Arabica Coffee Bean Shortage Leads To Higher Coffee Prices
United States (Mar. 3, 2011) – Have you noticed the steep increase in the price of a bag of fine quality coffee at the supermarket? Consumers are now seeing the results of steep price rises in the cost of green coffee beans (unroasted coffee beans) on the world market which has been going on for more than a year.
Due to coffee’s long “chain of custody” it takes some time price increases to work their way through the supply chain to consumers. However future price increases for coffee will likely come much quicker due to depleted world stockpiles and an already tight supply.
Here are the main reasons that the price of coffee is rising.
Strong Demand for Arabica Coffee Creating Price Increases
Europe and the U.S. have had a strong demand for coffee for many years including the higher-grade Arabica coffee, and this demand was sustained during the years of the economic downturn while in developing countries the demand for coffee rose rapidly.
This includes the Arabica coffee desired by the growing middle classes of emerging economies like India, China and Brazil.
Arabica coffee is the varietal that is used by top U.S. coffee providers like Starbucks, McDonald’s Peet’s, Caribou Coffee and Green Mountain Coffee Roasters. Arabica is also the type of coffee preferred for fine specialty coffee drinks including mochas, lattes and other coffee beverages.
Brazil Will Exceed the United States in Coffee Consumption
By 2015 Brazil is projected to be keeping more than half of its own coffee harvest in order to meet internal demand, which should exceed U.S. consumption in 2012.
This is going to continue to create more competition for coffee supplies worldwide worsening the coffee shortage and leading to coffee price increases unless supplies increase significantly to meet the growing demand. Brazil is the world’s number one coffee producer.
Coffee Price Increases in 2011 – Coffee Shortage continued:
Emerging Markets Coffee Consumption Growth Rate Beats Worldwide Average
In the developing nations with many up-and-coming professionals in the growing middle classes the rate of coffee consumption is growing rapidly. In Brazil coffee consumption set a new record in 2010 at 4.81 kilograms which broke the record which was set in 1965. 4.81 kilograms is enough coffee to brew about 81 liters of coffee.
While the worldwide rate of consumption is growing at about two percent each year, the rate is growing much faster in countries like India, China and Brazil where coffee consumption is growing rapidly.
Huge New Demand for Coffee Placing Upward Pressure on Coffee Prices
In India the demand for coffee is increasing at a rate of about five percent per year. China’s coffee coffee consumption has increased about forty percent during the last two years.
In the half of a decade beginning in 2004 Starbucks increased their China sales by 300%, and the company enjoys a seventy-percent market share in China.
The up and coming young professionals of these emerging markets like China appreciate their Arabica coffee, and it is said that they drink it in an effort to be more like Europeans and Americans.
Europe and United States Sustain High Coffee Demand During Economic Recession
Meanwhile the United States and Europe have managed to sustain their consistently very strong demand for coffee even through the financial meltdown and years of economic recession.
If the U.S. economy and the overall global economy continue to recover and see growth, it may have significant effects on coffee demand and contribute to an ongoing coffee shortage as well as further coffee price increases.
Higher Coffee Prices Unlikely to Ease Supply and Demand Issues
The question is whether rising coffee prices will dampen overall demand, though the customers of premium gourmet coffee Arabica coffee in particular seem to show a very strong brand loyalty and also seem not to mind paying a little more.
Well, they may mind it but they still pay it. In other words, coffee is exceptionally inelastic with respect to price hikes which means that raising the price doesn’t significantly reduce demand.
Poor Coffee Production Is Causing Coffee Price Increases
Due to lower than expected coffee harvests in numerous countries – including, Brazil, Vietnam, Kenya, Columbia and Central America – a significant upward pressure exists on coffee prices, particularly for the Arabica coffee beans.
The disappointing harvests have been caused by bad weather as well as coffee plant diseases and pests which have done great harm to large numbers of coffee crops in some of the world’s top coffee growing countries.
Adding to the coffee price increase pressures are the disappointing coffee harvests of Mexico, Panama, India, Costa Rica, Guatemala, Uganda and other countries.
