Coffee Prices Rising – Demand by Emerging Markets Driving Up Coffee Price in 2011

by Dan Harrington on March 19, 2011

United States (March 19, 2011) – Coffee Market Watch: Maxwell House coffee just went up in price again, just the latest in a continuing string of price rices by major coffee companies that have been pinched by the rising cost of green coffee beans (unroasted coffee beans).

Maxwell House is produced by Kraft Foods which has increased prices by more than 55% since May of 2010.

Latest Coffee Price Increase is Twenty-Two Percent

Yesterday’s price increase on Maxwell was twenty-two percent, which was the largest of the company’s recent price hikes, the last of which was about twelve percent in December of 2010.

Last month the Kraft rival J.M. Smucker Company, which sells the popular Folgers brand, raised their price ten percent.

Premium Coffee Inelastic With Respect to Increases in Price

Still the increase in the price of coffee per cup for consumers is not believed to be enough to decrease demand for an affordable luxury that people will go to great lengths to continue enjoying. Coffee has been shown to be very inelastic with respect to price increases, which means that when you charge more people still pay it.

Coffee Futures Spiraling Upward in 2011

Since June of 2010 Arabica coffee futures have increased by more than one hundred percent. The steep price increases in coffee futures were fueled by speculation buying including large infusions of money from hedge funds with investors seeking high returns in an inflationary economic climate.

Fundamental Supply and Demand Issues Creating Structural Changes to Coffee Market

Underlying the price increases of coffee are more fundamental structural issues including a strong and increasing worldwide demand at a time of short supplies due to various causes including inclement weather that has damaged crops and infrastructure, and also caused an increase in coffee plant diseases and pests.

Both Arabica and Robust Coffee Bean Varietals Increasing in Price in 2011

The high demand and short supply has driven up not only the higher grade Arabica coffee beans but also the Robusta beans that are used primarily to make instant coffee.

While many premium coffee providers, including such major names as Starbucks, Peet’s Coffee & Tea and Green Mountain Coffee Roasters offer Arabica coffee exclusively, Robusta is used in many coffee and espresso blends, and increasing Arabica prices have caused some Roasters to mix in larger amounts of Robusta leading to quality concerns.

Coffee Prices Rising – Demand by Emerging Markets Driving Up Coffee Price

Exceeding Robust Blending Wall Causes Quality Concerns in Specialty Coffee Market

Most roasters agree there is a “blending wall” beyond which any higher percentage of Robusta used will harm the overall product quality. In general Arabica coffee is preferred for the specialty coffee market including freshly-roasted whole bean coffee as well as Espresso Drinks including Cappuccinos and Lattes.

Rising Margins Causing Heavy Burden for Coffee Importers and Exporters

The rapidly rising coffee prices have also been troubling to coffee importers and exporters who cannot afford to pay the large financing costs or take increased risk on higher priced hedges in coffee futures. Since October of 2010 margins have increased 150% with Benchmark ICE Arabica coffee futures hitting a thirty-four year high.

Coffee handlers have been facing great difficulties dealing with the rising margins, which reflects how much they have to pay to keep an open position on the exchange in order to hedge their coffee buying in the coffee futures market.

Some Coffee-Growing Countries May Sell on Fixed Prices to Avoid Prohibitive Hedge Costs

In some countries, such as Guatemala, trade has slowed significantly because Arabica exporters can’t afford to pay the margins to hedge their purchases.

Some countries, such as Colombia, are considering dealing with the problem by selling at fixed prices to avoid the futures market, and Brazil traders have lifted hedges avoid the extreme costs of margins. While this may work in the short term the risk is a large exposure that risks a heavy loss if the rally in coffee prices subsides.

Coffee Prices Rising in 2011

Lower Worldwide Coffee Stocks Creating Tighter Supply Chain

Coffee price increases have been exacerbated by the rapid drop in stocks of green coffee beans in the world’s stockpiles during the last year. This will make any new disruptions in supply more likely to cause further price rises at the retail level for coffee.

Emerging Markets in Developing Nations Driving Arabica Coffee Demand Causing Rise in Coffee Prices in 2011

Brazil, India, China and other emerging economies are driving the demand for Arabica coffee with growing middle classes that appreciate fine coffee and are willing to compete with the United States and Europe in price for the best coffee beans.

Quickly Rising Demand by Emerging Markets Is Driving Up Coffee Price in 2011

While the emerging markets are exhibiting a demand for coffee that is growing much faster than the worldwide average of two percent yearly (e.g., China may be growing as fast as twenty percent annually), there is a simultaneous disruption of supply due to poor coffee harvest in major coffee growing countries including Colombia and Brazil as well as other major coffee growing areas including Mexico, Vietnam, Panama, Kenya, and India.

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