How Much Will You Pay For Coffee?

columbia coffee

How Much Will You Pay For Coffee?
| Published March 14, 2014 |

By R. Alan Clanton
Thursday Review editor

A few weeks ago we ran an article called “Coffee Prices: The Woes of Joe,” in which—among other things—we examined the severe drought which has affected the coffee output of Brazil, a nation currently supplying nearly one third of the world’s coffee. The reaction on social media and in emails was swift and vocal: the hardcore coffee drinkers would be undaunted by any price spike.

One reader on our Word Press blog said she would give up electricity and even food in order to keep coffee around in her kitchen. Another follower on Facebook wrote “sell the car, sell the house; keep the coffee maker and my last bag of Peet’s.”

Coffee enthusiasts, it seems, have to have their coffee fix.

Over the last six months, U.S. coffee prices have spiked, climbing by 29%, faster than the much-discussed increase in the cost of food and groceries (you can thank the California drought and the combined forces of multiple Polar Vortexes for that), the big surge in home energy prices, and a dramatic rise in insurance rates in the scores of states most affected by a harsh winter where mortgage insurance jumped.

In fact, coffee prices have risen disproportionally faster than almost anything, especially when compared to food and groceries. The reasons: a perfect storm of negative conditions.

The drought in Brazil has been one of the worst of recent decades. And though dozens of other countries around the world produce high quality coffee (Vietnam, Indonesia, India, Costa Rica, Guatemala), Brazil’s production still outstrips all others combined, even that of its famous coffee-producing neighbors, Columbia, Ecuador and Peru. Any significant dent in Brazil’s supply can have an immediate effect on prices worldwide, but especially in the U.S. and Canada where demand has risen in recent years.

The other problem is disease. Coffee, which is difficult to bring to maturity and grow, is also sensitive to pests and diseases. A blight which has affected vast tracts of coffee farmland in Costa Rica, Honduras and El Salvador has effectively cut 35% or more from Central American production, part of which feeds the supply chain right into grocery store brands like Seattle’s Best and retail shops like Starbucks.

The principal antagonist is a fungus called Leaf Rust. Rust has spread its nasty affliction widely across Latin America, damaging crops and forcing coffee farmers to experiment with a variety of techniques— grafting plants, testing hybrid seeds, deploying fungicides, even developing experimental nurseries—in an effort to push back against the disease. This make this aspect of the problem more troublesome is the fact that the tenacious, irascible Rust can quickly evolve and morph, sometimes in a matter of weeks, rendering any long term solution useless.

Another problem is a bug known as the cherry-borer, which tunnels into coffee cherries while they are in the fruit stage, effectively destroying the beans before they can reach maturity. The borer, many farmers and botanists believe, may be on the rise because of climate change; warmer temperatures give the pest a greater lifespan and longer opportunities to do its damage, even at higher altitudes where temperatures are traditionally cooler and less hospitable to the bug. Both leaf rust and the cherry borer problem can be solved by deeply pruning plants, or cutting them back completely, but that can result in the plants producing no cherries for two to three years while the plant regains its maturity. For some farmers, that wait can be financially catastrophic.

In the meantime, coffee speculators and investors, eager as always to make a buck on the front end of the trouble curve, have driven prices even higher. On the commodities markets, arabica coffee futures saw a jump of over 85% in a matter of months, and some analysts predict that the price could go even higher, especially if demand does not show any signs of slowing down.

The Brazillian drought will hurt major coffee makers Folgers and Keurig-Green Mountain the most, since Brazil is their dominant supplier. But the ripple effect will eventually hit everyone who drinks coffee, including those who love the high end operations like Starbucks. Starbucks, which sells almost as much coffee in stores as it sells in its coffee shops, says it plans to hold off on any immediate price increase—at least for now. The Seattle-based firm cites their large inventory and backup supplies, carefully and copiously secured before the crisis, as the central reason they can be patient.

But some coffee industry analysts suggest that even Starbucks will be forced to make some kind of adjustment soon, either in the form of price increases, or through alternate buying patterns (which could have the negative effect of rankling customers accustomed to Starbuck’s carefully crafted flavors and blends).

Demand is unlikely to slow. The vast majority of coffee drinkers readily admit they would pay more for the same cup of coffee, and they are generally loathe to consider substitutes—even cheaper brands of coffee.

The two main types of coffee are arabica and robusta. The former is used to produce many of the world’s high-end flavors and blends; the latter is used primarily in low-end brands, institutional coffee and instant coffee. Last year, Brazil produced nearly half of the arabica sold worldwide.

Other big producers of Arabica include Columbia, Honduras, Peru, Ethiopia, Mexico and Guatemala.

Related Thursday Review articles:

Some Sweet Financial News; Thursday Review; March 14, 2014.

Coffee Prices: The Woes of Joe; R. Alan Clanton; Thursday Review; February 5, 2014.