It's important to understand that coffee beans are a food crop - grown on farms, outdoors, and are subject to yearly fluctuations. Among the factors affecting the price of coffee are:
- Global supply
- Global demand
- Coffee varietal (Arabica vs. Robusta vs. Liberica)
- Coffee reviews and tasting notes for a particular origin or lot
- Local supply
- Weather - rain, sun, wind can all affect the quantity of coffee produced
- Pests and diseases - can reduce the quantity of marketable product
- Labour - an abundant supply of seasonal workers are required to harvest (local supply)
- Weather - rain, sun and wind can affect the quality of coffee through lack of nutrition
- Pests and diseases - can impair the trees ability to feed the coffee beans
These changes are reflected in green coffee prices, which doesn't always (in fact, very rarely) appear to the everyday consumer. Due to large stockpiles of green coffee it takes some time for the relatively rapid increase coffee prices to work their way to the consumers - coffee has a long “chain of custody” from soil to sip. However, green coffee stocks are depleted from year to year and coffee price increases are now showing up in coffee shops and on grocery stores shelves. In other words, the price of a cup of coffee has gone up and will likely continue to go up in the near future.
Still it has been higher, both in the late 1970s as well as in the late 1990s, topping $300 per ton. Many analysts see coffee climbing higher in the near future and perhaps reaching historic highs.
Companies throughout the supply chain are able to absorb price increases with the expectation that there will be a corresponding decrease at some point, which will restore profit margins. The perception of a company increasing its prices is typically a negative one, and certainly doesn't happen often with companies that have high margins to begin with. A price increase from a coffee roaster will usually be from those that are more aggressive in pricing and selling their coffees.
How to Price Coffee
If you're looking at starting a coffee roasting or distribution you might be surprised to find out that the coffee market hovers at around $1.50 per pound.
- Making connections and forming relationships with brokers
- Financing and pre-purchasing the coffee in 45,000-lb quantities (or more)
- Receiving the shipment via global trade routes
- Inspecting the shipment for quality - has it been damaged? Did you receive what you bought?
- Warehouse to store distribution quantities
- Repacking and distribution in usable quantities
- Roasting equipment, installation, venting
- Foodsafety inspections and certifications
- Sales and marketing costs to acquire customers
Each step in the process requires expertise - people who are knowledgeable, and who have the experience - and most of those people are working for larger companies already. On top of that, knowing when to buy (is the market up or down? is it going up or down?) can make the difference between between making 10% and losing 10%.
If you're looking to get into coffee roasting, you want to skip the hard parts and simply buy green coffee that's already nearby in quantities that are interesting to the distributors. Small startups can pay anywhere from $4-$8 per pound of green coffee, with the lower end for commodity Colombian and Brazilian coffees and the higher end for Organic or Fair Trade certified coffees, as well as some of the other premium beans (eg. Kenya AA).
Your prices will decrease marginally as you gain experience and smooth out your operations. But let's assume you start at $4/lb for a Colombian coffee.
You have to account for approximately 20% weight loss when roasting due to moisture loss - that means that 1-lb (454 grams) of roasted coffee will need 568 grams of green coffee.
$4.00 + 20% = $5.00
And your customers will complain if you deliver exactly 454 grams, so you'll want to overshoot by 10-20 grams (around 5%) to keep them happy.
$5.00 + 5% = $5.26
You need to pack the coffee into bags, which typically have to be purchased in quantities of 10,000+. You want at least a 1-way valve seal bag, which will run you about $0.40/each. Custom bags can be had as low as $1.00/each for purchases over 40,000 units.
$5.26 + $0.40 = $5.66
Hurray! We've hit our base product cost at $5.66. As with most businesses, you'll want product costs to represent roughly 1/3 of your sales price - another 1/3 is labour costs and the final 1/3 is profit (profit is what's used for the overhead: warehouse, utilities, insurance, equipment financing, inventory financing).
$5.66 x 3 = $16.98
Other expenses you now need to factor in include:
- Shipping costs
- Spoilage (this is a food product) - 10% product spoilage will eliminate 100% of your profits
You can reasonably cover overhead costs with about $10,000/month if you're diligent, which means you need to be generating about $30,000/month in sales on day one to cover your operations. $30,000 / $16.98 = 1,767 pounds of coffee per month, or 60 pounds per day.
Of course, the deciding factor in your pricing strategy will be: who is your market and what are they currently paying elsewhere? If you're uncompetitive with no unique selling proposition, you're dead before you've even started.
World Coffee Markets - A Problem of Supply and Demand
The reasons for the recent rapid rise in coffee prices include significant factors on both the supply and demand ends of the market.
