Coffee Price Increase 2011, Coffee Shortage, Commodity Prices Rising

by dan on March 4, 2011

UNITED STATES – Commodity Market World Report: Commodities including Arabica Coffee are rising rapidly in price for various reasons. Here they are:

Surging Demand for Commodities in Emerging Markets

A huge increasing overall demand for commodities by the emerging economies of Asia and Latin America seem to be the primary driver of rising commodity prices. Most prominent among these developing nations are China, Brazil, Russia and India.

The demand being created by these emerging markets and their huge and rapidly-growing middle classes is creating a fundamental change in commodity markets.

For example these countries are now vying for the best best coffee beans with Europe and the United States and this has been a primary factor in driving up coffee prices, and in particular the specialty coffee (Arabica coffee bean varietal) beans.

Political Unrest and Inflation Fears Drive Up Commodity Prices

Food prices have been rising quite rapidly for months with a renewed price spike occurring due to political unrest in North Africa and the Middle East.

Inflationary fears have led many countries to begin to make a serious effort to increase their own food inventories for the purpose of national food security. Between June and November of 2010 rice, wheat and corn rose 26% in price and then continued increasing.

And in the last few weeks it wasn’t just feeder cattle, live cattle, lean hogs, corn, rice, wheat, oats, soybeans, hogs and coffee that have shown recent large price increases, it’s also cotton, lumber, platinum, natural gas, crude oil and heating oil, among others.

Inclement Weather Crimping Supplies and Driving Up Commodity Prices

A drought in the Black Sea area led to poor harvests in 2010. This was just one of numerous problems with recent harvests including floods and fires. In Latin America hot and dry weather harmed wheat, corn and soybean harvests.

Also see: The Top Ten Coffees in the World.]

Coffee Price Increase 2011, Coffee Shortage, Commodity Prices Rising

Increase in Commodity Prices Exacerbated by Government Export Bans

When Russian enacted a ban on wheat exports and India banned onion exports it exacerbated the commodity price increase issue. Government export bans are continuing to place upward pressure on commodities as countries deal with inflationary fears and try to ensure they can meet their own internal demand in the future.

Fluctuating Currencies Contribute To Commodity Price Increases

When currencies fluctuate it complicates the issue of rising commodity prices. While the price of a commodity may go up in one country it can go down in another at the same time if due to a currency fluctuation of a particular country.

Commodity prices may rise for a particular commodity, such as poor coffee harvests in Colombia and Brazil as has occurred recently, but typically if a whole range of commodities is going up in price at the same time it is a sign of growing worldwide demand for commodities overall.

Influx of Investor Funds Leads To Commodity Price Pressures

Due to the attractiveness of commodities in a potentially inflationary economic environment, a large amount of money has flowed into commodity markets in the last year including money from index funds.

This surge of investor money has had the effect of further driving up commodity prices with many investors betting on future price increases (e.g., buying Coffee Future in anticipation of a future price increase for coffee).

Coffee Shortage, Commodity Prices Rising - Coffee Price Increase 2011

Rising Oil Prices at Heart of Commodity Price Increase Woes

Perhaps the most pervasive effect on consumers comes from the sharp price spikes in oil. An increase in the price of oil affects virtually every other  commodity and consumer product due to the use of oil in transportation of goods.

Consumers also see the price rise at the gasoline pumps and thus have less disposable income to spend on other things, creating a drag on the economy and stifling growth.

The traded energy commodities include not only crude oil, natural gas and ethanol but also heating oil, propane, Gulf Coast gasoline and Brent crude.

Coffee Shortage  Causing Coffee Price Increases in 2011 - Commodity Prices Rising

More Commodity Price Rises Due To Various Factors

China’s recent large purchase of more soybeans has also placed pressure on food prices along with rising purchases by domestic livestock and ethanol producers. In recent weeks wheat and corn sales by United States exporters has seen an increase.

Approximately 1/3 of corn production in the U.S. was used to make ethanol which tends to be more profitable than using the corn for food. This has caused corn prices to surge at the same time other food products have been rising including soybeans and wheat. Ethanol production depends upon corn, crude oil and natural gas.

The fundamental structural changes now taking place in the commodities markets is primarily driven by the large and rapidly growing demand for commodities being created by developing nations (e.g., emerging economies) including China, India, Latin America and Russia.

For example, in these countries the consumption of Arabica coffee has increased way faster than the global average. The large middle classes of these countries now want their fine cup of coffee each day, and they are willing to compete with the United States and Europe for the best coffee beans.

Along with some supply issues, this has created a distinct shortage of Arabica coffee which is now favored worldwide not just for fresh-brewed coffee but also for espresso coffee drinks like cappuccinos and lattes.

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