UNITED STATES (Feb. 14, 2011) – Coffee Markets Business Report: Coffee price increases are showing no signs of easing in the near future due to issues on both the supply and demand sides of the equation. In particular there is a shortage of premium coffee beans known as Arabica coffee.
Arabica and the lower-priced Robusta coffee beans constitute the majority of the world’s coffee market along with a small amount of Liberica coffee beans. Both Robusta and Liberica are considered inferior to the higher-quality Arabica.
Specialty Coffee Comprised of Arabica Coffee Beans
Most all “specialty coffee” is comprised of Arabica coffee beans though some blending of Robusta, particularly in espresso blends, is a common occurrence. The Robusta beans are said to impart a certain desired quality into the flavor of the espresso as well as espresso coffee drinks.
In recent years there seems to be a huge surge in Arabica coffee demand from large, emerging markets including Brazil, India and China. These countries have growing middle classes which have been providing a high demand for good coffee, Arabica coffee, and they are competing with the United States to purchase these gourmet coffee beans.
Brazil will likely surpass the United States in coffee consumption in 2012 and will be keeping about half of its own crop by 2015.
Starbucks Thriving In China Where Coffee Demand Increasing
China’s coffee market, where Starbucks has a 70% market share, grew 40% over a two-year period. Some say the growing middle class there drinks coffee in part to emulate Europeans and Americans.
Starbucks tripled sales in China from 2004 to 2009 and from 2007 to 2010 saw a worldwide increase in its average number of customers per store from 408 to 424 each day.
Starbucks raised prices at the end of 2010 in the United States and China and the price hikes were met with very little resistance. The company is opting to hold on to market share rather than announce new price increases.
At the end of January, 2011 Starbucks said it wouldn’t be raising prices despite the higher price of coffee beans and other commodities thus affecting Starbucks’ profits more than expected.
Starbucks Reports Higher Sales and Profits
However Starbucks also reported United States sales and profits easily beating Wall Street estimates by increasing about 44% percent in the fiscal first quarter ending January 2, 2011 as compared to the same quarter a year earlier.
Starbucks profits were 45 cents per share which was higher than the predicted 39 cents, with profits totaling $346.6 million.
Starbucks is expanding in the world’s emerging markets and also increasing its products in grocery stores including its highly marketed Via, a new instant coffee product.
Coffee Shortage – Coffee Price Increase
Starbucks Expanding After Slowing Its Pace
Starbucks has eleven thousand cafes in the U.S. and another six thousand or so around the world. The company is now growing quite rapidly again after having to slow its pace in 2008 when it was hurt by growing too rapidly.
International sales were up five percent while United States sales were up eight, and these numbers also beat analysts’ predictions. Sales were up five percent at Starbucks cafes which had been in operation at least 18 months.
Coffee Shortage Causes Coffee Price Increase
Gourmet Coffee Lovers Exhibit Strong Brand Loyalty
Another thing about this demand for fine Arabica coffee which has been driving up coffee prices is that the consumers show a strong brand loyalty and are willing to pay more for the product. In other words specialty coffee in particular is inelastic with respect to price increases.
Coffee Price Increases Reflected in Coffee Markets
Since the end of 2009 the a seventy percent increase has been realized in the iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN. Coffee has been surging in price along with other commodities and has really come into its own in the last six months.
Starbucks has warned investors that the higher prices will cut into its profits this quarter but is holding off for the time being on any new price increases, instead opting to try to retain market share during the coffee price run-up.
Starbucks has already purchased all of the coffee beans it will need for 2011 and part of 2012. Starbucks’ stock has risen 45% since the end of August.
Coffee Price Increases Widespread Due to Arabica Coffee Shortage
Top coffee retailers such as Starbucks, Peet’s, Caribou Coffee and Green Mountain Coffee Roasters among others will eventually have little choice but to pass commodity price increases on to consumers to protect their bottom line unless commodity prices begin to ease instead of continuing their upward trend.
Kraft, Green Mountain and Peet’s Also Raise Coffee Prices
Green Mountain Coffee Roasters raised prices up to 15% in October, 2010 for North American coffee products such as Coffee K-Cups portion packs which work with the popular Keurig single serve brewing systems.
Peet’s Coffee & Tea raised prices in September, 2010 due to a thirty-five increase in the price of green coffee beans since the start of 2010.
Coffee Price Increase in 2011 Due to Coffee Shortage continued:
Young Professionals Fueling Coffee Shortage and Coffee Price Increases
The coffee price hikes don’t seem to be deterring customers who keep buying the product despite higher prices.
