Coffee Prices 2011

Shortage of Coffee in 2011 has Broad Price Implications

United States – Coffee prices in 2011 should continue to rise as they did in 2010. The reasons are numerous and include both a decreased supply as well as an increased demand. Each of these factors in turn is due to various causes.

Decreased Coffee Supply in 2011

During the last decade the world’s powerhouse coffee growers including Brazil and Vietnam planted massive new acreage in coffee. Most predicted that this would continue to dampen any coffee price increases due to increased worldwide demand. They were wrong.

The long time commodity bear market for coffee has now ended as demand has caught up with supply and there has been a fundamental shift in the world’s coffee environment.

Coffee Prices Rising Even With Record Coffee Harvests

Even with record harvests from some of the world’s top coffee producers (e.g., Brazil’s 2010 crop was a record 55 million bags) there is still a demand that exceeds the supply and thus the world’s coffee storehouses are being depleted and coffee prices have risen and will likely continue their ascension at least into 2012.

In particular short supply is the Arabica coffee plant varietal that is desired by gourmet coffee lovers around the world including patrons of the top specialty coffee retailers including Starbucks, McDonald’s, Caribou Coffee and Peet’s Coffee.

Young Professionals in Developing Nations Gaining Taste for Whole Bean Arabica Coffee

Coffee prices went up 30% from 2004 to 2007, and from May to December of 2010 coffee prices rose forty percent and today the supply of high quality Arabica coffee beans remains tight. A primary reason for this is the demand for fine coffee drinks (e.g., espresso drinks such as cappuccinos and lattes made with espresso produced from specialty coffee beans) continues to increase, particularly in developing nations.

Brazil itself, whose crop is about three-fourths Arabica, is seeing this phenomenon with its up and coming young professionals developing an allegiance to the whole bean coffee beverages, and thus the country is keeping more of its own crop just to satisfy domestic demand. The country is growing wealthier and so are its tastes.

Rising Coffee Consumption Exacerbating Coffee Shortage

From 2008 to 2010 Brazil’s domestic coffee consumption rose ten percent, and the same thing is happening in Asia and in particular China where many citizens are developing a taste for fine coffee.

During the last two years China’s coffee consumption has increased an estimated 40%, and analysts have predicted that within four years Brazil will be consuming half of the coffee they produce in that country.

Decreased Yields Due to Weather Contribute to Coffee Shortage

Central America and Columbia are also major Arabica producers, and those country’s saw decreased yields in 2010 due to heavy rains and inclement weather. As a result their coffee prices reached multi-year highs.

A La Nina weather pattern is predicted for the coming year which could negatively affect Columbia’s coffee harvest. The Columbian National Federation of Coffee Growers has also reported a smaller potential harvest and continued higher prices.

The gap between the supply and demand of coffee leading to the coffee shortage has been an issue that has also been noted by the International Coffee Association which has predicted that coffee prices will remain elevated through 2011.

Record rainfalls in Panama in 2010 led to a significant decrease in coffee production in that country (e.g., from 186,000 quintals to 156,000 quintals) primarily due to mold damaging the leaves of the coffee plants.

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Coffee Price Increase 2011-2012 – Coffee Prices – Coffee Shortage Due to Emerging Markets

Estimates for price increases in Panama range around twenty percent. Among Panama’s more than 60 coffee brands is the now renowned Panama Geisha that set a world record when it drew an auction price of $170 per pound. Decreased yields of coffee crops have also been reported in Guatemala, and Costa Rica.

Also contributing to higher coffee prices in 2010 and into 2011 is the declining value of the United States dollar which has the result of supporting higher commodity prices.

Low Green Coffee Stocks Worldwide

Green coffee beans (unroasted coffee beans) stockpiles have become lower worldwide. The green coffee stocks in coffee producing countries decreased to about twelve million bags which is the lowest level on record.

In New York the supply of green coffee has reached a ten-year low. Stocks of green Arabica coffee beans on the New York exchange fell from 3.1 million bags at the beginning of 2010 to 1.7 million bags at the end of the year.

The smaller the overall green coffee bean stocks are the more vulnerable coffee prices are to any disruption in supply such as problems caused by too much or too little rain.

For example, when the proper rains did not arrive in time for the flowing season of Brazil’s coffee plants in October of 2010, it led to a thirty percent price increase in about one month.

Analysts Embracing the “New Normal” of Higher Coffee Prices

Many commodities traders predicted that Brazil’s record coffee crop would bring coffee prices back down into a normal range after the severe price hike due to the October weather scare (the rains finally came, by the way). They were wrong.

