Coffee price rise tests consumer appetite What price the American addiction to a daily caffeine kick? The falling sales reported last week by US coffee roaster JM Smucker may offer an answer. The maker of the top US packaged coffee brand Folgers said its revenues and profits for the three months to October had been hit as consumers stopped buying its coffee after the company raised its prices earlier this year. The US group increased prices to consumers by an average of 9 per cent in response to higher prices for arabica beans because of adverse weather in Brazil. Smucker's warning that coffee sales volumes in the quarter fell almost 20 per cent divided market bulls and bears about the impact of higher prices on demand in the world's largest coffee consumer. The news added to the general lacklustre sentiment. Arabica prices have climbed almost 70 per cent since the start of the year, but are down more than 15 per cent from the October high of $2.29 a pound. "The news does contribute towards reasons to be cautious for the short to medium-term market prospects," says Lionel de Roland-Phillips at Johannesburg-based coffee trader I&M Smith. Rainfall in Brazil, the world's largest coffee producer, bringing some relief to coffee farmers there, and lack of physical buying in leading European countries such as Germany, have led to caution spreading among market players. Financial players, especially the hedge funds that have been behind the buying over the past several months, have pared back their bullish positions. Continuing concerns about production in Brazil have provided support, but the prospect of lower consumption, which would reduce the pressure on prices even if Brazilian supply remains weak, has led to profit-taking. Coffee bulls, nevertheless, are trying to take comfort in the view that demand is generally inelastic - or relatively unresponsive to higher prices. Some coffee drinkers may gravitate to cheaper brands if prices rise too high at the top end, but overall demand will remain relatively unchanged, say beverage specialists. Coffee remains the vital drink in the morning for so many Americans. People are not suddenly going to switch to tea," says Jonas Feliciano, senior beverages analyst at Euromonitor. Indeed, some analysts have attributed the decline in Smucker's sales to discounting by rival roasters looking to grab market share. Kona Haque, head of research at commodity trading house ED&F Man, said: "We're not sure if we can read too much into those numbers as a proxy for all roasters, let alone overall US consumption numbers." The recent lack of upward momentum in the coffee market can partly be explained by high inventory levels in the supply chain, including the roasters. Global end of season coffee stocks at the end of August are expected to be the highest in a decade thanks to past bumper crops. Many coffee companies and roasters have bought forward supplies and are well covered, say analysts. The coffee trees in Brazil are currently flowering, and it is not clear what will be the effect on next year's crop of residual damage from the drought at the start of this year. The situation today is clear - coffee is plentiful. It is the forward situation that is uncertain," says James Hearn, co-head of agriculture at commodities brokers Marex Spectron. The bulls are likely to seek support in data such as the ratio between inventory and demand. Until recently, demand for coffee both in developed and emerging markets has risen so fast that arabica coffee stock/demand ratios are at the lowest since the 2010-11 crop year, when coffee prices hit a 34-year high of more than $3 a pound. The worry for ordinary coffee drinkers is that the buffer provided by robusta, the cheaper bean usually used in instant coffee, may not be as large this time. The sharp jump in arabica prices two years ago led to "switching" of beans, with roasters creating cheaper blends by increasing the amount of robusta used in the mix. "If arabica prices move further north, leading to a widening spread against robusta, then we should see some demand shift back to robusta," says ED&F Man's Ms Haque. In 2010-11, Vietnam and Indonesia, the leading robusta producers, had bumper crops, but both countries are expecting smaller harvests in the coming season. There could be further volatility in coffee prices in the months to come.