This trend of coffee price increases became quite noticeable in 2010 and is continuing in 2011 unabated. The reasons are manifold and are due to a fundamental change in the world’s coffee market. Most notably, the supply of premium Arabica coffee beans is down while the demand is up. The result is a shortage of gourmet coffee.
Also called specialty coffee, premium coffee, and whole bean coffee, the world’s gourmet coffee supply has been suffering from various problems including real estate pressures, coffee plant diseases and pests, the difficulties inherent in growing Arabica coffee vs. lower grade coffees, climate change causing farmers to move to higher elevations for the cooler weather favored by the Arabica coffee plants, and generally inclement weather including drought as well as floods destroying coffee crops.
On the demand side of the equation the world increasingly is favoring specialty coffee over other beverages. This is true not only in the United States and Europe where the already high demand has sustained itself despite the economic downturn in recent years, but also in emerging markets such as Brazil, India and China where a growing middle class and legions of up-and-coming young professionals have developed a taste for gourmet coffee, don’t mind paying the price, and exhibit a strong brand loyalty.
Exacerbating the premium coffee shortage is the fact that coffee consumption has shown to be rather inelastic in respect to price increases. In other words, even though coffee prices have gone up significantly in the last two years, the increased costs don’t seem to be having an effect on demand and thus higher coffee prices are not likely to ease the specialty coffee shortage.
A New Breed of Specialty Coffee Lovers
What we are seeing is a fundamental shift in the coffee market and a growing new breed of gourmet coffee lovers who desire fresh-brewed whole bean coffee and also favor their finely prepared specialty coffee drinks such as a Lattes and Cappuccinos.
The inelasticity of coffee with respect to price increases means that a rise is price will likely not temper the high demand by emerging markets, and if economies worldwide begin to recover from the economic downturn then we are likely to see more pressure on supplies due to vastly increased demand in the U.S. and Europe as well as emerging markets.
During the next couple years green coffee bean inventories and storehouses will continue to be depleted as the coffee harvests of Arabica coffee struggle to keep up with the growing demand.
Meanwhile coffee prices will likely continue to climb ever higher and this comes on the heels of earlier price increases. For example, from 2004 to 2007 wholesale coffee prices rose about thirty percent from 2004 to 2007.
Quick Overview of Coffee Farming
Most of the world’s coffee plants are either Arabica or Robusta. These two coffee plant varietals constitute the vast majority of all commercial coffee. A much smaller amount of the Liberica coffee plant varietal is also grown.
Arabica coffee plants prefer higher elevations and are more susceptible to coffee plant diseases and pests. The Arabica species is grown almost exclusively in tropical and sub-tropical climates at elevations usually at least 2,000 feet above sea level and more commonly from 4,000 to 6,000 feet above sea level.
Robusta coffee plants are hardier and can tolerate lower elevations. They are also more resistant to coffee plant diseases and pests. Robusta coffee also has more caffeine. Robusta is a Canephora coffee plant varietal (Coffea canephora var. robusta).
A relatively small about of Liberica Coffee (Coffea liberica) is also grown commercially. Grown primarily in West Africa and Malaysia, Liberica is not as widely grown as Arabica coffee plants or Robusta coffee plants because of Liberica’s generally inferior flavor and aroma characteristics compared to those other coffee varieties.
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Most of the world’s specialty coffee is comprised of Arabica coffee beans while most lower grade coffees are comprised of Robusta beans. Most of the world’s instant coffee is also made from Robusta beans.
Arabica coffee plants are cultivated in East Africa and Central Africa, all throughout Latin America, in India, and also Indonesia. Arabica Coffee is more expensive to produce than Robusta coffee because it is more vulnerable to pests, more prone to coffee diseases, and more difficult to grow than Robusta coffee plants.
