A supply shock is an unexpected event that suddenly changes the supply of a product or raw material, resulting in an unforeseen change in price. Supply shocks can be negative, resulting in a decrease in supply; or positive, which produces an increase in supply; however, they are often negative. Assuming that aggregate demand does not change, a negative supply shock causes the price of a product to rise, while a positive supply shock reduces it.
This is precisely what is happening with coffee and other raw materials today. Climate change is hitting producers hard. Frosts in Brazil, drought in Colombia, record low production in Rwanda and Burundi, to name just a few. These extreme weather events impact production and its quality.
Also, the blockade of the Suez Canal affected coffee deliveries from Asia and Africa. Covid's disruption to shipping, with containers out of place and a boom in demand for goods, has caused severe delays and raised freight costs to the highest levels in a decade. For example, it has been reported that coffee growers in Rwanda and Burundi were unable to receive fertilizers and other inputs this year to optimally manage their crops, which generated great losses in the sector. Political unrest in Colombia has also disrupted shipments.
Increased demand amid the supply crisis has pushed the global price of coffee to a seven-year high, which will undoubtedly affect prices throughout the chain. But the key question (at least to us) is, whether coffee price inflation will result in coffee growers receiving more for their cherries? That's still too early to say, but we have a slight suspicion that it will not.
Also, the blockade of the Suez Canal affected coffee deliveries from Asia and Africa. Covid's disruption to shipping, with containers out of place and a boom in demand for goods, has caused severe delays and raised freight costs to the highest levels in a decade. For example, it has been reported that coffee growers in Rwanda and Burundi were unable to receive fertilizers and other inputs this year to optimally manage their crops, which generated great losses in the sector. Political unrest in Colombia has also disrupted shipments.
Increased demand amid the supply crisis has pushed the global price of coffee to a seven-year high, which will undoubtedly affect prices throughout the chain. But the key question (at least to us) is, whether coffee price inflation will result in coffee growers receiving more for their cherries? That's still too early to say, but we have a slight suspicion that it will not.
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