Coffee Prices Going Up 2012

by Dan Harrington on June 2, 2011

Supply Disruptions, Soaring Demand and Speculative Trading All Driving Up Coffee Prices in 2011 and 2012

Coffee Market World Price Report: Emerging markets have been driving up the demand for fine Arabica coffee and competing with the U.S. and Europe for the best coffee beans.

Exacerbating the upward pressure on coffee prices are disappointing harvests in prime coffee growing regions as well as an inflationary environment and speculative trading in coffee futures markets.

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Arabica Coffee Beans are Primarily In Demand

Only Arabica coffee beans are served by fine coffee houses like Peet’s and Starbucks, and the famous K-Cup coffee maker Green Mountain Coffee Roasters sells only Arabica coffee beans.

The popular Coffee K-Cups are brewed in Keurig single serve brewing systems and marketed under numerous brand names including Green Mountain, Caribou Coffee, Timothy’s Coffee, Newman’s Own Organics and Tully’s Coffee.

Also serving fine Arabica coffee is Caribou Coffee and McDonald’s. All of these companies have been forced to raise prices to keep up with the surging costs of green coffee beans.

Also going up in price repeatedly in the last year are Yuban and Maxwell House coffees produced by Kraft Foods which has raised ground coffee prices as well as the price instant coffee. Another major coffee company to raise prices repeatedly in the last year is the J.M. Smucker Company, which markets Dunkin’ Donuts, Millstone and Folgers coffees.

Arabica coffee beans also constitute most all of the markets for Organic Coffee (including Fair Trade Coffee) as well as Bird Friendly Coffee and Shade-Grown Coffee.

Consumers are increasingly preferring fresh-roasted Arabica coffee including plain brewed coffee as well as a whole variety of gourmet coffee beverages including Espresso-based drinks, the most popular being Caffe Latte, Caffe Mocha and Cappuccino.

Coffee Prices Going Up 2012 continued: Coffee Market Report

Emerging Economies Increasing Coffee Demand Driving Up Prices

The demand for high quality Arabica beans has surged in recent years largely due to a rapid rise in demand in emerging markets including Brazil, India, China and Latin America.

While the worldwide average increase in coffee consumption is about two percent annually, emerging markets are seeing growth ranging from five percent to as much as twenty percent annually.

China seems to be leading the charge with a rise in demand for coffee estimated at twenty percent annually for the last two years, which explains why Starbucks plans on opening 1,000 stores there and only about 100 in the U.S. Starbucks has an estimated 70% market share in China.

Brazil’s rapid growth in coffee consumption has analysts estimating that the country will be keeping more than half of its own coffee beans by the year 2015. This is significant since Brazil is the largest coffee grower in the world and also the largest grower of Arabica coffee. By 2012 Brazil is expected to become the world’s number one coffee consumer, overtaking the United States.

Growing Middle Classes of Emerging Markets Increasingly Favor Gourmet Coffee Drinks

The world’s emerging economies have fast-growing middle classes that now have an increasing amount of disposable income they can use for “affordable luxuries” such as fine coffee.

At the same time the United States and Europe have sustained their traditionally very high demand for coffee even during the years of the economic downturn. Rebounding world economies may increase demand for coffee and add to the distinct Arabica coffee bean shortage.

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Depleted Coffee Stockpiles Exacerbate Supply Disruptions Causing Coffee Price Spikes

Meanwhile stockpiles of green coffee beans (unroasted coffee beans) are at an all time low due to disappointing harvests in numerous major coffee growing regions last year. Even bumper crops in the coming year may not be able to replace stockpiles and ease prices significantly due to the consistent rise in demand, particular in the emerging economies of 2011 and 2012.

Coffee Remains Inelastic With Respect to Price Increases

As coffee beans go up in price on world markets the price increases have been making their way to the supermarket shelves and also to coffee shop chains. Consumers are responding by still buying as much coffee as ever showing once again that coffee is rather inelastic with respect to price increases.

