Coffee Prices 2011

by Dan Harrington on March 30, 2011

Coffee Market Report – Emerging Markets Driving Coffee Demand: During the last six months major coffee roasters and retailers have enacted a series of price increases to consumers to the steeply increasing prices these companies have to pay for green coffee beans (unroasted coffee beans).

Companies that have raised prices for consumers include Kraft (Yuban and Maxwell House coffees), Starbucks, Peet’s Coffee & Tea and Green Mountain Coffee Roasters, J.M. Smucker Company (Folgers) and virtually all others. Consumers are now paying more for their Cappuccinos and Lattes.

Arabica Coffee Futures Prices Have Been Rising Rapidly in 2011

During the last year Arabica coffee futures on the Intercontinental Exchange have spiraled upward with no end in sight.

Speculation trading saw large infusions of money from hedge funds and traders able to take advantage of easy money policies maintaining low interest rates in the United States driving investor money into commodities markets including coffee, and in turn driving up coffee prices even faster than they may have gone up based solely on supply and demand issues.

Emerging Markets Driving Increased Coffee Demand

Rapidly increasing demand from emerging markets including Brazil, India, China and Latin America are creating strong demand pressures. Meanwhile bad weather affecting major coffee growing regions is creating supply problems, and a distinct shortage of Arabica coffee beans.

Worldwide the demand for coffee has been rising about two percent annually, but in emerging markets it is growing much faster. For example in China the increase in coffee consumption is estimated at close to 20% annually and that is likely a large part of why Starbucks plans on opening 1,000 new stores there.

In contrast, Starbucks has said they will only about one to two hundred in the U.S. each year.

Increased Coffee Production Uncertain Due To Wariness Over Boom-Bust Cycles

Coffee farmers are not responding rapidly to increased coffee prices with new production, in part due to wariness created by boom-bust cycles they have seen before.

Expanding production is incentivized by higher prices yet the long-term investment with coffee – requiring three to five years to begin paying off – takes a long term stability in higher prices to make it worth the effort and risk.

There is a general fear of making a major investment in expanding production and then having prices drop by the time the increased harvests begin.

Coffee Prices 2011 continued:

Disappointing Coffee Harvests Mostly Due To Inclement Weather Creating Supply Issues

Lower coffee production by the world’s powerhouse coffee growers Brazil and Colombia are a major factor in the overall shortage of Arabica coffee beans.

Lower production has affected many other country’s coffee crops as well including Mexico, Vietnam, Panama, Kenya, and India. Excessive rains in India lowered the estimated coffee production, and the country’s coffee prices are up more than twenty percent from one year earlier.

Massive coffee replanting in Colombia and Tanzania should pay off eventually but since coffee plants take three to five years to begin producing substantial crops the replanting will not ease the supply shortage and upward pressure on coffee prices anytime soon.

Arabica Coffee Plants More Difficult To Grow Than Robusta

Increasing Arabica coffee production is expected to remain a challenge for farmers well into the future due to a variety of factors including the fact that the Arabica coffee plant varietal is harder to grow than the hardier Robusta coffee plants, and more costly to maintain.

Coffee Prices in 2011 continued:

Robusta coffee beans are used to make instant coffee and also included in many coffee blends including espresso blends. Starbucks and Peet’s serve only 100% Arabica, and Green Mountain Coffee Roasters only sells only 100% Arabica coffee.

Arabica plants require higher elevations to thrive, and rising temperatures have been driving premium Arabica farmers to higher elevations. According to the International Coffee Association the average temperature in coffee growing countries has increased 1.5 degrees in the last 25 years.

Coffee Supply Concerns Due To Various Causes Leading To Upward Pressure On Coffee Prices

Arabica coffee plants are also more vulnerable to coffee plant diseases and pests including coffee leaf rust and in some regions outbreaks have increased due to excess rain and high humidity.

Real estate pressures have also displaced Arabica coffee farmers, for example, in central and western Kenya where coffee plants were uprooted and the prized Kenya AA coffee prices rose to new heights on the Nairobi Coffee Exchange.

Coffee Prices 2011 continued: Emerging Markets Driving Demand

Gourmet Coffee Remains Inelastic With Respect To Price Increases

Higher coffee prices have not as of yet seemed to dampened demand as people are willing to pay more for their premium Arabica coffee. As a commodity coffee has always shown itself to be relatively inelastic with respect to price increases which means that consumers will keep buying it even when prices go up.

The result is that higher coffee prices are not doing much to ease the distinct shortage of premium Arabica coffee beans. Emerging economies have discovered gourmet coffee and they are willing to compete for the best beans by paying higher prices.

Coffee Demand Growing Worldwide, Straining Supplies and Leading To Coffee Price Increases

By 2012 Brazil is expected to be consuming more coffee than the United States, and they will be keeping half of their own crop by 2015 just to satisfy their own internal demand for coffee.

Meanwhile the United States and Europe have sustained their high demand for specialty coffee even during the years of recession following the financial crisis. A rebounding economy may lead to an increased demand placing further upward pressure on coffee prices. Don’t expect coffee prices to be going down significantly anytime soon.

Thank You for Visiting Gourmet Coffee Lovers and Reading Coffee Prices 2011. Love Your Gourmet Espresso and Coffee!

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