Coffee Price Increases in 2011 – Arabica Coffee Shortage
Worldwide Coffee Shortage Due to Supply and Demand Imbalance
In 2011 the demand for coffee is projected to be around 135 million 60-kg bags of coffee while the supply of coffee is expected to be around 131 million bags
Shrinking Stockpiles of Coffee Causing Price Hikes
Yet another factor affecting world coffee prices is the problem of shrinking stockpiles. Arabica coffee beans on the New York Exchange shrunk to 1.7 million bags at the end of 2010, down from 3.1 million bags at the beginning of the year. Total stockpiles reached a record low of about twelve million bags of coffee.
Coffee-exporting countries have been steadily increasing their own demand for coffee with a twenty-three percent increase since 2005. Green coffee bean stockpiles have declined 65% since that time.
Withholding of Stocks and Speculation Fuel Coffee Price Increases
Due to some countries including Brazil putting a hold on the sales of their stockpiles of green coffee bean stocks at the same time that investors are speculating about future price increases together were major drivers of recent price hikes for coffee.
The pressure on Robusta coffee bean prices has also trended sharply upward largely due to the Arabica coffee shortage. Overall worldwide demand for coffee is going up about two percent each year so all coffee supplies will be subject to upward price pressures.
Uganda Sees Lower Harvest Contributing to Coffee Price Increaes
Bad weather and coffee plant diseases and pests – including twig borers and mealy bugs – caused a reduced coffee production in Uganda.
Total volume dropped 13% for coffee that was shipped in December, 2010 as compared to one year earlier. Overall this was a drop of 17% from what the country had originally forecasted for the coffee harvests.
However the higher prices Uganda received for its coffee offset the production shortfall, with total coffee revenues increasing 12%. The country of Uganda has been planting coffee at a rapid rate with the hopes of raising the country’s production significantly in the coming years.
Coffee Shortage Leads To Coffee Price Increases in 2011
Coffee Plants Uprooted in Kenya Add To Higher Coffee Prices
Real estate demands in Kenya have led to the uprooting of coffee plants in order to provide more area for homes. This and weather difficulties led to a lower harvest as well as higher coffee prices at the end of 2010 on the Nairobi Coffee Exchange, in particular for the prime Kenya AA coffee beans.
Coffee Planting in Tanzania Should Eventually Help Coffee Production
Tanzania has seen lower coffee production due to drought and has been engaged in a massive coffee replanting effort that should begin to pay off in a few years.
The country is highly respected in the gourmet coffee world for its Tanzania Peaberry coffee, one of the world’s top gourmet Arabica coffees. By 2015 Tanzania hopes to be raise its current annual production of about 70,000 tons to 100,000 tons.
The current coffee price spikes are being driven predominantly by the shortage of the higher quality Arabica coffee beans rather than Robusta coffee plant varietal which is the other main coffee plant grown commercially, or the Liberica coffee plant varietal, which is also grown commercially in Malaysia and West Africa.
Arabica coffee plants thrive in sub-tropical and tropical climates at higher elevations. Generally the Arabica plants should be at least above two thousand feet above sea level, and preferably at elevations from four thousand to six thousand feet.
The world’s specialty coffee market – also referred to as premium coffee, gourmet coffee, or premium gourmet coffee – consists primarily of Arabica coffee beans though some Robusta may be included in espresso blends. The specialty coffee market also includes Organic Coffee (including Fair Trade Coffee), Shade-Grown Coffee and Bird Friendly Coffee.
The Arabica coffee plant varietal includes several distinct variations that are grown in large quantities around the world. The most widespread Arabica varieties are Typica (Coffea arabica var. typica), Bourbon (Coffea arabica var. bourbon) and Arabica (Coffea arabica var. arabica).
Specialty coffee is judged for its flavors and aromas and other primary characteristics including body, acidity, bitterness, sweetness and finish.
These primary characteristics along with more subtle qualities are judged during coffee cupping (professional coffee tasting of particular coffees in order to rate them for the various qualities as well as overall quality. Arabica coffee is considered significantly superior to Robusta and Liberica.
Coffee Shortage Brings Coffee Price Increases in 2011
Coffee Prices Will Continue To Rise Unless Supply Meets Demand
Normal coffee production for Brazil in 2010 would have been about 11.5 million bags of coffee but instead the country only harvested 8.9 million bags. That disappointing harvest, due to inclement weather, came after a 2009 harvest that was just 7.8 million bags which was a thirty-three year low.
