Coffee Shortage 2011

by Daniel Harrington on February 4, 2011

UNITED STATES (Feb. 3, 2011) – Why have coffee prices risen so dramatically in 2010 and continuing in 2011? The answer is a coffee shortage, and in particular a shortage of the premium coffee beans known as Arabica coffee.

The world’s two main coffee plant varietals grown commercially are the higher-quality Arabica and the lower-priced Robusta coffee beans, with a smaller amount of Liberica coffee beans which is also considered to be of a distinctly lower quality than Arabica.

Arabica Coffee Bean Shortage Leads to Price Increases

Though the premium coffee market is almost exclusively Arabica, Robusta coffee beans are commonly used in espresso blends to impart a desirable quality to the espresso shots as well as the gourmet coffee drinks (espresso coffee drinks).

The world has seen a strong and rising demand for the premium gourmet coffee beans, often referred to as specialty coffee, which is comprised almost exclusively of Arabica coffee beans. This includes the coffee and espresso brewed up for customers at the most prominent coffee houses and sold by the top coffee retailers such as Starbucks, Peet’s, Caribou Coffee and Green Mountain Coffee Roasters among others.

Emerging markets such as India and China have developed an increased demand for this gourmet coffee as well, particularly the young professionals of these countries who don’t mind paying a bit for a cup of coffee and show a strong brand loyalty.

Starbucks controls about seventy percent of the premium coffee market in China and tripled sales there from 2004 to 2009. From 2007 to 2010 Starbucks saw a worldwide increase in average number of customers at its stores, from 408 to 424 each day.

At the end of 2010 Starbucks raised prices in the U.S. and China and the increases were met with very little resistance. At the end of January in 2011 Starbucks announced that, despite the marked higher price of coffee beans as well as other commodities that were affecting its profits more than expected, the company would not raise prices. At the same time Starbucks reported United States sales and profits which easily beat the Wall Street estimates.

Starbucks profits increased about 44% percent in the fiscal first quarter ending January 2, 2011 as compared to that same quarter one year earlier. Starbucks profits were forty-five cents per share, whereas analysts had predicted 39 cents, and the profits totaled $346.6 million.

At Starbucks cafes that had been in operation at least 18 months, international sales were up 5% while United States sales were up 8%, and these numbers also beat analysts’ predictions.

The statement by Starbucks that they would not raise prices in 2011 was made a bit easier by the fact that they have already purchased all of the coffee beans they need for the year, a fact that was confirmed by the company’s Chief Financial Officer Troy Alstead.

With around eleven thousand cafes in the United States and another six thousand or so around the world, Starbucks is growing again after having to slow its pace in 2008 when it was hurt by growing too rapidly.

Today Starbucks is expanding again, particularly in the world’s emerging markets. Starbucks is also increasing its offerings in grocery stores including its new Via instant coffee product.

Green Mountain Coffee Roasters raised their prices for coffee products in North America as much as 15% in October of 2010 including the prices of their popular Coffee K-Cups portion packs which work with their Keurig single serve brewing systems. The K-Cups are sold under various brand names including Caribou Coffee, Newman’s Own Organics, Timothy’s Coffee, Tully’s Coffee and Green Mountain.

A few months earlier the J.M. Smucker Company, which is the parent company of Dunkin’ Donuts, Millstone and Folgers, raised prices about 9% on its top coffee products due to increases in the price of green coffee beans.

About the same time a 9% price increase took effect for Yuban and Maxwell House coffees which are produced under the parent company Kraft Foods, and these price increases included both ground coffee as well as instant coffee.

Peet’s Coffee & Tea announced price increases in September, 2010 because of what they said was a 35% increase in the price of green coffee beans since the beginning of 2010.

Coffee Market Inelastic in Respect To Price Increases – Pressures on World Coffee Supplies

When it comes to the world of gourmet coffee the product has shown to be inelastic when it comes to price increases. In other words, even when prices go up people keep buying it. Companies such as Starbucks serve a relatively affluent demographic worldwide including many young professionals who exhibit a strong brand loyalty.

This is the new breed of gourmet coffee lovers and they want their fresh-brewed whole bean coffee or a specialty coffee drink such as a Latte or Cappuccino, seemingly no matter what the price. As a result of this inelasticity of coffee with respect to prices, the coffee shortage likely won’t quickly be eased by rising coffee prices because high demand will likely be sustained and may continue to grow.