The affluent demographic that purchases Arabica bean coffee is a rising middle class that is spending money on things that just a few years ago they considered superfluous. Among this group are many young professionals.
These gourmet coffee lovers enjoy specialty coffee drink include a finely prepared Latte or Cappuccino. Coffee has shown to be inelastic with respect to price increases though eventually it will have some effect on demand. This was likely a concern of Starbucks in holding off on new price increases to instead retain market share.
Green Coffee Stockpiles Being Depleted
Green coffee beans are stored in large quantities in warehouses worldwide and these stockpiles were severely depleted last year. Without that buffer consumers could see price increases much more rapidly in response to new disruptions in supply in an environment of consistently rising demand.
Coffee Shortage – Coffee Price Increase
Coffee has a very long “chain of custody” from the farmer to the coffee cup. This also helps to delay short term shortages from affecting consumers, but with the tighter supply prices are more vulnerable.
The shortage in Arabica coffee beans shortage is going into its second year and doesn’t show any signs of slowing. Meanwhile green coffee stocks are at historic lows in the United States as well as in major coffee growing countries.
Coffee Prices Increase – Arabica Coffee Shortage
Fundamental Shift In World Coffee Markets
The current disjunct in supply and demand is a fundamental problem at the root of the rise in coffee prices and the worldwide shortage of Arabica coffees in particular.
The benchmark “C” Arabica coffee futures contract trading on the ICE Futures market has climbed eighty percent since June of 2010 reaching a 13-year high.
There is a very precarious supply and demand imbalance right now and it was reflected in the influx of money from funds betting on higher future coffee prices.
In 2010 coffee futures rose more than sixty-five percent which was the best rise since 1994. Coffee exports decreased more than five percent in July, 2010 compared to the previous July.
Lower Coffee Harvests Causing Coffee Shortage, Price Increases
Smaller coffee harvests in Costa Rica and Guatemala have made the coffee shortage worse, as did the decrease of nearly twelve percent in coffee production in Indonesia and bad weather that hurt the coffee crop in Vietnam.
At the end of 2010 the Arabica coffee price in Vietnam, which is the second largest coffee producer in the world, sawa a 100% increase from 2009 in some areas due to bad weather. Vietnam grows mostly Robusta coffee with about six percent being Arabica.
Flooding causing crop and road damage in Colombia, the world’s second largest Arabica coffee producer. A La Nina weather pattern has brought heavy rains and this is expected to continue into 2011 giving Colombia’s second straight year of lower production.
The Colombian National Federation of Coffee Growers announced higher prices and smaller supplies.
Real estate pressures have caused problems for coffee crops in Kenya and many coffee plants were torn up in western and central Kenya displacing coffee farmers. This led to a big price jump on the Nairobi Coffee Exchange at the end of 2010 for the prized Kenya AA coffee beans.
Rainfall in Brazil led to coffee crop damage, and also contributing to the growing coffee shortage is the fact that Brazil’s coffee crop is alternately weak and strong every other year, with 2011 being a weak year for coffee in the country.
Tanzania is engaged in massive coffee planting in an effort to increase production to 100,000 tons from the current 70,000 tons by 2015. The country recently experienced a drought that damaged coffee plants.
Coffee plants take about five years to begin producing so eventually Tanzania should contribute significantly to coffee markets. The country is known for its Tanzania Peaberry coffee.
Coffee Shortage – Coffee Price Increases
It remains to be seen whether the world’s Arabica coffee crop production can withstand bouts of bad weather and other problems and begin to rise to keep up with the large growing demand in emerging markets as well as the United States and Europe with their strong sustained demand.
It’s estimated production needs to increase by about 30 million bags in the next decade to meet rising coffee demand. The current coffee shortage and rising coffee prices are likely to continue into 2012 due to the harvest problems encountered by major coffee growing countries in 2010 and 2011.
Coffee Prices Increase Due to Coffee Shortage
If the climate cooperates the world should see much better coffee harvests in 2012, and by 2015 many of the new planting programs will be coming to fruition, though still it remains to be seen if this will be enough to satisfy the nearly insatiable demand for specialty coffee products which could continue to grow at a rapid rate.
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Also included are full details about Coffee Makers (Automatic Drip Coffee Makers, Single Serve Coffee Makers, Pod Coffee Makers, Coffee Pods, Coffee K-Cups, T-Discs, and French Press, (also see Best Coffee Makers), and Espresso Machines (including Pod Espresso Machines) as well as Instant Coffee and Decaffeinated Coffee.
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