Arabica Coffee plants are also more sensitive to temperature and handling, and yield a smaller harvest per acre than the Robusta variety. Arabica coffee beans are usually are harvested by hand to ensure a high quality of coffee fruit (cherry) picked at peak ripeness. Harvesting occurs periodically throughout the fall and winter months as the cherry ripen.
Blending Robusta Coffee with Arabica Coffee
Some Robusta coffee is often blended in with Arabica beans, particularly for espresso blends used for making espresso coffee drinks such as lattes and cappuccinos. The added Robusta is said to impart a desirable quality to the pulled espresso shots.
However there is a limit to how much Robusta can be added to Arabica while still producing a product that can be referred to as specialty coffee. This limit on how much Robusta can be added is known as the “blending wall.”
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Though green coffee prices had gone up much earlier, the large stockpiles of green coffee beans and the long “chain of custody” of coffee from soil to sip meant that the consumers would experience some delay in feeling the price increases for retail coffee.
Now the coffee shortage is in full swing and worldwide green coffee stockpiles are reaching historic lows due to the high demand and low supply.
Green Coffee Price Increases Being Passed On To Consumers
One of the first major companies to raise prices in 2010 was the J.M. Smucker Company, the parent company of Folgers, Dunkin’ Donuts and Millstone, raising prices about nine percent on top coffee products and stating that the price increases were due to the rise in the price of green coffee beans.
Yuban and Maxwell House coffees raised their prices about nine percent at about the same time. They produce coffee under the parent company Kraft Foods, and the coffee price increases included both ground coffee as well as instant coffee.
In October of 2010 Green Mountain Coffee Roasters raised prices on their coffee products in North America as much as fifteen percent and this included the popular Coffee K-Cups portion packs that are designed to work with Keurig single serve brewing systems and sold under a variety of brand names including Tully’s Coffee, Caribou Coffee, Newman’s Own Organics, Timothy’s Coffee, and Green Mountain.
In September, 2010 Peet’s Coffee & Tea increased coffee prices stating it was due to a thirty-five percent increase in green coffee bean prices since early 2010.
Starbucks Follows Suit and Raises Coffee Prices in 2010, But Not 2011
When Starbucks raised its prices at the end of 2010 in both China and the United States it was met with very little customer resistance. It seems the company’s customers display a strong brand loyalty and aren’t about to give up their grande latte.
In China, Starbucks controls about seventy percent of the specialty coffee market. Starbucks sales in China and tripled from 2004 to 2009, and the company’s worldwide average number of customers per store per day went up from 408 to 424 from 2007 to 2010. Starbucks has about 11,000 cafes in the United States and another 6,000 or so around the world,
Despite the fact that green coffee prices have continued to see a considerable rise in price Starbucks said at the end of January in 2011 that they would not be raising prices during the year.
Starbucks Thrives Despite Commodity Price Increases
The higher price of coffee beans and other commodities used by Starbucks (e.g., milk, bread) will affect the company’s profits somewhat, but in January of 2011 Starbucks reported sales and profit numbers that easily beat analysts’ previous estimates.
The company also reported that stores which had been open for at least a year and a half showed a five percent increase internationally and an eight percent increase in the U.S., and those numbers also beat Wall Street estimates.
Overall Starbucks profits rose about 44 percent in the first fiscal quarter ending January 2, 2011 compared to that quarter the previous year.
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Wall Street had estimated that Starbucks would report profits of 39 cents a share but they came in at 45 cents, totaling $346.6 million in profits for the fiscal quarter.
Starbucks also announced that they would not be raising coffee prices in 2011, a decision made a bit easier by the fact that they have already purchased all of the coffee beans they will need for the year. The company has continued to expand and has also increased the presence of its products in grocery stores including its new Via instant coffee.
Emerging Countries Placing Pressure on World Coffee Supplies
Due to the rise in demand for coffee in its own country, the major coffee growing powerhouse of Brazil will keep a bigger percentage of its own coffee harvest. Analysts estimate that Brazil will likely keep about half of its own coffee production by 2015.