Since higher prices don’t seem to be reducing demand for fine coffee it is likely that the supply situation will not be eased as the demand remains strong. Thus it is likely that either coffee prices will be going up in 2011-2012 or at least the high prices will be sustained for the remainder of 2011 and into 2012 unless fundamental market changes occur to ease the supply/demand disjunct in coffee markets.

Latest News on Coffee Prices Going Up in 2012 continued:

How Are World Markets Responding To Run-Up In Coffee Prices?

While some major coffee growing countries such as Tanzania and Colombia have been engaged in massive coffee planting and replanting programs, a coffee plant takes about five years to reach maturity and begin producing coffee crops so the current efforts won’t ease market pressures anytime soon.

Other countries are responding to the huge spike in coffee prices by staying the course. Brazil, for example, has stated their intention of not subsidizing increased coffee production or encouraging farmers to increase production because they have seen extreme boom-bust cycles in the past that have left farmers high and dry when coffee prices plummeted just after major new investments in expanding coffee production.

Coffee Futures Prices Have Been Spiraling Upward

Coffee futures are traded on the Intercontinental Exchange (ICE) in New York, and the price of these Arabica coffee futures has risen nearly 100% in the last year. Futures prices in commodities in general have been driven up by speculative trading which has contributed to the worldwide run-up in commodity prices across the board.

This futures trading has been driven by huge infusions of cash from hedge funds and index funds, which many attribute to the low interest rates being maintained by the Federal Reserve. The easy-money, easy-credit policies of the United States at a time of rapid growth in emerging economies has caused investors to seek higher returns with the result of driving up commodity prices and continuing the trend of coffee prices going up.

Unless economic conditions change, many analysts predict that commodities may continue to rise in price and this includes not just coffee beans but also sugar, cocoa, cotton and others.

These commodity price increases are driven not just by speculative trading but also by fundamental supply and demand situations in the markets with the effect of causing widespread food inflation and overall inflation with a major contributing factor being rising oil prices.

Coffee Prices Rising 2011-2012 continued:

Devalued U.S. Dollar Effectively Rises All Commodity Prices for Americans

Meanwhile the United States has amassed massive new debt in the last few years and this has had the effect of lowering the value of the U.S. dollar against other currencies, which in turn creates higher commodity (e.g., coffee) prices for all Americans.

For example, sugar tripled in price from June, 2007 to February, 2010 and this came after a four hundred percent increase between 2002 and 2006.

Coffee shops are forced to raise prices not just because of the rising cost of coffee beans but also other commodities like milk and the grains to make bread products. Agricultural commodities have suffered from numerous supply disruptions recently from floods on the Canadian praries and in Australia to drought in Russia.

Inclement Weather Disrupts Coffee Supplies Worldwide

The major coffee growing countries of Brazil, Colombia and Vietnam all saw major crop damage due to excessive rain, road damage, and also coffee plant diseases and pests exacerbated by high humidity. These problems have affected Coffee Growing Regions around the world and in some cases have significantly decreased coffee harvests and coffee exports, and also placed strong upward price pressures that have kept coffee prices moving up in 2011 and likely into 2012.

In Indonesia there was a twelve percent drop in coffee production in 2010, and the coffee harvests in Guatemala, and Costa Rica were also lower. Tanzania saw a nine percent drop in coffee production which significantly raised the price of the esteemed Tanzania Peaberry coffee.

Also contributing to coffee prices going up in 2011 and 2012 are coffee production problems in Kenya where real estate pressures led to the uprooting of coffee plants and a rise in the price of the highly respected Kenya AA Coffee.

Another general problem exacerbating the rise in prices for food commodities in particular is that the emerging markets are increasingly vulnerable to disruptions in supply because of the required land, water and labor that becomes more scarce in an emerging economy with a rising middle class.

This comes at a time when demand is not going down, and instead is rising at a steady pace due to the growing world population that now hovers around seven billion.

Analysts have estimated that the demand for coffee will continue to outpace the supply for some time to come, and in the next decade overall there will be a shortfall of about 30 million bags of coffee compared to demand unless coffee production increases significantly.

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