In short, on the supply side, harvests of premium Arabica coffee beans have been much lower than expected. Inclement weather and coffee plant diseases and pests have reduced coffee crops in some of the major coffee growing countries. Recent coffee harvests have been lower than expected in Kenya, Brazil, Vietnam, Colombia and Central America.
On the demand size emerging markets such as India, China and Brazil are rapidly gaining a taste for gourmet coffee while the U.S. and Europe have sustained their high demands even through rough economic times.
In the emerging markets in particular the rise in demand for specialty coffee is being driven in part by up-and-coming young professionals who display a strong brand loyalty (e.g., Starbucks). This is part of the fundamental shift in coffee markets with the growing population of gourmet coffee lovers who enjoy fresh-brewed whole bean coffee or prefer a specialty coffee drink such as a Lattes or Cappuccino.
Premium coffee has exhibited a tendency to be rather inelastic with respect to price increases and thus despite price rises at Starbucks, and among other top coffee retailers, the demand for fine Arabica coffee beans remains strong and growing. It remains to be seen if there is some point at which the demand growth will be affected by rising prices.
Another factor, however, is that the sustained strong demand in Europe and the United States persisted despite a severe economic recession. If the economy begins to recover significantly this may spur further demand growth.
Coffee Goes Up In World's Coffees Futures Markets
The price of coffee futures increased about 44% from the fall of 2010 to the summer of 2010. The market is responding to the shortage of coffee, more specifically Arabica coffee, leading traders to bet that prices will rise in the future. This created an influx of funds into places where coffee futures are bought and sold including the Intercontinental Exchange.
The New York Coffee, Sugar, and Cocoa Exchange handles Arabica Futures while Robusta Futures are handled by the London Futures Exchange. These are the primary marketplaces that engage in the trading of international coffee futures contracts. Coffee futures went up 72% in 2010 to a 13-year high.
Due to concerns of bad weather in India and Brazil, possible hoarding of coffee stocks by major producing countries, and other issues, Arabica coffee scheduled for March delivery reached $2.4225, the highest since June of 1997. According to some analysts, coffee production will need to increase by as many as 30 million bags during the next decade to meet demand.
Supply Side Issues - Lower Than Expected Coffee Harvests
In Colombia harvests have been reduced by inclement weather. A La Nina weather pattern caused by cooling equatorial waters in the Pacific Ocean in 2010 and into 2011 has caused floods and coffee crop damage in Colombia and Central America.
Colombia Sees Lower Coffee Production
Colombia is feeling the effects of the weather and is undergoing its second straight year of lower coffee production as reported by the Colombian National Federation of Coffee Growers.
Colombia is the world's second largest producer of hand-picked Arabica coffee behind Brazil. Colombia produced 8.9 million bags of coffee in 2010 (instead of the expected eleven to twelve million bags), and 2009 was a thirty-three year low of just 7.8 million bags.
Colombia also experienced unusually high humidity that spread a fungus on coffee crops. This fungus is known as coffee leaf rust, or roya, and attacks the leaves of Arabica coffee plants causing yellow-orange lesions and reduced coffee yields, and potentially can severely harm or kill coffee plants.
Increasing temperatures have also been blamed for the coffee rust now attacking coffee plants at higher elevations than previously seen.
The current La Nina weather pattern is expected to continue to affect Colombia in 2011 which may exacerbate their coffee production issues. Continuing higher coffee prices and a smaller potential harvest was recently reported by the Colombian National Federation of Coffee Growers.
Record Rains Hurt Panama Coffee Crop
Coffee prices in the country went up about 20%. Panama has recently received distinction in the specialty coffee market for its prized Panama Geisha coffee which set a world record by earning an auction price of about $170 per pound.
Coffee Price Increases Not Likely to Ease Soon
The declining value of the United States dollar has also contributed to higher coffee prices in 2010 and continuing in 2011. A lower dollar supports higher commodity prices in general.
The International Coffee Association also said that coffee prices would likely remain higher through 2011.
Global Climate Change and Gourmet Coffee Production
According to the International Coffee Organization there has been a 1.5 degree temperature increase in coffee growing countries in the last twenty-five years. This has caused many Arabica coffee farmers to move to higher elevations with cooler temperatures favored by Arabica plants.
Also a problem is the broca borer worm that lays its eggs inside the coffee bean and has recently been more prevalent in the region than previously.
Brazil Coffee Crop Damage and Lower Output
In Brazil coffee crops have been damaged by rains and production has declined 13%. This has worsened the output in a weak year as the country's harvest goes through alternating weak and strong years, and 2011 is a weak year.
At the same time Brazil's internal coffee demand is rising quite fast and the country is expected to be keeping about half of its own crop by 2015 as the country's develops an increasing preference for Arabica coffee.
Brazil's consumption rate is the highest of all coffee-producing countries and will likely be consuming more than the United States in 2012.