Demand for coffee in China will also continue to put pressure on worldwide coffee supplies. The country has seen an increase in coffee demand of about 40% during just the last two years. The country’s demand for fine coffee is growing so rapidly that Starbucks said the growth couldn’t accurately be estimated.
The country of India has been seeing a rise in coffee demand that is estimated to be about five percent per year. Like Brazil and China, the increase in coffee demand in India is in large party being attributed to the up-and-coming young professionals who have developed a taste for the premium coffee.
Stocks of Green Coffee at Historic Lows in U.S. and Worldwide
Though the coffee shortage really began in earnest around the end of 2009, the impacts have taken a while to work their way down to the coffee consumer level due to the vast storehouses of green coffee beans around the world.
These unroasted coffee beans are stored in huge warehouses that are now showing significant signs of depletion due to the sustained and growing high demand for coffee as well as the lower than expected harvests and other supply side problems.
Green coffee stocks in the United States and in major coffee growing countries are now at historic lows.
Fundamental Shift in the World Coffee Market Causing Price Increases
The executive director of the International Coffee Organization said on January 31, 2011 at a United Nations Conference in Geneva that “The fundamentals are in place to justify the price increases we’ve seen.” He then added that, “The coffee market is being driven much more by fundamental supply factors than by investors,” and also that “The shortage is in Arabica, and Arabica is going up.”
It was further noted that the increases in coffee prices in the last few years is justified by the generally short supply of Arabica coffee beans, and also that this was now being felt also in the market for Robusta coffee due to pressures created by the Arabica coffee shortage.
The respected coffee group’s executive director also noted the recent “increase in inflow of speculative funds, hedge funds over time,” which was one factor of rising coffee prices, yet he noted that “it seems that the fundamentals do prevail.”
In other words the price increases in coffee are due to a fundamental supply and demand issue – including disappointing coffee harvests by major coffee growing regions for various reasons – and not just due to speculation by investors.
Also see: The Top Ten Coffees in the World
2011 World Coffee Markets Responding to Arabica Coffee Shortage
In early February of 2011 coffee prices in New York reached their highest level since 1997 while increasing to a 28-month high in London. Coffee stocks decreased 1.64 million.
Supply Shortfalls in Columbia, Vietnam and Brazil
Shortfalls in coffee harvests are widespread including an expected drop in the Vietnam harvest due to unfavorable weather, as well as a low harvest in Antioquia, Columbia blamed on too much rain in 2010 reducing the mid-crop. Vietnam is the world’s largest producer of Robusta coffee.
In January of 2010 Vietnam exported about 140,000 tonnes of coffee, a decrease of 3.7% from January of 2010 though the total value of the coffee exports increased thirty percent to US$266 million.
The most recent bad news was about Brazil’s coffee production being reduced by recent rains. Analysts are keeping a close watch on world coffee crops because the supply has already been short to meet demand, depleting the world’s usually sizable green coffee stockpiles.
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Since supplies are already very tight, when a new potential coffee crop harvest reduction is announced it can cause a new upward price movement in the coffee market, and this has been given as the reason for the last few price upticks.
Coffee growing regions are subject to a variety of maladies including the current the La Nina weather pattern – created by cooling equatorial waters in the Pacific – that has brought floods and inclement weather damaging the coffee crops in Columbia and Central America.
This is Columbia’s second straight year of lower than expected coffee production. The U.S. Department of Agriculture Service had said on December 10, 2010 that Columbia, which is the second biggest producer of Arabica coffee, was suffering from delays in agricultural shipments due to floods and road damage. The Columbian National Federation of Coffee Growers echoed this sentiment.
Also see: Five Best Coffees In the World
Coffee Shortfalls in Kenya, Tanzania, Guatemala, Costa Rica, Indonesia
Other coffee growing regions have also suffered problems. In central and Western Kenya coffee plants have been pulled up in some areas due to real estate pressures and the country saw significant coffee price rises at the end of 2010 on the Nairobi Coffee Exchange for the respected Kenya AA coffee beans.