The sustained worldwide demand for Arabica coffee will likely continue to place a strong pressure on coffee supplies and deplete green coffee bean inventories and storehouses. This is true even though the recent rises in coffee prices come on the heels of previous price increases. For example, from 2004 to 2007 wholesale coffee prices rose about thirty percent.

Worldwide Pressures on Coffee Supplies

While the United States and Europe have displayed an strong and increasing demand for fine coffee for decades, now other major countries are putting a significant pressure on Arabica coffee supplies due to extraordinary demand growth.

In the case of Brazil, the world’s powerhouse coffee grower, this means that it will now be keeping more of its own product, an estimated half of all its coffee production will be consumed internally by the year 2015.

Another example is China which has seen a forty percent increase in demand in just the last two years. According to Starbucks the demand for coffee in China was growing so fast a good estimate of growth could not be precisely determined.

India, another area where up-and-coming young professionals are developing a taste for specialty coffee, the demand has been increasing at a rate of about five percent annually.

Green Coffee Bean Storehouses at Historic Lows

Green coffee beans (Unroasted coffee beans) are stored around the world in large warehouses in vast quantities that in the past have caused any temporary shortages to go mostly unnoticed and any price increases to take a long time to work their way through the coffee’s long “chain of custody” from the farmers to the consumer.

Since the coffee beans shortage has now been going on well more than one year the price pressures have materialized and give every indication of continuing their ascent unabated. Green coffee stocks are now at historic lows both in the U.S. and in major coffee growing countries.

Fundamental Market Factors Causing Coffee Price Increases

On January 31, 2011 the International Coffee Organization executive director announced at a United Nations Conference in Geneva that “The fundamentals are in place to justify the price increases we’ve seen. The coffee market is being driven much more by fundamental supply factors than by investors.” Sette added that “The shortage is in Arabica, and Arabica is going up.”

Sette also commented that the coffee price increases in recent years were justified by the short supply of Arabica coffee. In addition Sette noted that the Robusta coffee market was also starting to react to the Arabica coffee shortage.

Coffee Futures Price Spikes

When coffee futures prices spiked at the end of 2010 it was in part due to an influx of money based on the speculation of future coffee price increases. However, at the United Nations conference Sette remarked that coffee markets typically are not driven primarily by financial factors. Sette said that “We have seen an increase in inflow of speculative funds, hedge funds over time, but it seems that the fundamentals do prevail.”

In other words, the coffee price increases we are seeing in 2011 are due to fundamental reasons of supply and demand, including disappointing coffee harvests by major coffee growing regions for various reasons, and an increasing demand for coffee around the world as well as a sustained strong demand in the United States and Europe.

The benchmark “C” Arabica coffee futures contract trading on ICE Futures has kept up its high price level and has risen nearly 80 percent since June of 2010, now at a thirteen year high.

Precarious Supply and Demand Balance in World Coffee Markets

The International Coffee Organization also noted the “precariousness of the supply/demand balance” as coffee futures hit a thirteen year high in December of 2010 and prices continued to climb on demands from funds.

Coffee futures rose more than 65% for the year showing their biggest annual gain since 1994. The underlying very strong fundamentals of the market is seen to be responsible for the significant rise in fund buying. Meanwhile world coffee exports decreased more than 5% in July of 2010 compared to one year earlier.

The Coffee Supply/Demand Equilibrium

The sometimes delicate equilibrium between supply and demand in the coffee markets has clearly been set on a course for a marked disjunct that may take some time to remedy.

Demand for coffee is now clearly outstripping supply with pressure coming from both sides of the equation – decreasing Arabica coffee supplies and increasing demands.

While the supplies may eventually increase significantly in attempt to meet the coffee market demands, the demand may continue to rise lengthening the time in which the market can be stabilized.

Arabica Coffee Supplies Will Take Time to Meet Demand

Arabica coffee only grows well in certain countries, basically those between the Tropic of Cancer and Tropic of Capricorn, and only at certain regions in those countries, more specifically the higher elevations.

Moreover coffee plants take three to five years to mature and begin producing so even if massive plantings were occurring now it would be some time before it affected the world’s coffee harvest totals.

Climate Change and Coffee Growing – Arabica Coffee Plants Grow Well at Higher Elevations

The Arabica coffee bean varietal grows best at higher elevations where the temperature is cool enough for the sensitive plants. During the last twenty-five years, according to the International Coffee Organization there has been gradual rise in temperature totaling about one-half of one degree in coffee growing countries.

This slight temperature shift has caused coffee farmers to move upward in elevation wherever possible in order to properly grow the premium Arabica coffee plants.