Furthermore 2011 with be an “off year” in Brazil’s two year coffee production cycle in which every other year produces fewer coffee beans. The yield for the 2011 crop in Brazil is predicted to be about twenty-five percent less than 2010.

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Coffee Commodity Price Sensitive to Supply Disruptions

Though next year’s reduced yields have already been factored in today’s market prices, further disruptions in supply (e.g., weather problems) could exacerbate the situation and lead to further price increases.

For example, even though Vietnam grows primarily the lower grade Robusta coffee varietal which is traded in London, heavy rains in Vietnam in December of 2010 led to a flurry of speculation coffee buying in New York.

Coffees Futures Markets

Between fall and summer of 2010 there was a forty-four percent increase in the price of coffee futures.

A predicted continuing shortage of specialty coffee beans has already affected world markets where speculation has lead traders to bet on future rises in price and has also led to an influx of money on the Intercontinental Exchange which is the place where the selling and buying of coffee futures occurs.

The primary marketplace for the trading of international coffee futures contracts is the coffee futures market with the London Futures Exchange handling Robusta Futures and the New York Coffee, Sugar, and Cocoa Exchange handling Arabica Futures.

Adding to the concern is hoarding of coffee stocks by top producing countries.

Coffee Futures Hit 13-Year High in 2010

At the end of 2010 coffee futures capped off a seventy-two percent rise for the year which put prices at a thirteen year high. This was attributed in part to inclement weather in both India and Brazil. Arabica coffee scheduled for March delivery was priced at $2.4225 which was the highest price since June of 1997.

Demand for Coffee Continues to Rise

The sustained demand for coffee in the United States and Europe as well as the growing demand in such countries as Brazil, India and China are creating a steadily increasing demand for coffee currently totaling about one percent each year. Some analysts this number may grow a bit faster.

It should be noted that the steady increase in demand has been occurring despite a downturn in the world’s economies which has led to high unemployment rates and a host of economic problems. If the economy picks up again, as it seems to be doing, this could fuel an even steeper increase in demand.

Coffee Supply Shortfalls Continue from Various Causes

With the continued concern over Arabica coffee supplies most people in in the industry expect prices to continue to rise. Due to rains causing a blight to the crops and damage to infrastructure, Central America is experiencing its third straight year of historic low production.

In Columbia the coffee farmers have been sustaining damage due to the broca beetle as well as coffee leaf rust. Estimates for a return to normal production in Columbia (about 11 million bags per year) ranges from one and one-half to two years.

Due to a supply decrease in Tanzania the benchmark coffee price of that country’s crop rose 5.5 % at an auction on January 20, 2011, according to the Tanzania Coffee Board. The supply decreased more than nine percent as the price for a 50 kilogram bag of the the top AA Arabica grade rose to $248.02 from $261.72.

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Thirty Million More Bags of Coffee Needed in Next Decade

Meanwhile the worldwide demand for coffee continues to increases. Some analysts estimate that as much as thirty million extra bags of coffee will be needed during the next decade to meet this increased demand for coffee.

Other problems are also besetting the supplying countries. For example in Kenya there has been competition for land use with some coffee farms being uprooted to make way for residential real estate. At the end of 2010 there was a significant price increase was seen for the esteemed Kenya AA Coffee on the Nairobi Coffee Exchange.

Also affecting some coffee farming areas is climate change that has caused a gradual creeping upwards of temperatures, causing some Arabica growers to move to higher ground.

People Love Their Cup of Fine Java Despite the Cost

High end coffee retailers such as Starbucks and Peet’s have shown that their consumers are quite loyal, and that gourmet coffee consumption is rather inelastic with respect to price increases. The customer base for gourmet coffee is a relatively affluent demographic which displays a strong loyalty to the product despite a rise in cost.

Unlike some other more sensitive markets, it seems that when people are asked to pay more for their cappuccino they pay it without much complaint, and this is true not just in the United States but worldwide.

Due to the long chain of custody of coffee from soil to sip, and the typically large storehouses of coffee, it takes a while for a price increase to work its way to the consumers, but that time has now come. Most major retailers began price increases in the last quarter of 2010 and they may continue in 2011.

Without raising prices on retail coffee and coffee drinks at coffeehouses the retailers will surely see slimmer profits. Meanwhile many retailers are dealing with increased costs for labor as well as rent and other costs of running a business.

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