The coffee in your coffee costs less than the lid
Green beans are a single-digit share of what a café charges. Where the rest goes, and why a record harvest barely moves the price of a flat white.
Every so often the coffee price makes the news. A drought in Brazil, a poor robusta harvest in Vietnam, and the futures price of green coffee jumps by half in a few months. Headlines follow about the cost of your morning cup.
Then you go to a café and the flat white costs almost exactly what it cost before.
Nobody is gouging you, and nobody is sitting on an increase they intend to pass along later. This is the ordinary arithmetic of a business where the coffee is one of the smaller line items.
Where the money in a café cup goes
A single espresso shot uses somewhere between seven and eleven grams of roasted coffee. Roasting drives off moisture, so a kilo of roasted beans starts life as rather more than a kilo of green ones, but the direction of the arithmetic is unchanged: even at the elevated green-coffee prices of the last two years, the beans in a single café drink are a matter of cents.
Now list what else the café is paying for.
In roughly descending order for a typical urban café:
- Staff. The barista's time, plus whoever else is on shift, plus the employer's share of taxes and contributions on that time.
- Rent. A café is a business that sells floor space by the hour and settles the bill in drinks. In an expensive city this can rival the wage bill.
- Milk. In a milk-based drink this is often larger than the coffee, because you are using two hundred millilitres of it and eight grams of beans.
- Everything else that runs. Electricity for a machine that stays hot all day, water, refrigeration, a dishwasher, waste collection, card processing fees, insurance, accounting.
- Tax. VAT or its local equivalent, at a rate that in several countries depends on whether you sit down.
- The cup, lid and sleeve, on a takeaway drink, which really can approach the cost of the coffee inside them.
- Margin, which on independent cafés is famously thin.
The consequence for growers
Run the same arithmetic from the other end and it turns bleak.
If the green coffee in a café drink is a few cents, the share reaching the person who grew it is smaller still. Between the farm gate and the roaster sit a cooperative or mill, an exporter, shipping, an importer, and the roaster's own costs and margin.
This is the structural reason a boom in coffee prices does relatively little for smallholder incomes and a slump hurts them badly. The farm-gate price moves with the commodity market. The retail price barely notices the commodity market at all. The two ends of the chain are effectively in different industries, one of them a volatile global commodity business and the other a stable local hospitality business.
It is also why certification schemes exist, why they focus on the farm-gate price specifically, and why arguments about them are so heated: the leverage point is a small number at the very start of a long chain.
What actually moves a café price
Since coffee is not the driver, the things that do move the price of a cup are the things that move the cost of running a room with a person in it.
A minimum wage rise moves it. A rent review moves it. An energy price shock moves it, both directly through the machine and indirectly through the milk. A change in the VAT treatment of hospitality moves it immediately and visibly. Hence the popularity of hospitality VAT cuts as an emergency measure, and the fact that the prices rarely come all the way back down afterwards.
The green coffee price moves it late, partially, and mostly at the supermarket rather than the café, because a bag of beans on a shelf is a product where the coffee is most of what you are buying. This is the cleanest illustration of the tradable and non-tradable split you will find in a single aisle: the same commodity, sold two ways, one of which tracks the world price and one of which does not.
Two ways to buy the same beans
| Café cup | Supermarket bag | |
|---|---|---|
| Coffee as a share of price | Small | Large |
| Tracks the world coffee price | Weakly | Closely |
| Tracks local wages and rent | Closely | Weakly |
| Gap between rich and poor countries | Very large | Modest |
How to use this when guessing
For any prepared drink or prepared food, ignore the ingredient entirely. You are estimating the cost of a few minutes of somebody's labour and a few minutes of a room's rent in that country, and then adding tax.
For a packaged good on a shelf, do the opposite. Start from a world price, add freight, add the local tax, and adjust modestly for retail margin.
Getting these two the right way round is worth more than any amount of memorised price data, and it is the single most common mistake people make in the first week of playing.
Sources
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