunities
and eventually, there will be no one left to grow and sell coffee at these prices.
If coffee was produced using Western wages, for the amount of labour it takes to grow
and harvest, your morning coffee should cost $25 a cup, at the very least.
Thus, since the advancement of the developing world feels almost inevitable, you might have
to brace yourselves for some pretty hefty price hikes if you’re into coffee.
Of course, spending more on coffee won’t be a problem if your income increases as well,
and one of the best ways you can do that is by learning new skills from Skillshare.
If you’re not familiar with Skillshare, it’s the largest online learning platform
in the world, with thousands of courses on topics like productivity, motion graphics,
music production and numerous other fascinating topics.
I’ve actually made courses for Skillshare myself, if you’re interested in learning
about the stock market.
You can watch them and all the other awesome classes on Skillshare right now if you register
for a free trial using the link in the description.
Then, once you’ve signed up there you should also follow me on Instagram to watch the awesome
teasers I post for my upcoming videos.
We’re gonna hear each again in two weeks, and until then: stay smart.