Adding to Brazil’s difficulties was a fungus on coffee crops to to the excess humidity. The country’s crops have been significantly harmed by the coffee leaf rust called roya that attacks the leaves of the Arabica coffee plant leaving yellow-orange lesions and reducing yields if not killing the plant.
This coffee leaf rust seems to be moving to higher elevations affecting coffee crops in places previously not affected. Some blame this on global climate change.
Temperatures in coffee growing countries have climbed 1.5 degrees in the last two and one-half decades according to the International Coffee Organization and it is having a negative effect on Arabica coffee farmers not just due to spreading diseases and pests but also because the farmers have to seek out higher elevations suitable for growing the high grade Arabica coffee plants.
Likewise in Colombia the pests are moving to higher elevations. A recent broca infestation affected farms above 4,000 feet when this was not the case previously. The broca is a type of borer worm that enters the fruit and then lays eggs within the coffee bean itself.
Attempts To Increase Coffee Supply Struggling to Keep Up with Demand
Brazil, Vietnam and Colombia, three of the world’s largest coffee growers, have planted large amounts of new acreage with coffee though the plantings have yet to come to fruition.
It remains to be seen whether the lag time for increasing supplies will allow demand to firmly overtake the supply so that when the benefits of the plantings are finally realized it still will not be able to meet demand, which by then may have risen even more rapidly than the increase in supply.
Many industry analysts see the current supply and demand situation in the coffee markets as signaling a fundamental structural change that will affect the industry for years to come.
If the global economy sees a significant recovery from the recent financial crisis it may fuel even greater demand for coffee and other commodities and contribute to an inflationary environment in which coffee prices will continue to rise.
Adding to the problem is that during the recession there was a dearth of capital spending and investment in future production and thus there may be a lag time in increasing production as demand rises.
If the economy does not recover significantly then there may be a continuation of lack of investment in production which will also put pressure on supplies as demand continues to rise in response to emerging markets as well as a growing world population.
Declining Value of US Dollar Effectively Raises Coffee and Other Commodity Prices
Since the financial crisis and bank bailouts the United States government has amassed large amounts of debt that have contributed to a declining value of the US dollar. This has had the effect of creating higher commodity prices for Americans.
An additional factor is the low interest rates being maintained by the Federal Reserve which has had the effect of driving investor money into commodities, in turn driving up commodity prices based largely upon speculation of future higher prices. Large amounts of fund buying has flowed into Coffee Futures markets and other commodity Futures markets.
Broad Range of Commodities Moving Up In Price With Coffee
Commodities that have spiraled up in price include cotton, soybeans, copper and corn. From the fall to the summer of 2010 coffee futures climbed forty-four percent, and in 2010 overall Coffee Futures rose over sixty-five percent, the largest yearly rise since 1994.
Coffee is not alone in the rising commodity price world. Copper hit a forty-year high, oil is skyrocketing, and sugar, pork, wheat and beef are all way up as is iron ore which is made into steel.
Brazil Announces Withholding of Coffee Stocks
Last month Brazil announced that it would not be selling the Arabica coffee it has in storage, totaling 1.2 million bags. This coffee being withheld from sale was bought from coffee farmers in 2009 to help the country boost coffee prices. Today Coffee Futures are more than double of what they were at the time the coffee beans were purchased.
While the coffee beans being withheld from the market by Brazil only amount to about three percent of Brazil’s annual production, releasing the supplies now would help slow the rise in coffee prices worldwide.
However it is a pretty good bet on the part of the country that prices will continue to rise since worldwide coffee demand is expected to outpace supply by up to thirty million bags in the next ten years at current rates of production. One estimate places global coffee supply in 2011-2012 at around 131 million 60-bags while demand is projected at 135 million bags.
Tight Coffee Supply Situation More Vulnerable To Supply Disruptions
Any new supply disruptions, however, including inclement weather, coffee hoarding by coffee growing countries, or outbreaks of coffee plant diseases and pests could exacerbate the tight supply situation and lead to increasing coffee prices.
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