Coffee Production in Uganda
Due to inclement weather as well as coffee plant diseases and pests such as twig borers and mealy bugs, Uganda saw a thirteen percent decrease in volume of coffee shipped in December of 2010 compared to the previous year (237,747 bags of coffee vs. 272,755 bags) reflecting a seventeen percent reduction in what had been predicted for the harvests.
Another factor affecting Uganda's shipments was increasing urbanization in some coffee growing areas.
Despite the decrease in volume, Uganda's coffee export total value increased due to higher prices paid, which was beneficial to coffee farmers. While $25.6 million was earned in December of 2009, that increased about twelve percent to $28.6 million in December of 2010.
Uganda's Arabica coffee exports increased to 187,044 bags in October/December 2010 up from 164,659 bags in 2009, which increased from 121,805 bags in 2008.
Meanwhile Robusta coffee continued to decrease. Prices of Arabica coffee Uganda increased 12.5%. The highest prices were earned by Mt. Elgon (Bugisu) coffee followed by the Bugisu A and Organic Wuar coffee.
Uganda is currently involved in a coffee production campaign aimed at exporting 270,000 tonnes (4.5 million bags) by 2015.
Kenya Real Estate Pressures Uproot Coffee Plants
In central and western Kenya there have been real estate pressures which have caused coffee plants to be pulled up to make way for homes. This caused coffee prices to rise on the Nairobi Coffee Exchange at the end of 2010 for the highly respected Kenya AA coffee beans.
Tanzania - Drought and Massive Coffee Plantings
Tanzania is also involved in a massive coffee replanting program expected to increase production to 100,000 tons per year, up from the current 70,000 tons by 2015.
The current coffee supply shortage in Tanzania caused the benchmark coffee price there to rise five and one-half percent at a January 20, 2011 auction, as was reported by the Tanzania Coffee Board. Tanzania's coffee supply dropped about 9% and the cost of a 50 kilogram bag of the the best AA Arabica grade rose to as high as $261.72, up from $248.02.
Vietnam Sees A Drop In Coffee Production
Inclement weather in Vietnam, the world's largest Robusta coffee producer, caused a significant drop in coffee production.
The exporting of about 140,000 tonnes of coffee in January of 2011 was a 3.7% reduction from January of 2010. The total value of the coffee exports increased by thirty percent to US$266 million.
Coffee Production Decreases Widespread
Some Good News About Coffee Supplies
In the last quarter of 2010 coffee exports increased in Nicaragua, Costa Rica, Honduras, El Salvador, the Dominican Republic and Peru. However a decline in Brazil's coffee production could overshadow all of those increases due to the major role Brazil plays in the world coffee markets.
The effects of the worldwide coffee shortage are beginning to ripple through the markets. During 2010 the world's green coffee stocks were depleted as consumers were temporarily buffered from the shock of significant reductions in supply at the same time that demand increased rapidly.
Tighter Coffee Supply Situation Predicted
As the world's green coffee bean supplies dwindle and demand grows coffee prices will be more susceptible to any further disruptions in supply.
Last year the stockpiles served as somewhat of a buffer to consumers as coffee prices rose, but now with smaller stockpiles and a tighter supply chain price increases will be quicker to come in the face of bad news on the supply side of the coffee market.
World stockpiles of green coffee in coffee producing countries dropped to about twelve million bags and stocks in New York decreased to a 10-year low. On the NYSE green Arabica coffee bean stocks dropped to 1.7 million bags at the end of 2010, down from 3.1 million bags at the beginning of the year.
The tighter supply makes markets more responsive to problems with coffee harvests in major coffee growing countries. When Brazil didn't receive sufficient rains during the coffee plant flowering season in October, 2010 it caused a 30% price increase in the next month. Brazil's 2011 coffee harvest is predicted to be about 25% lower than 2010.
Coffee Price Increases Across the Board
Wholesale coffee prices rose about 30% from 2004 to 2007, and current price increases should exceed that quite easily. Among the many major companies who have raised prices is the J.M. Smucker Company which is the parent company of Millstone, Folgers and Dunkin' Donuts.
Smucker increased prices about nine percent in 2010 on all of their top coffee products because of the rise in price of green coffee beans.
Nest it was Maxwell House and Yuban increasing prices. Those companies produce coffee under their parent company Kraft Foods and they raised prices on ground coffee as well as instant coffee.
Green Mountain price hikes included their popular Coffee K-Cups that are brewed using Keurig single serve brewing systems. K-Cups are produced under various brand names such as Newman's Own Organics, Timothy's Coffee, Tully's Coffee, Caribou Coffee and Green Mountain.
In September Peet's Coffee & Tea rose prices as a response to what they said was a thirty-five percent hike in the price of green coffee bean from the beginning of 2010.
