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Coffee Prices Rise as Demand Grows

Sunday, November 21, 2010

Your morning cup of coffee could start costing a bit more as prices for green-coffee, or unroasted beans, are now more than 50 percent higher than they were a year ago. The increase has already led to price hikes for many coffee brands and even higher prices are expected in the months ahead.

Coffee prices have risen due to a surge in the number of coffee drinkers around the world, primarily in emerging economies. The supply of beans has not increased enough to keep pace. At the same time, the Federal Reserve is keeping interest rates in the U.S. low and investors are turning to commodities like coffee for higher returns, driving coffee prices up even further.

Donald Schoenholt has been in the coffee business for nearly 50 years as a specialty roaster at his family-owned business Gillies Coffee Company and he knows this boom and bust cycle of coffee only too well.

“Gillies got into the specialty coffee business when there was no such thing,” he said. “I remember my grandfather telling me, ‘There’s two types of coffee, good coffee and bad coffee and we make the good kind.’”

Founded in 1840, Gillies is the oldest coffee company in the nation and among the oldest businesses still open in New York City. 

Coffee Prices at 13-Year Highs

Prices for unroasted beans have risen over the past two years as the demand for coffee has outpaced the supply.

Last year, roughly 129 million bags of coffee were consumed globally while only 126 million were produced. The difference was made up with coffee that had been stored in warehouses. Going forward, however, there are concerns about the quality and amount of those supplies. 

Coffee production has dropped in parts of the growing world like Central and South America due to bad weather that has yielded smaller coffee crops. Planting more trees now will not help the current situation as, on average, it can take five years before coffee trees start producing.

The surge in coffee drinkers has come from emerging economies like Brazil, the world’s largest coffee producer. Coffee has always been a staple in the country, but coffee analysts say that as Brazil’s economy has developed, a greater number of citizens have more disposable income to spend on products like coffee. Brazil is soon expected to pass the United States as the world’s largest coffee-consuming nation.

Then there are countries that only recently have adopted the habit of drinking coffee. 

“As China becomes more and more middle class,” said Schoenholt, “they want to emulate European and American ways and that means drinking coffee.”

It’s the same in other countries as well. India, where coffee is grown but has usually been exported, coffee drinking is becoming more common. According to Ric Rhinehardt, executive director of the Specialty Coffee Association of America, India is on course to become a net importer of coffee as more people switch from tea to coffee.

Already, these expanding economies have pushed up the prices for other commodities like corn, cotton, soybeans and copper. Now, the same is happening with coffee.

Higher coffee prices have also attracted the attention of investors. As a coffee buyer, Schoenholt closely watches the price of coffee futures traded at The Intercontinental Exchange, or The ICE.

“There is so much money now in coffee that I have to now look at it and believe this is not coffee roasters that are pushing the price up because of their customers’ needs but rather money coming in from money funds…that is jigging the price up.”

Rhinehardt said investors are speculating that coffee prices will continue to rise in the future, which in turn can push prices up higher.

The increase in costs for the raw material has led roasters to start charging more to consumers. Kraft raised the price for its brand Maxwell House, as has J.M. Smucker for brands it owns, like Folgers. Starbucks announced it would charge more for certain coffee drinks. At Gillies, Schoenholt expects he, too, will have to raise prices for his customers, which include Fairway grocery store and the River Café in Brooklyn.

In the past, higher prices have not led to a decrease in coffee consumption, according to Rheinhardt at the Specialty Coffee Trade Association. 

“Coffee consumption hasn’t fluctuated dramatically with price changes either up or down,” he said. “Some of that has to do with the shift in the paradigm of how consumers understand coffee pricing.”

He said that consumers see prices based on per cup costs and the coming increases could translate into five or ten cents a cup by retailers. 

“Nobody really says, ‘Wow, ten cents more a cup! I just won’t have coffee.”

But as coffee drinkers pay more, Schoenholt said it is possible they might opt for lower-priced or lesser-quality coffee.

“Americans are going to drink coffee,” he said.  “They just may not like the coffee they are drinking as much for a while until they can go back to buying the ones they really like.”

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Comments [2]

Jon

I have a commodity office in Vietnam. The Robusta is there if you're willing to pay the price. You just might be buying someone else's coffee that was sold earlier at lower price.Doesn't that make you feel good?

Nov. 23 2010 03:30 PM
John Mioduszewski from Piscataway

Where are the Vietnamese to flood the market with cheap robusta when you need them?

Nov. 22 2010 10:49 AM

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