Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / The Real Cost of Your Morning Coffee
Transcript
- Lucas: So I was grabbing a coffee this morning, and I paid four dollars and fifty cents for a plain latte. And I thought, wait, coffee futures have been sliding all week. The September contract on the Intercontinental Exchange is down about one point eight percent over the last five days. Why is my latte still four fifty? Luna: Right, that's the classic disconnect. The commodity price and the price at the counter feel like they should move together, but they rarely do. Lucas: Exactly. And it's not just coffee. We saw this with cocoa earlier this year. Cocoa prices crashed, but chocolate bars didn't get cheaper. So today we're going to drill into why your morning coffee is so sticky, even when the futures market does something else. Luna: Let's start with the numbers. Coffee futures have been volatile. They surged about eleven percent back in July, and now they're giving some of that back. But the retail price has been pretty steady, hasn't it? Lucas: Steady is the word. The Bureau of Labor Statistics tracks the average price of a cup of coffee, and it barely budges month to month. In June, the CPI for coffee was up only two percent year-over-year, while the futures market swung double digits. So what's going on? Luna: I imagine it's because roasters and cafés don't buy their coffee on the spot market every day. Lucas: Precisely. They lock in prices months in advance through futures contracts or supply agreements. So a coffee shop's cost of beans today is based on contracts signed maybe six months ago, not today's futures price. That smooths out the volatility. Luna: So the futures price is more of a signal for future costs, not today's. Lucas: Exactly. And that's the first layer. But there's more to it. Even when the underlying commodity gets cheaper, the other costs don't. Let's break down what goes into that latte. Luna: I'm guessing it's more than just beans. Lucas: Way more. For a typical $4.50 latte, the coffee beans themselves might be only forty or fifty cents. Then you've got milk, which has its own commodity price, but that's also been rising. And then the big one: labor, rent, utilities. Those don't move with the coffee futures market. Luna: So even if beans drop by twenty percent, that's only ten cents off the latte. Not enough to change the menu price. Lucas: Right. And there's a whole other layer: the roasters and the distributors. They have to hedge their own costs. They buy futures to lock in prices, and if they're good at it, they might save money. But they don't necessarily pass that on to the consumer, especially if they think the price drop is temporary. Luna: So they're using the futures market to manage their own risk, not to speculate on retail prices. Lucas: Exactly. And there's also the issue of menu pricing psychology. Cafés don't want to change their prices every time the commodity market sneezes. They might adjust once a year at most. That's why you see price hikes when coffee surges, but you rarely see price cuts when it crashes. Luna: So it's kind of a one-way ratchet. Lucas: That's a good way to put it. And it's not just coffee. We saw the same thing with oil and gasoline. When crude drops, gas prices do come down, but they're slower to rise when oil spikes. That's the 'rockets and feathers' effect. Luna: Rockets and feathers — I like that. So how much of the price at the counter is actually the commodity? Lucas: For coffee, it's surprisingly small. The International Coffee Organization estimates that the green bean cost is only about ten to fifteen percent of the retail price in a café. The rest is processing, transportation, labor, rent, and the café's margin. Luna: So even if coffee futures went to zero, your latte would still be maybe four dollars. Lucas: Yeah, you'd save maybe thirty cents. And that's assuming the roaster and the café pass on the savings, which we've seen they often don't. There's also the impact of shipping costs. We saw container rates spike in 2024 and 2025, and those costs get baked into the price of every bag of beans. Luna: And shipping costs are still elevated compared to pre-pandemic. So that's another sticky layer. Lucas: Exactly. So when we look at the recent dip in coffee futures, we shouldn't expect to see cheaper lattes at the counter. The futures market is signaling something about future supply and demand, but the retail price is a different beast. Luna: So what does the dip actually tell us? Is it a supply glut or just a correction after that big rally? Lucas: It's probably a bit of both. The rally in July was driven by concerns about the Brazilian crop. There were some frost scares and drought worries. But then the weather improved, and some of the premium came off. The market is also watching the Brazilian real, because a weaker currency makes their exports more competitive. Luna: So it's a lot of moving parts. Lucas: It is. And that's why the average consumer shouldn't try to time their coffee purchases based on futures prices. It just doesn't translate. Luna: But there is one place where you might see the impact: the price of grocery store coffee, especially if you buy whole beans. That's a bit more sensitive to commodity prices because the markup is thinner. Lucas: That's true. Supermarket coffee has a much lower margin than a café latte. So if you see a change, it's more likely to show up there. But even then, it takes months for the supply chain to work through. Luna: So if you want to save money, maybe buy your beans and brew at home. Lucas: That's the takeaway. But before we wrap up, I want to say something about how we make this show possible. We don't run ads, and that's thanks to a small group of listeners who chip in a few dollars a month on buy me a coffee dot com slash fexingo. It's not a big operation, but it literally funds the research and the time that goes into these episodes. Luna: And we really appreciate it. It keeps the show independent and focused on the numbers, not on selling you something. Lucas: So if you've been getting value out of these conversations, that's a simple way to keep it going. No pressure, but it makes a real difference. Luna: Anyway, back to coffee. So the next time you see a headline about coffee futures crashing, you'll know why your latte doesn't get cheaper. Lucas: Exactly. And maybe you'll think twice about that four-dollar cup. Or not. I'm still going to buy it. Luna: Same. But at least now we know why it costs what it costs. Lucas: And that's the commodity economy in a nutshell. Thanks for listening, and we'll catch you next time.