Coffee Prices Going Up

by Daniel Harrington on May 31, 2011

Arabica Coffee Bean Prices Driven Up By Supply Disruptions, Strong Growth in Emerging Market Demand, and Speculative Coffee Futures Trading

Coffee Market Report 2011 – You Caffe Machiatto may be costing you a bit more at the local coffee shop, and that bag of coffee beans you pick up at the supermarket has also gone up in price. You thought gas was going up! Tthe surge in coffee prices has outdone even gasoline in the last year.ts

Major Coffee Companies Raising Prices

Last week J.M. Smucker Company (Folgers, Millstone and Dunkin’ Donuts coffee) raised prices yet again, this time by eleven percent (after three earlier increases that totaled 23 percent). Peet’s Coffee also announced a new price increase after two recent increases, and Kraft (e.g., Yuban and Maxwell House coffees) also recently raised their coffee prices due continued increases in the price of green coffee beans (milled but not yet roasted coffee beans).

Kraft’s recent price hikes come on the heels of March price hikes that included an increase of 6.25 cents per pound on instant coffee as well as 70 cents per pound on ground coffee. This trend of coffee prices going up is not new – Kraft had raised prices in December of 2010, which came after a nine percent increase in coffee prices in August of 2010.

Starbucks Raises Prices on Packaged Coffee Beans

Joining the price-raising party is Starbucks which recently announced that it will increase the price of bagged coffee sold in Starbucks stores in the United States by 17 percent beginning on July 12, 2011.

This is the first time since 2009 that Starbucks has raised the price of its packaged coffee sold in stores, though in March the company raised the price of Starbucks coffee sold in supermarkets by twelve percent, and also has raised prices on some “labor-intensive” coffee drinks sold at Starbucks stores.

Despite the rapidly increasing price of coffee consumers seem undaunted. Coffee has long shown itself to be inelastic when it comes to price increases, which means that demand does not go down as people are willing to pay more for their cup of coffee, Latte, Cappuccino or Mocha. And They want whole bean Arabica coffee, not lower grade Robusta coffee beans, and the coffee prices are going up for all of these beans.

Virtually all of the coffee beans used in the specialty coffee market are Arabica coffee beans. The exception is that some espresso coffee bean blends at a relatively small amount of Robusta beans to impart a certain desired flavor to the espresso coffee drinks.

Coffee Futures Driven Up By Speculative Trading

In the past year coffee futures have nearly doubled due to supply and demand factors as well as speculative trading on futures markets driven by large infusions of cash from hedge funds and index funds engaged in financial speculation. Coffee futures contracts are traded on the New York Board of Trade.

This speculative futures trading, in anticipation of higher prices in the future, has occurred across the commodity markets and is attributed to the low interest rates being maintained by the Federal Reserve driving large amounts of money into commodity markets, which in turn has helped to drive up commodity prices, including coffee prices – coffee futures have nearly doubled in the last twelve months.

Meanwhile the massive new U.S. debt that has accrued in the last few years has driven down the value of the U.S. dollar which effectively creates higher commodity prices for all Americans, so coffee prices going up is due to reasons beyond simple supply and demand.

Emerging Economies Driving High Demand for Fine Arabica Coffee

The demand for Arabica coffee has been outpacing supply due in part to large new demand in emerging markets including China, Brazil and India. At the same time there have been numerous supply disruptions due to inclement weather (e.g., Indonesia, Brazil, Colombia) as well as coffee plant diseases and pests that have hurt production.

Demand for coffee has remained strong in the United States even during the years of the economic downturn. Meanwhile demand in emerging markets has risen at much higher rates than the two percent increase in worldwide demand and this is a big part of why coffee prices are going up.

More Reasons Coffee Prices Going Up Around the World

Brazil has seen growth of about five percent per year in demand for coffee and is on pace to surpass the U.S. as the world’s number one coffee consumer by 2012. By 2015 Brazil is expected to be keeping more than half of its own coffee crop, which will put a further strain on the world coffee supply since Brazil is the world’s largest coffee producer.

China has seen growth in demand for coffee at an estimated 20% yearly for the last two years. This largely explains why Starbucks announced it would be opening 1,000 new stores in China where it has an estimated 70% market share, and Starbucks also signed a deal to enter the India market.