The Global Coffee Quality Research Initiative

Founded to build a collaborating network of coffee companies worldwide to support and direct research on coffee quality, the Global Coffee Quality Research Initiative (GCQRI) is supported by the Specialty Coffee Association as well as the Borlaug Institute (an agricultural research institute at Texas A&M University).

Research will focus on problems threatening coffee quality taking into account that specialty coffee consumption now comprises about forty percent of the market and an estimated 50,000,000 farmers in 35 countries are struggling to meet the market demands for high quality coffee.

GCQRI is envisioned as an effort to alleviate both the quality and supply of high quality coffee while increasing farmer returns, coffee roaster sales, and coffee consumption of both the high grade and lower grade coffees worldwide. The results of the research are intended for wide dissemination throughout both coffee consuming and producing countries and provided free to all parties.

Problems in Coffee Growing Regions

Meanwhile a bevy of problems have beset major coffee growing regions from the La Nina weather pattern bringing floods and inclement weather damaging crops in Columbia and Central America. La Nina conditions are created by cooling equatorial waters in the Pacific.

Bad News on the Coffee Harvest Front

On December 10, 2010 the U.S. Department of Agriculture Foreign Agricultural Service announced that the world’s second biggest Arabica coffee producer, Columbia, suffered from delayed agricultural shipments due to flooding causing crop and road damage.

Meanwhile the heavy rains from a La Nina weather pattern were predicted to last at least into the first quarter of 2011. This is the second straight year of lower coffee production in Columbia along with higher prices due to the smaller supply. This was verified by an announcement from the Columbian National Federation of Coffee Growers.

Real estate pressures in Kenya have led to coffee plants being uprooted to make way for homes, particularly in central and western Kenya. The real estate pressures in Kenya not only displaced coffee farmers but also caused steep price increases at the end of 2010 on the Nairobi Coffee Exchange for the highly esteemed Kenya AA coffee beans.

Rainfall in Brazil led to coffee crop damage, and also contributing to the growing coffee shortage is the fact that Brazil’s coffee crop is alternately weak and strong every other year, with 2011 being a weak year for coffee in the country.

In the country of Tanzania, known for its Tanzania Peaberry coffee, a huge number of coffee plants were damaged by an extended drought. The country is now replanting coffee at a rapid pace though these plants will take years to begin producing.

By the year 2015 Tanzania plants on producing about 100,000 tons of coffee a year, up from the current 70,000 tons.

Decreased coffee harvests have also been reported in Costa Rica and Guatemala, while Indonesia saw an almost 12% decrease in coffee exports and Vietnam also experienced crop damage due to inclement weather in 2010.

Some major coffee growing regions have also seen significant coffee crop damage due to coffee plant diseases and pests which have been a persistent problem in most areas and when unchecked can have the effect of ruining a large percentage of a coffee crop, and in some cases the entire harvest is lost.

Robusta Coffee Beans and the “Blending Wall” with Arabica Beans

Despite the fact that many coffee processors blend the lower priced Robusta coffee beans in with Arabica coffee, and the fact that Robusta coffee production is achieving record harvests in 2010-2010, these major coffee sellers are said to have reached a “blending wall” in regards to mixing Robusta beans in with the Arabica.

In other words they cannot increase the percentage of Robusta beans in the blend without risking a significant deterioration in the perceived quality of the brewed coffee or espresso.

As a result, an increased supply of Robusta coffee beans is not expected to have an effect on the shortage of Arabica coffee beans, and if processors blend in a higher percentage of Robusta it will lead to a lower price for the product.

Economic Recovery Could Exacerbate Coffee Shortage

Despite the financial crisis the demand for coffee continued strong and growing. This also begs the question about what effect an economic recovery would have on the coffee supply and demand issues. Most analysts agree that a significant economic recovery would lead to an even faster increase in the demand for specialty coffee, thus exacerbating the coffee shortage.

At the end of 2010 there was a marked spike in coffee futures prices on the New York Board of Trade (Intercontinental Exchange), ending the year around $240.50.

Vietnam Coffee Supply Sees Increased Prices

Also at the end of 2010 the price of Arabica coffee in Vietnam, the world’s second largest coffee producer, doubled from 2009 in the center highland of Da Lat (to VND 14,500/kg) with a total output of about 10,000 tons annually which had decreased due to unfavorable climate conditions. Only about six percent of Vietnam’s coffee is Arabica, which is generally harder to grow than Robusta.

