Price Shocks and Why You Keep Buying

Goal: After this lesson you can explain why coffee prices swing so hard and what it means that demand for coffee is inelastic. Subject: Economics | Run time: about 7 minutes

Quick recall

Last time we sorted out the three sourcing models. Two quick questions. One: what price floor does Fair Trade guarantee the farmer? One dollar and sixty cents a pound, plus a twenty cent premium on top (Fair Trade USA, 2023). Two: what price range does direct trade pay per pound? Between three dollars and fifty cents and six dollars a pound, for high-quality beans (Specialty Coffee Association, 2024).

Why this matters

In 2024 the price of coffee did something wild. It jumped about 70 percent in a single year and hit its highest level in 27 years, climbing above three dollars and twenty cents a pound (Rabobank, 2024). A price that big, that fast, would make people walk away from almost any other product. People kept buying coffee. Today is about why the price moves like that, and why you barely flinch.

The idea

Start with where the price is set. Commodity coffee trades on the C-Market, and the C-Market is volatile, which means the price swings up and down a lot (Rabobank, 2024). What drives those swings? Mostly the weather. Roughly 60 to 70 percent of coffee's price volatility comes down to weather in the growing countries (Rabobank, 2024). That fits the geography. Coffee is a fussy plant grown in a narrow band of the world, so when the weather goes bad in a big producer, the whole global price feels it. That is what happened in 2024. Brazil, a giant in coffee, got hit with drought and then frost, and that bad weather was the main reason prices surged about 70 percent to that 27-year high (Rabobank, 2024). A drought in one country, a price shock for the whole world. Now the strange part the hook promised. The price went up about 70 percent, but people barely cut back on how much coffee they drank (Specialty Coffee Association, 2024). To explain that, we need one idea: price elasticity. Price elasticity measures how much people change what they buy when the price changes. If a small price hike makes people buy a lot less, demand is elastic, it stretches. If the price jumps and people keep buying almost the same amount, demand is inelastic, it does not stretch. Coffee's demand is inelastic (Specialty Coffee Association, 2024). A 70 percent price jump barely dented how much people drank. For a lot of people coffee is a daily habit, almost a need, so they pay the higher price and keep their cup. That is great news for sellers and a trap for buyers. The price can climb and the customers stay. So where does that money go once you decide to keep buying? That part is partly up to you, through something called the local multiplier effect. When you spend at a locally owned cafe, about 68 percent of that revenue gets recirculated back into the local economy, in wages, local suppliers, and local owners. Spend the same money at a chain, and only about 43 percent stays local (American Independent Business Alliance, 2023). Same cup, very different ripple. Your inelastic habit moves real money, and where you spend it decides how much stays near home.

Picture it

Picture the coffee price as a small boat on open water, and the weather in Brazil as the wind. A calm year, the boat sits still. Then drought and frost blow through, and the boat gets thrown 70 percent higher in a single season (Rabobank, 2024). Now picture yourself on the dock, watching the price lurch up that high, and reaching for your cup anyway. That refusal to quit is what inelastic demand looks like in real life.

Remember this

The fact to carry out: coffee prices swing hard, mostly because of weather, which drives 60 to 70 percent of the volatility, and in 2024 a Brazil drought helped push prices up about 70 percent to a 27-year high (Rabobank, 2024). But coffee demand is inelastic, so that huge jump barely cut consumption (Specialty Coffee Association, 2024). Since you are going to keep buying, where you buy matters: local cafes keep about 68 percent of your money in the community, chains about 43 percent (American Independent Business Alliance, 2023).

Quick check

Quick check. Coffee's price jumped about 70 percent but people kept drinking nearly as much. What is the one-word name economists use for demand that barely changes when the price moves? Inelastic. Coffee demand is inelastic, so a big price jump caused only a minimal drop in how much people drank (Specialty Coffee Association, 2024).

Key Takeaways

Coffee trades on the volatile C-Market, and roughly 60 to 70 percent of that price volatility comes from weather in growing countries (Rabobank, 2024).
In 2024 prices surged about 70 percent to a 27-year high above three dollars and twenty cents a pound, driven mostly by Brazil drought and frost (Rabobank, 2024).
Coffee demand is inelastic, meaning a 70 percent price jump barely cut how much people drank (Specialty Coffee Association, 2024).
The local multiplier effect: local cafes recirculate about 68 percent of revenue locally, versus about 43 percent for chains, so where you buy shapes how much money stays near home (American Independent Business Alliance, 2023).

Sources

American Independent Business Alliance. (2023). The local multiplier effect: How locally-owned businesses create more economic impact. AMIBA Research.
Rabobank. (2024). World coffee map 2024: Climate challenges and price volatility. Rabobank Food and Agribusiness Research.
Specialty Coffee Association. (2024). The specialty coffee almanac 2024: Market trends and pricing analysis. https://sca.coffee