Coffee Prices 2011 – The Rising Price of Coffee

by Dan Harrington on March 23, 2011

Five Main Reasons Coffee Prices Are Rising in 2011 – Price of Coffee Beans Going Up

Investor Coffee Market Report: During the last nine months the price of green coffee beans (unroasted coffee beans) on world markets has been spiraling upward. The reasons for the run-up in coffee prices are manifold, and all of the various causes that began the price spike that began nearly one year ago and remain true today.

Among the reasons for rising coffee prices are increasing demand by emerging markets, lower supplies due largely to inclement weather, historically low coffee stockpiles, an overall commodity rally, and a distinct shortage of the higher quality Arabica coffee beans.

Here are the Five Main Reasons Coffee Prices Are Rising in 2011:

Reason Number One: Rising Demand in Emerging Markets Amid Strong Worldwide Demand

The total worldwide coffee demand for 2011-2012 is forecasted to be around 135 million bags (sixty-kilogram bags) while total coffee production for 2011-2012 is currently forecasted at around 131 million bags of coffee.

During the next decade industry analysts have predicted that, if current rates of coffee production are sustained, then demand will outpace coffee supplies by about 30 million bags of coffee.

The worldwide demand for coffee has been about two percent annually but coffee demand is growing much faster than that in developing nations where emerging economies are creating strong new demand.

The surge in coffee drinking in China is said to be in part to the wish to emulate the habits of Americans and Europeans. In Brazil they are rapidly developing a taste for the finest coffee beans, and India is poised for coffee market growth like never before.

China’s increase in demand for coffee has been estimated at about 40% in the last two years which is why Starbucks – which has about seventy percent of the market share there – will be opening 1,000 new stores in the country. Starbucks also penned a new deal with a major company in India that sets the stage for entry into that vast and growing market.

The world’s largest emerging markets, including China, Brazil, India, Latin America and Russia, have all been increasing their desire for good coffee beans and other commodities, and they are willing to compete in price with the United States and Europe for the best Arabica coffee beans. This has the effect of driving up coffee prices as demand grows.

Brazil, which will soon surpass the U.S. in coffee consumption, set a new record last year in their per capita coffee consumption breaking the previous record set in 1965. Consumption in 2010 was an estimated 4.81 kilograms which is equivalent to about eighty-one leaders of brewed coffee.

India’s coffee demand is increasing at about five percent a year, also far above the worldwide average growth in coffee demand of about two percent.

The growing middle class in India – just like in Brazil, China and Latin America – is developing a taste for fine coffee and has enough money for what many now consider an affordable luxury. Starbucks recently came to an agreement to begin opening stores in India, a vast and largely untapped market like China.

The U.S. and Europe were able to continue their strong demand for fine coffee all through the years of the economic recession and if the economy rebounds this could place further pressure on demand.

American consumers are increasingly interested in the higher quality Arabica coffees as are served by the top coffee chains, Roasters and retailers including Starbucks, Green Mountain Coffee Roasters, Peet’s, Caribou Coffee, McDonald’s and others, and favored in fine coffee beverages including a range of Espresso-based drinks such as the Caffe Latte, Caffe Mocha and Cappuccino.

The growing specialty coffee market is predominantly Arabica beans and includes various categories including Organic Coffee (e.g., Fair Trade Coffee) as well as Bird Friendly Coffee and Shade-Grown Coffee.

Reason Number Two: Shrinking Supplies Due to Weather and Other Causes

Disappointing coffee harvests around the world have led to shrinking supplies due largely to inclement weather but also affected by other causes such as coffee plant diseases and pests, real estate pressures and various other factors. As a comparison, total coffee exports worldwide for the month of July in 2010 was 5% less than July of 2009.

This year is a weak year on the biennial cycle of Brazil coffee crops and bad weather also hurt production causing an estimated decrease in yield of about twenty-three percent, decreasing from thirty-seven million bags from forty-eight million.

Meanwhile the supply of coffee coming from Brazil is facing pressure from the country itself which is expected to be keeping half of its sizable crop each year by 2015 just to meet its own needs. By 2012 Brazil will likely be drinking more coffee than the U.S.

Numerous other countries have seen declines. In Uganda there was a thirteen percent drop in volume of coffee shipped due to mealy bugs and twig borers among other pests.

Smaller coffee crop harvests have also occurred in Colombia, Guatemala and Costa Rica. Colombia has had several years of low coffee production due to bad weather as well as planting programs that should pay off in a few years if the weather cooperates.

A persistent La Nina weather pattern has plagued the region with excessive rains which in turn have increased the damage done by coffee plant diseases and pests. The Colombian National Federation of Coffee Growers confirmed the lower supplies along with higher coffee prices. Coffee leaf rust as well as the broca beetle caused damage to Colombia’s coffee crops.

The real estate pressures in central and western Kenya pushed farmers off land and caused coffee plants to be uprooted, also driving up coffee prices including the renowned Kenya AA Coffee 2011 is expected to also be a lower yield year for Kenya.

Coffee Prices 2011 – The Rising Price of Coffee continued:

Vietnam coffee crops were damaged by inclement weather. In Indonesia there was a 12% decrease in exports. Tanzania has been replanting crops and recovering from a drought so is also experiencing lower yields which it homes to increase in the next five years. The country is famed for its Tanzania Peaberry Coffee.

Yet another country that saw lower production was Panama due to inclement weather including high humidity that caused a mold outbreak which damaged coffee plants. Panama is renowned for its Panama Geisha coffee that garnered record prices at auction.Reason Number Three: Tenuously Low Coffee Stockpiles Creating Tighter Supply Chain

The world’s coffee stockpiles were severely depleted last year due to the run-up in coffee prices and higher demand at a time of shrinking supplies. This depletion of coffee stockpiles has the effect of eliminating the buffer between any supply disruptions and higher prices at cafes and on store shelves.