On February 1, 2011 the export price of coffee in Ho Chi Minh City Port rose to (US) $2,025 per tonne increasing the coffee bean price in the Dak Lak province to VND39,000 per kilogram, which was up nearly VND1,000 from the day before. The high quality coffee beans reached a record high of VND40,000 per kilogram.

One Dak Lak exporter described the situation as coffee traders wanting to buy more coffee beans to fulfill contracts they had already signed while coffee farmers were trying to wait for higher prices amid speculation that this would be possible in the near future. At the same time coffee exporters showed a reluctance to sign on to any new contracts with the overall effect of causing an increase in coffee prices.

While Vietnam was able to export about 140,000 tonnes of coffee in January of 2011, this was a 3.7% decrease from January of 2010 yet still the total value of the coffee exports rose thirty percent to US$266 million.

Coffee Supplies and the Chain of Custody

From the coffee plants growing in the fields to the harvesting of the coffee cherry, and processing, shipping and storing, roasting, and packaging, coffee takes a long time to reach the final consumer. The recent coffee shortage began more than one year ago so the new round of price increases really began to materialize at the end of 2010.

Many large-scale coffee roasters and coffee retailers purchase large amounts of coffee in advance so it took a while for them to feel the full effect of rising coffee prices. Now that the shortage has worked its way through the supply chain it is beginning to be noticed in coffee shops and on grocery store shelves.

Continued price increases at the source will place further pressure on roasters and retailers, and new rounds of price increases may not take so long to materialize at the consumer level. This is expected to continue throughout 2011 and into 2012 as the world’s coffee supplies try to catch up with the sustained and increasing demand for premium gourmet coffee worldwide.

Stocking Up On Coffee Unlikely

Despite the fundamental shift occurring in the world’s coffee markets and a general public awareness that coffee prices will continue to rise in the future, it is unlikely that consumers will stock up on their Arabica coffee supplies in any significant amounts.

One reason for this is that many people prefer to have their coffee prepared at the local coffee shop, and the other is that coffee is by its nature a product that is not well-suited to purchases long in advance. Gourmet coffee is best when it has been freshly-roasted, and even if it is packaged well the true gourmet coffee lover knows that a package of coffee will not be as good if its not fresh.

Once coffee has been roasted it begins to lose its finest flavors and aromas quite rapidly. Consumers intent on protecting themselves against future coffee price increases could, if they wished, stock up on , green coffee beans and roast the beans at home (see home roasting) but this is too inconvenient for many coffee drinkers so they will likely just pay the higher price for coffee in the future.

Coffee Supply Outstripped By Demand

Some analysts predict that the shortage of the higher grade Arabica coffee will also lead to a shortage of lower grade commodity coffees including Robusta coffee. The overall worldwide coffee production is expected to be outstripped by demand (coffee consumption) by about five million bags of coffee in 2012, and in this case further price increases would be expected.

Coffee Quality May Suffer Due to Coffee Shortage

Premium gourmet coffee production involves a set of standards at every level of production, and these standards create higher costs that some coffee farmers find hard to rationalize despite the higher prices garnered by premium coffee beans.

The coffee shortage may cause many coffees to be marketed as higher grade coffee when in fact the beans would not normally be classified in the gourmet category by a respected coffee cupper (professional coffee taster).

Some experts in the field feel that the future of gourmet coffee will rely more upon fundamental evaluations of coffee products so that prices accurately reflect the quality of the particular coffee beans used. While this already occurs to some degree in the gourmet coffee market it may take on enhanced role in the future.

In recent decades major coffee growing countries have encouraged the production of lower quality coffee plant varietals which are disease resistant and able to produce high yields, and which are harvested mechanically rather than by the preferred gourmet method of hand-picking to ensure only ripe coffee cherry are harvested to ensure high quality coffee beans.

Future production of gourmet coffee is further hindered by this fact which contributes to the assessment that premium coffee production will not increase significantly from 2011 to 2013.

Whether coffee production will begin to increase beyond that time range is yet to be determined though there will almost certainly be very strong market pressures for the production of high quality coffees.

In the specialty coffee market there are already many programs in place that provide some assurances of coffee quality. This is most prevalent in the Organic Coffee as well as through the Fair Trade Coffee programs. Other coffee production initiatives such as Bird Friendly Coffee and Shade-Grown Coffee also place a premium on quality during the production process.

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{ 1 comment… read it below or add one }

Reginald Grand'Pierre March 18, 2011 at 1:01 pm

I truly appreciate your website. The information is clearly written and easy to find. I will use it as reference and share it with others.
Reggie

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