An extended drought harmed many coffee plants in Tanzania which produces the highly valued Tanzania Peaberry coffee. Though massive planting is now going on Tanzania it will be some years before they are fully producing. Currently producing about 70,000 tons of coffee annually, Tanzania hopes to raise that number to 100,000 tons by 2015.
Coffee Price in 2011 – Coffee Futures Price Spikes
March delivery prices of Arabica coffee increased 2.2% to $2.5035 per pound in New York on the ICE Futures United States after reaching $2.507 which was the highest level since June of 1997.
There was also an increase of more than 2% in Robusta coffee with March delivery rising to $58 (2.7%) at $2,187 per metric ton on the New York Stock Exchange Liffe in London, after previously touching $2.204 which was the highest level since September 25 of 2008.
Also blamed for the worldwide shortfall in coffee supply are coffee plant diseases and pests including fungal disease associated with high humidity.
In December of 2010 when coffee futures prices reached a thirteen year high – rising more than sixty percent for the year and showing their best annual gains since 1994 – coffee prices were still climbing due in part to the demands from funds. At that time “the precariousness of the supply/demand balance” was noted by the International Coffee Organization.
Though one might say this was in part due to speculation, indeed the speculation was based on an understanding of the fundamentals now existing in the world’s coffee markets with exports decreasing more than five percent in July, 2010 compared to a year earlier.
Meanwhile the benchmark “C” Arabica coffee futures contract trading on the ICE Futures maintains its high level of price having increased about eighty percent since June, 2010.
A Disjunct in the Equilibrium of Coffee Supply vs. Demand
The equilibrium of the coffee market in terms of supply and demand is very delicate to to the nature of the coffee crops around the world and their vulnerability to many disruptions, as well as increasing demand for Arabica coffee worldwide even in the face of an economic recession that has had devastating effects on many other markets.
The shortage in the world’s Arabica coffee supply cannot easily respond quickly to the shortage due to the time it takes to increase coffee crops, and a stabilization in the world’s coffee markets is not expected anytime soon.
A coffee plant typically takes at least three to five years to reach maturity and begin producing a crop of coffee cherry (coffee fruit) which are then picked and processed and brought to market, which also takes a considerable amount of time often involving shipping thousands of miles. Even if massive coffee plantings were occurring now it would be some time before it affected the world’s coffee harvest totals.
A full coffee crop may be produced after about five years and then the plant may continue to produce well for about fifteen to twenty years, possibly much longer in the right conditions. A typical coffee plant produces about one pound of coffee beans annually.
Global Climate Change Effects on Arabica Coffee Production
According to the International Coffee Organization, during the last two and one-half decades the world’s coffee-growing countries have seen a steady rise in temperature equal to about one-half of a degree overall. The result is that coffee farmers have been moving to higher elevations favored by the premium Arabica coffee plants.
Solutions to the World Wide Coffee Shortage Driving Coffee Price Increases and Threatening the Quality of Gourmet Coffee Products
With the goal of supporting and directing coffee research to improve quality a new initiative is being developed and is known as the Global Coffee Quality Research Initiative.
The goal is to build a collaborating network of coffee companies. The broad initiative is supported by the Specialty Coffee Association and also the Borlaug Institute which is an agricultural research institute at Texas A&M University.
Currently an estimated fifty million coffee farmers in 35 countries work to produce high quality coffee, and specialty coffee comprises about 40% of the market. The new research effort will work to address problems threatening coffee quality as well as the ability of the farmers to meet market demand.
Also a goal of GCQRI is the increasing of returns to coffee farmers as well as an increase in coffee roaster sales and coffee consumption of lower grade as well as high grade coffee worldwide. Coffee producing countries as well as coffee countries will be included in the wide dissemination of the research results regarding coffee plants, harvesting of coffee cherry, coffee processing, shipping, storing, roasting, and packaging.
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