Why Are Coffee Prices Going Up – Rise In Coffee Prices Explained
There seems to be no end in sight for the run-up in green coffee bean prices along with a host of other commodities.
The reasons for this are many fold but can easily be summarized: soaring demand in emerging economies, sustained high demand in traditional major coffee markets (e.g., U.S., Europe), supply disruptions due to inclement weather, avoidance of increased production investment due to fear of boom-bust cycle and the five years required for coffee plants to mature, and last but not least, speculative trading in coffee futures markets with large infusions of money from hedge funds, driving up commodity prices across the board.
This increase in prices (especially at the specialty level) is leading to financial incentives for major investments by developing economies in production and output levels – many industry organizations within these are investing heavily in higher-yielding varietals, educating farmers on better growing practices and streamlining the exporting process. This will significantly increase production volumes in the next few years which will help to bring prices back down. Countries such as Nepal expect a 10-fold increase in production from 2015 to 2020.
Okay now let’s quickly review each of these factors and you will then understand what is causing upward pressure on green coffee prices.
Soaring Demand in Emerging Markets
The best example of this is China, traditionally a nation of tea drinkers, increasingly taking a liking to fine coffee including espresso-based coffee beverages like Lattes and Cappuccinos.
The demand for coffee in China has been growing so rapidly analysts have a hard time gauging it though estimates have been a growth of about twenty percent annually for the last two years.
The vast untapped market of China is just getting started, and Starbucks has announced plans for 1,000 stores there and is indeed fueling the rapid growth rate for coffee demand (they have a 70% market share in the country).
Some say that the Chinese are favoring these fine coffee drinks in part to emulate Americans and Europeans, and China’s growing middle class can now afford the affordable luxury of premium gourmet Arabica coffee including specialty coffee drinks like Lattes and Cappuccinos. Recent coffee auctions actually show that premium coffee companies in China, Japan, South Korea and Vietnam are outbidding their North American and European counterparts for the best-of-the-best beans.
Starbucks recently signed a deal to begin entering the India market and Brazil’s demand for coffee is growing so fast it is set to surpass U.S. coffee consumption by next year and become the world’s number one coffee consumer.
Brazil is already the world’s number one coffee grower, and their increasing desire for the best coffee beans to meet internal demand will have an effect on world markets. By 2015 Brazil is expected to be keeping more than half of its own formidable annual coffee crop.
Sustained High Demand in Traditional Major Coffee Markets
Even during the recent years of economic downturn after the financial crisis and crash of the housing boom, the United States and Europe have sustained their high demand for coffee, and in particular the higher grade Arabica coffee served by Starbucks, Peet’s and other fine coffee shops and comprising most of the specialty coffee market including the whole beans on supermarket shelves.
If world economies rebound and see significant economic growth in coming years these traditional major markets that import and consume the most coffee may see a rise in demand that will further exacerbate the current upward pressure on green coffee bean prices.
Coffee Supply Disruptions Due To Changing Weather Patterns
The last few years have seen numerous major coffee growing regions suffer diminished crops due to inclement weather and high humidity leading to outbreaks of coffee plant diseases and pests. These problems affected the world’s largest coffee grower Brazil as well as the world’s second and third top growers Colombia and Vietnam.
The weather caused a widespread problem of fungus on coffee crops, including the coffee leaf rust known as roya which attacks the Arabica coffee plant leaves and causes yellow-orange lesions and decreases yields. Countries such as El Salvador have responded to the coffee rust crisis by planting other varietals – such as Sarchimor and Catimor – that are more resistant to coffee leaf rust. This not only helps prevent all of their plants from being damaged, but also helps curtail the spread of the disease to other trees that are vulnerable.
Also seeing lower coffee production were Guatemala, Costa Rica, and Indonesia as well as numerous other countries. This lower production has placed strong upward pressure on prices during the last year and severely depleted world coffee stockpiles of green coffee beans (unroasted coffee beans) to record lows.
Lower stocks means the market is much more vulnerable to price rises if there are any new supply disruptions as there is no buffer for the consumer as has been the case in the past.
A persistent La Nina weather pattern in 2010 and continuing into 2011 adversely affected the coffee crops of Colombia and Central America. La Nina is caused by the cooling of the ocean waters in the equatorial Pacific with the result of unstable weather in the region.
Tanzania coffee production decreased 9% and led to a price spike for the famed Tanzania Peaberry coffee, and in Kenya there was also lower production due to real estate pressures that pushed out coffee farmers to make way for homes, and causing a spike in the price of the premium gourmet Kenya AA Coffee.
Coffee Production Not Increasing Despite Price Incentives
While supply and demand fundamentals dictate that a commodity which becomes highly profitable will eventually become more readily available, driving down prices, this does not seem to be the case in the current coffee market.
Coffee farmers and governments of major green coffee bean growing regions have been through numerous boom and bust cycles in the past that have left producers high and dry when the bottom falls out of the market just after they have made large new investments in production.
In the current market there is a great wariness to increase investment in infrastructure and coffee planting programs due to a general distrust of the stability of the market and the current high coffee prices. These farmers and their associated governments are more often taking the approach that it is better to keep supply where it is to ensure continued high prices.
The Brazil government in particular has stated this general theory in regard to their country’s green coffee market and has refused to incentivize increased production. The country has also withheld coffee stocks from sale in anticipation of high future prices, and this act in and of itself helped to drive prices upward.
Speculative Trading in Coffee Futures Markets
Green coffee futures have nearly doubled in price in the last year and this has been lamented by many, including Starbucks CEO Howard Schultz, as artificially driving up coffee prices for reasons other than basic supply and demand.
The steep jump in futures prices has made it difficult for importers and exporters to afford the margins they need to pay to protect their investments and in some cases this has caused severe supply disruptions that in turn drove up coffee prices even further.
The large infusions of cash into commodity markets in the last year, including coffee futures, is largely attributed to the easy-money, easy-credit policies in the U.S. and the Federal Reserve’s maintaining of low interest rates which has driven large amounts of money from hedge funds and index funds into commodity markets. This high volume of money entering commodity markets is widely blamed for creating higher commodity prices across the board.
In addition to the run-up in coffee futures prices, the U.S. economic policies have led to massive new amounts of U.S. debt in the last few years, and this in turn has caused a weakening of the U.S. dollar which effectively creates higher commodity prices for everyone in the U.S.
Coffee Companies Raising Green Prices
All of the top coffee companies have been repeatedly raising prices during the last year including Starbucks, J.M. Smucker Company (Folgers, Dunkin’ Donuts and Millstone), Green Mountain Coffee Roasters, Peet’s Coffee & Tea and Kraft (Yuban and Maxwell House) including price increases on both ground coffee and instant coffee.