The growing middle classes in these emerging economies have more disposable income for “affordable luxuries” like gourmet coffee including espresso coffee drinks like cappuccinos or a lattes. The surge in demand for coffee in China, traditionally a tea-drinking country, is attributed in part to the Chinese wanting to emulate American and Europeans. The upward pressure on prices created by this new demand is a big part of the reason for coffee prices going up.

String of Coffee Supply Disruptions Deplete Coffee Stockpiles

Last year’s supply disruptions were numerous, from Tanzania where coffee plants had been damaged by drought, to Kenya where real estate pressures and urbanization caused coffee plants to be torn up to make way for homes. This led to a price spike for the highly respected Kenya AA coffee beans on the Nairobi Coffee Exchange.

In addition to problems with production among the world’s top coffee growers including Brazil, Vietnam and Columbia, there were problems in Mexico, VietnamPanama, Kenya, Costa Rica, Guatemala and India. The country of Indonesia’s coffee exports dropped about twelve percent. Decreased coffee production was also seen in Uganda in part due to an infestation of mealy bugs and twig borers.

In Panama, which is now known for the Panama Geisha coffee that set a new price record at an auction last year, the coffee harvest was down and coffee prices were up by about 20% due to excessive rains that caused coffee plant leaf damage due to mold and significantly hurt the harvest. This is typical of why coffee prices are going up.

There remains continued concern over the 2011 coffee crops of India and Brazil. Brazil is now in a weak year of its alternating cycle of weak and strong years, a fact that is exacerbated by the coffee crop damage due to excessive rains and coffee pests and diseases.

There is also continued concern over the possibility of a persistent La Nina weather pattern causing more damage to Colombia harvests – the country has seen three straight years of lower than normal coffee production. Colombia is the world’s second largest producer of the higher grade hand-picked Arabica coffee after Brazil, which is part of the reason for coffee prices going up.

The La Nina is a weather phenomenon involving the cooling of ocean waters in the Pacific near the equator leading to floods and coffee crop damage in Colombia and Central America.

The country of Vietnam saw excessive rains at the end of last year which fueled a renewed surge of speculative coffee futures buying in New York based upon the possibility of a decreased Vietnam harvest. Even though Vietnam primarily grows the lower grade Robusta coffee plant varietals whose futures are traded in London, the overall Arabica coffee shortage has created tensions throughout the world’s coffee markets and is partly responsible for coffee prices going up.

Coffee Price Speculators Blamed for Rising Price of Coffee Beans – Coffee Prices Going Up

Starbucks CEO Howard Schultz has stated publicly his distaste for the speculative trading that has forced the company to raise prices, including the pending 17% price increase on in-store packaged coffee.

Coffee price speculators, says Schultz, are largely to blame and many agree, yet there is little anyone can do about it other than try to change U.S. easy-money policies blamed for driving funds into commodity markets and in turn artificially driving up prices for reasons other than basic supply and demand.

This isn’t to say that coffee prices would not have gone up to some degree due to demand outpacing supply in some markets, but most analysts agree a significant percentage of the price increases on coffee in the last year have been caused purely by the large increase in speculative trading, driving coffee prices to a 34-year high.

Continued Upward Pressure Expected On Coffee Prices

It remains to be seen if the coffee stockpiles that have been depleted in the last year will be replenished with bumper crops after numerous supply disruptions. Even with increased new production it will take some time for the market to stabilize, and meanwhile demand continues to increase in emerging markets placing upward pressure that will keep coffee prices going up or at least not going significantly down.

So in summary, don’t expect coffee prices to drop anytime soon. The market remains vulnerable to any new supply disruptions which, if they occur, will translate much more quickly to higher prices on store shelves and at the coffee shop. Depleted stockpiles have shortened the chain of custody of coffee and eliminated the traditional buffer that has protected consumers against coffee price spikes.

Every day around the world more than 2.25 billion cups of coffee are consumed, and more than 25 million people are involved in the coffee industry. About one third of the world’s coffee is grown in Brazil which cultivates more than three billion coffee plants.

Thank You for Visiting Espresso Coffee Guide and Reading Coffee Prices Going Up! Savor Your Coffee and Espresso!


{ 5 comments… read them below or add one }

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It just dropped $30+ …

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