Why Coffee Prices Are Rising In 2011 – Emerging Markets Driving Demand for Arabica Coffee

by Dan Harrington on March 23, 2011

Price Gap Between Arabica and Robusta Coffee Varietals Widens

Coffee Markets Report: Despite the continually widening gap between the lower quality Robusta coffee beans and the preferred Arabica beans, most coffee retailers are sticking with the Arabica variety. Last week the difference between Arabica and Robusta prices reached a record high due to surging Arabica prices.

Consumer Tastes Prefer Arabica Coffee – Brand Quality Remains Important in 2011

Consumers are increasingly savvy, having been trained by such large coffee chains as Starbucks and Peet’s which serve 100% Arabica, and companies like Green Mountain Coffee Roasters which sell only 100% Arabica.

Brand quality is of utmost importance in the coffee industry where consumers like their whole bean fresh-Roasted coffee.

Arabica Futures Spiraling Upward

Arabica coffee prices are now at a fourteen-year high with upward pressure on prices due to disappointing coffee harvests as well as speculation in coffee futures markets at a time of growing demand.

In countries such as Colombia and Tanzania where there has been massive replanting in the last couple of years, increased supplies may come beginning in three to five years if the crops grow well. coffee plants take about five years to begin producing a substantial crop.

Colombia, the world’s third largest coffee grower, is in its third consecutive year of lower coffee harvests due mostly to inclement weather.

Emerging Markets Driving Demand for Premium Gourmet Coffee

Coffee demand is increasing worldwide at a rate of about 2% annually but growing much faster than that in emerging markets like Brazil, India, China and Latin America where growing middle classes want premium coffee beans and are willing to pay for them and compete with the United States and Europe for those beans.

In the United States and Europe the high demand for coffee was sustained even during the recent years of the economic recession so a rebounding economy may cause demand to increase further.

In recent months demand has been strengthening significantly in European markets. Despite higher prices there has not been any slow down in growth for major coffee markets.

Brazil – World’s Top Coffee Producer – Set To Become the World’s Top Coffee Consumer

Brazil’s demand for coffee is rising rapidly along with its emerging economy. Last year’s coffee consumption growth in Brazil is estimated at more than four percent totaling about 19 million sixty-kilogram bags which was just three million bags shy of coffee consumption in the United States which is currently the world’s biggest coffee consumer.

Why Coffee Prices Are Rising In 2011 – Emerging Markets Driving Demand for Arabica Coffee continued:

Brazil – the world’s largest coffee grower – is expected to surpass U.S. coffee consumption as early as 2012 and by 2015 Brazil will be keeping more than half of its own coffee crop just to meet internal demand.

Brazil In 2011 – Off Year But Good Future Potential Increase In Coffee Production

Meanwhile Brazil’s coffee production will be down in 2011 due not only to bad weather but also due to the fact that the country is the off-year of a bi-annual cycle of production. Estimated coffee production in Brazil in 2011 is about forty-three million bags which would be five million bags less than 2010.

As the world’s biggest coffee producer becomes the world’s biggest coffee consumer it will place more upward pressure on coffee prices and crimp world coffee exports.

However, among the many large coffee-growing countries currently struggling to recover from lower coffee production, Brazil is the one country that shows some real potential of significantly increasing its crop next year.

Emerging Markets Driving Higher Demand for Arabica Coffee

Even if the increased production comes to fruition, however (e.g., barring any weather disruptions or other problems), it is still unlikely that it will be enough to meet the strong demand from developing nations.

In China the demand for coffee has been increasing perhaps more rapidly than anywhere else.

In the last two years China’s coffee market has grown at an estimated 20% annually and Starbucks, which maintains an estimated 70% market share in China, has plans to open 1,000 new cafes there. In contrast, Starbucks will only be opening one to two hundred stores annually in the United States.

Fundamental Structural Change in World Coffee Market

Whether coffee prices will continue to rise depends upon various factors including the weather in coffee growing regions. Most analysts agree that there has been a fundamental structural change in the coffee market with growing demand by emerging markets outpacing declining supplies, particularly of Arabica coffee.

Emerging Markets Driving Demand for Arabica Coffee continued:

One factor that may eventually ease the upward pressure on coffee prices is an eventual end to the widespread speculation on coffee futures markets which many have blamed for artificially driving up prices and hurting importers and exporters.

Speculative Trading Drives Up Coffee Futures

No less than the CEOs of Starbucks and Nestle have derided the price spike caused by traders in coffee markets and the large infusions of cash from funds which had the effect of driving up prices rapidly in the last half of 2010 and continuing now in 2011.

Because speculators have driven up coffee prices – e.g., Arabica coffee futures more than doubling in the last twelve months – many consider coffee to be as much as fifty percent overvalued right now due to a global commodities bubble.

Why Coffee Prices Are Rising In 2011 continued:

Coffee Prices Going Up – Consumers Feeling the Pinch

Coffee bean prices on world markets have almost doubled in the last twelve months and now stand at a fourteen-year high.

With major coffee companies increasing prices numerous times in the last nine months – including Starbucks, Green Mountain Coffee Roasters, Kraft (Yuban and Maxwell House coffees), – consumers are getting used to paying more at the cafe and also when buying premium coffee beans off supermarket shelves. Just last week Starbucks raised coffee prices twelve percent on packaged coffees sold in supermarkets.

Gourmet Coffee Remains Particularly Inelastic With Respect To Price Increases in 2011

Still the increase in coffee prices doesn’t seem to be dampening demand. Coffee has always shown itself to be very inelastic with respect to price increases, which means that when prices go up people keep paying it and don’t reduce consumption.

However since consumer prices have not yet increased as much as the price of green coffee beans (unroasted coffee beans) on world markets, it is only a matter of time before prices go up even more unless the price of green coffee beans drops significantly and the depleted world coffee stocks are replenished.

Most industry analysts don’t see this happening anytime soon, and even if it did the worldwide supply of coffee may still be significantly outpaced by growing worldwide demand, particularly in the emerging markets of developing nations.

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