Starbucks hiked prices at the end of 2010 in the United States and China. In China Starbucks controls some 70% of the premium coffee market where they tripled their business from 2004 to 2009. Having purchased all of the coffee beans they will need for 2011, Starbucks has vowed to keep prices steady during this year though future price increases seem inevitable in the face of rapid coffee bean price hikes.
Starbucks runs about 11,000 cafes in the United States along with another 6,000 worldwide. The company's profits climbed about forty-four percent in the 1st fiscal quarter that finished on Jan. 2, 2011 vs. the previous year, translating to profits of 45 cents per share which exceeded analyst estimates and brought in a total profit of $346.6 million.
Starbucks is now in the process of expanding the number of products it offers in grocery stores including its popular new instant coffee known as Via.
Starbucks and Coffee Prices
Starbucks purchases coffee on the coffee market, but also owns some of its own farms and works with farmers to increase their yield and quality so that they have a steady supply of quality coffee beans. The high margins means that Starbucks rarely raises their prices from year-to-year. Future increases seem inevitable, however, as rising costs cut into the company's profits.
What is Specialty Coffee?
Also known as gourmet coffee or premium coffee, and often premium gourmet coffee, specialty coffee refers to higher grades of coffee and places a value not only on the type of coffee bean but also how it was grown, harvested, and handled throughout the processing as well as storing, packaging, shipping, roasting and grinding.
Currently the specialty coffee market is comprised mostly of Arabica coffee beans although many espresso blends may contain an amount of Robusta designed to impart a desirable accent to the espresso shots and espresso coffee drinks..
However there is a “blending wall” that prevents the addition of too much Robusta without diminishing the quality of the specialty coffee. As Arabica prices continue to go up there is an incentive to blend in more Robusta though there will likely also be more effort placed on discerning which gourmet coffees being purchased consist primarily of Arabica coffee beans rather than a high level of Robusta blend.
Growing Arabica Coffee Plants vs. Growing Robusta Coffee Plants
In general, Robusta coffee plants are easier to grow because they thrive at lower elevations and are more resistant to coffee diseases and pests. Arabica coffee plants are more vulnerable and hand-picking adds another cost though it is an important component of any fine gourmet coffee.
Cultivated in East Africa and Central Africa as well Latin America, India, and Indonesia among other countries, Arabica coffee plants also produce a smaller yield of coffee cherry harvest per acre than Robusta coffee plants and
Robusta beans are typically picked using mechanical harvesting. Specialty coffee also refers to various types of coffee produced under certain guidelines such as Bird Friendly Coffee, Shade-Grown Coffee, and Organic Coffee (including Fair Trade Coffee),
Arabica coffee plants are only grown in countries fairly close to the equator within the tropical and sub-tropical climates and mostly at elevations above two thousand feet though desirable elevations are typically much higher.
Many of the finest gourmet coffees are grown at elevations between about four thousand feet above sea level to about six thousand feet above sea level.
Popular and widely cultivated Arabica varietals include Bourbon (Coffea arabica var. bourbon), Typica (Coffea arabica var. typica), and Arabica (Coffea arabica var. arabica).
The Robusta coffee plant varietal is a type of Canephora coffee plant that is technically classified as Coffea canephora var. robusta.
Robusta is generally considered to be inferior to Arabica coffee in regard to the flavors and aromas in the brewed cup of coffee as well as the other qualities by which fine coffee is judged (e.g., during coffee cupping (professional coffee tasting), including body, acidity, bitterness, sweetness, and finish or aftertaste).
Coffee Farm Costs
The cost to operate a coffee farm will vary by country and region as well as growing practices (organic, shade-grown, bird friendly, etc). We've found a handy chart from Univesity of Hawaii Manoa that breaks down operating costs for a Hawaiian coffee farm with some generalisations:
The Global Coffee Quality Research Initiative
In an effort to build a network of Coffee Companies collaborating to improve various aspects of the coffee market, the Global Coffee Quality Research Initiative (GCQRI) aims to support and direct coffee research and improve overall coffee quality.
This new initiative has the support of the Specialty Coffee Association as well as the Borlaug Institute (a Texas A&M University agricultural research institute).
With specialty coffee now comprising about forty percent of the market the initiative hopes to work on problems that farmers encounter regarding coffee quality and meeting market demand.
An estimated 50 million people are involved in the coffee market around the world. One goal is to improve the profits for farmers as well as the sales by coffee roasters for both the lower grade coffees as well as high grade coffees.
The research will then be given to coffee producing countries at no charge and this will include information about coffee plants, the harvesting of coffee cherry, coffee processing, and also shipping, storing, roasting, and packaging to deliver the consumer the best coffee possible.
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