With smaller stockpiles of coffee available, any new disruptions in the coffee supply chain are felt more quickly by coffee companies, importers and exporters, and the consumer.

In addition to potential bad weather that may disrupt supplies, other problems include Coffee Growing Countries hoarding supplies in anticipation of higher prices (this is already a problem), and restrictive government policies that ban exports due to inflationary concerns.

Coffee Prices 2011 continued:

Brazil, for example, recently said it would hold on to nearly 1.2 million bags of Arabica coffee beans it has been storing since 2009. The country purchased the coffee beans from Brazil farmers with the goal of propping up coffee prices at a time of lower demand with a large supply – the coffee futures prices have risen nearly 100%.

The stockpiles of Arabica green coffee beans on the New York exchange, for example, declined to just 1.7 million bags of coffee by the end of the year after starting the year at 3.1 million bags. The tighter supplies shorten the “chain of custody” of coffee from the fields to the consumer, and thus makes the market more vulnerable to sudden price increases.

During the last few months of 2010 the price rises to consumers began with major coffee companies announcing a series of increases due to the rising cost of green coffee beans (unroasted coffee beans).

The Rising Price of Coffee continued:

Yuban and Maxwell House coffees made by Kraft Foods went up nine percent and the price increase was for instant coffee as well as ground coffee.

Green Mountain Coffee Roasters hike prices for coffee products in North America up to fifteen percent in October, 2010 and this round of increases included the popular Coffee K-Cups brewed in Keurig single serve brewing systems and sold under various brand names including Green Mountain, Caribou Coffee, Newman’s Own Organics, Timothy’s Coffee and Tully’s Coffee.

The J.M. Smucker Company (Dunkin’ Donuts, Millstone and Folgers), also raised prices nine percent on its coffee products. Peet’s Coffee & Tea rose prices in September of 2010. Starbucks also raised prices. And virtually all of these price increases were followed by more price increases in 2011 including some just in the last few weeks (e.g., Starbucks packaged coffee in stores going up 12%).

Reason Number Four: Monetary Policies Contributing to Run-Up In Commodities Prices – Coffee Futures Spiral Upward

During 2010 coffee futures rose more than sixty-five percent (more than 40% during the last six months of the year) which was the largest yearly rise since 1994. At the end of the year coffee futures really spiked up in price and this continued into 2011.

While coffee futures were rising precipitously, to the great consternation of coffee importers and exporters who couldn’t afford the margins to insure their crops, worldwide coffee exports were dropping more than five percent creating even stronger upward pressure on coffee prices.

A large reason for the run-up in coffee futures prices has been the huge amounts of money that came into futures markets from speculative funds and hedge funds.

Low interest rates currently being maintained by the U.S. Federal Reserve incentivized investors to place large amounts of moneys into the commodities markets which has had the effect of driving up prices even further.

How much of the coffee price run-up is due to the speculative trading and how much is due to the fundamental structural changes in the world’s coffee markets (e.g., supplies not meeting demand) remains to be seen though some see a commodity bubble that was created by the speculative trading that may eventually ease.

Whether the supply and demand issues will keep the prices high on their own is a matter of debate, though most analysts see a significant Arabica coffee shortage driving up prices at least into 2012, possibly longer, primarily due to the disappointing harvests combined with growing demand from emerging markets as well as overall increasing worldwide demand for coffee.

Contributing to the higher coffee prices for Americans is the declining value of the U.S. dollar which is largely attributed to the massive new amounts of debt the United States has assumed in the last four years including the annual deficits as well as the rising U.S. National Debt.

A devalued U.S. dollar has the immediate effect of creating higher commodity prices for all Americans and this includes higher coffee prices.

The speculative money that has flooded into commodities markets has contributed to the rapid rise in price of a whole range of commodities including cotton, soybeans, corn, wheat, rice and metals such as gold, silver and copper as well as the iron ore used to makes steel. Copper prices are at a 40-year high

Coffee Prices 2011 – The Rising Price of Coffee continued:

Reason Number Five: Arabica Coffee Shortage Linked To Difficulty Growing Arabica Plants

Most all commercial coffee plantations grow either the Robusta or the Arabica varietal coffee beans. While the Arabica beans are of a higher quality they are also harder to grow and more vulnerable to coffee plant diseases and pests than the Robusta varietal.

While Robusta can grow well at lower elevations, quality Arabica beans are grown only at higher elevations and they are also more sensitive to weather disruptions.

Arabica coffee plants take more care, and the finest Arabica crops are hand-picked to ensure only the ripest coffee cherry are picked at the optimal time, while Robusta plantations are typically harvested using large machines that pick coffee beans at a whole range of ripenesses.

The world’s specialty coffee market (e.g., gourmet or premium coffee) is comprised predominantly of Arabica coffee bean varietals though some Espresso blends (used for Espresso Coffee Drinks like caffe lattes and Cappuccinos), utilize a limited amount of Robusta as do the blends prepared by many Roasters.

However many of the top coffee companies guarantee customers that they will only sell or use 100% Arabica coffee beans.

Due to rising temperatures Arabica coffee farmers have been pushed to higher elevations, and according to the International Coffee Organization the average temperature in Coffee Growing Regions has risen one half of one degree in the last 25 years.

The typical harvest from Arabica coffee plants is less than the harvest from the Robusta variety.

Thank You for Visiting Gourmet Coffee Lovers and Reading Coffee Prices 2011 – The Rising Price of Coffee. Lover Your Gourmet Coffee and Espresso!

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