UNITED STATES (Feb 12, 2011) - Coffee Market Business Report: In 2009 the world saw a 3 million bag shortfall of coffee production as compared to demand and thus the stockpiles of green coffee beans (unroasted coffee beans) worldwide grew significantly smaller.
The tighter supply of coffee in 2011 will mean that consumers will be more likely to see prices go higher, and traders in coffee futures will see markets surge even more, if there are any further disruptions in the supply chain.
Much bad news regarding coffee crops in major producing countries - Brazil, Columbia, Tanzania, Kenya - has already been absorbed by those who must set prices and decide on purchases in the world’s coffee markets.
For example, the 2011 harvest in Brazil is expected to be down about twenty-five percent from 2010. Recent coffee harvests have been lower than expected in Kenya, Brazil, Vietnam, Columbia, Panama, and Central America.
Drought and Recovery in Tanzania’s Coffee Market
The recent drought in Tanzania has hurt that country’s coffee plants and now Tanzania is involved in massive replanting efforts that are expected to increase its coffee harvest from 70,000 tons to 100,000 tons per year by 2015.
When Tanzania’s benchmark coffee prices climbed five and one-half percent at the January 2011 auction it attained a price of $261.72 for a fifty-kilogram bag of the premium AA Arabica grade, up from $248.02.
Kenya AA Coffee Prices Surge on Nairobi Exchange
Other problems on the supply side of coffee include the real estate pressures affecting central and western Kenya which have led to the uprooting of coffee plants and which have caused a surge in coffee prices in that country.
Green Coffee Bean Stockpiles Decreasing Rapidly
Green coffee beans stockpiles went from 3.1 million bags at the beginning of 2010 to 1.7 million at the end on the New York Stock Exchange (green Arabica). In coffee producing countries stockpiles dropped to about 12 million bags.
In early February Starbucks warned that increasing coffee prices were going to cut into its profits though it had purchased all the beans it needs for 2011 and had raised prices in late 2010.
The benchmark Arabica bean contract on the ICE futures exchange reached a 13-year high in January, 2011 putting it up more than 80% since June of 2010 with coffee futures rising more than 70% in 2010. From the fall to the summer the increase was about 40%.
The primary reason for this was the anticipation by traders of future price rises on Arabica coffee.
Money from funds has flowed into the the Intercontinental Exchange where coffee futures are bought and sold on the New York Coffee, Sugar and Cocoa Exchange which handles Arabica Futures and the London Futures Exchange handles Robusta Futures.
Arabica coffee futures scheduled for March delivery rose to $2.4225, the highest since 1997, amid increasing demand worldwide for Arabica coffee, which is generally considered to be of a higher quality than Robusta coffee.
To meet the rising demand for coffee worldwide it is estimated that an extra 30 million bags will be required over the next decade. In 2010 coffee consumption will likely exceed demand by about 5 million bags.
If the U.S. economy rebounds along with other world economies this number it may fuel even more demand for the more expensive Arabica coffee and the global specialty coffee market.
While Starbucks was recently able to report profits rising forty-four percent along with a five percent increase in international same store sales. The company raised prices at the end of 2010 and has held off on more price increases despite the rapidly rising price of coffee beans.
The company is also dealing with significant price increases for other commodities including bread and milk. Add that to the coffee price increases of nearly 50% in the past half-year.
Certainly the markets will deal with any significant coffee shortage over time, and while Brazil is in a “weak year” next year will be a “strong year.”
And the La Nina weather pattern plaguing Central America and South America coffee crops will hopefully dissipate, and the massive plantings going on in Tanzania will come to fruition (this may take five years).
And Columbia’s rejuvenation efforts in replacing many coffee plants will lead to higher production (again, this may take some years). Coffee production will most certainly make a valiant effort to catch up to demand.
The International Coffee Organization recently reported that coffee growing countries have experienced a rise in temperature of about one and one-half degrees on average, and that this is having a significant effect on Arabica coffee farmers.
Arabica coffee plants are much more sensitive than the lower quality Robusta plants which can be grown at lower elevations. It is the Arabica plants that produce the finest gourmet coffee beans.
Since Columbia one of the world’s main growers of hand-picked Arabica coffee along with Brazil (which is also seeing decreased harvests), it has caused some concern in world coffee markets and in particular, the specialty coffee market.
Columbia’s 2010 coffee production was about 8.9 million bags which was a marked decrease from the expected production of about 11.5 million pounds. This comes after a dismal 2009 in which only 7.8 million bags of coffee were harvested which was the lowest harvest in thirty-three years.
Another problem besetting Columbia’s coffee industry is a fungus that has become a problem due to the excess rains and high humidity. The coffee crops have been affected by this coffee leaf rust (also called roya) which attacks leaves of the Arabica coffee plants and causes lesions that affect overall yield and can severely damage the coffee plants.
Somewhat alarming is the fact that the coffee leaf rust has been creeping up into higher elevation areas where it was not previously a problem.
Coffee Demand Growing Around the World
Meanwhile demand will continue to grow, about two percent annually worldwide but much faster in some major new and emerging markets with huge and fast-growing middle classes. These are India, China, and Brazil. And these are the precise customers likely proving the point that coffee is rather inelastic when it comes to price increases.
They want specialty coffee, premium coffee, whole bean coffee - call it what you like, they want good coffee. And they also want good espresso, and specialty coffee drinks like lattes, cappuccinos and mochas.
And they don’t mind paying more for it. When Starbucks raised prices last year in the U.S. and China it didn’t seem to sway people’s habits one bit. Of course at some point there is likely to be an effect on demand if prices rise too high though no one has yet found that point.
Starbucks Opts To Retain Market Share and Build Customer Base
Starbucks seems to be trying to hold off at this point in trying to find out, instead trying to retain market share by holding prices steady and letting the customer base grow.
The shortage of Arabica coffee bean varietals is driving the price increases causing the shortage which extends its reach into Robusta markets. The specialty specialty coffee market is comprised primarily of Arabica beans though Robusta is blended in to some espresso blends. Companies such as Starbucks and Peet’s use Arabica coffee beans.
Also see: Coffee Prices Going Up
Sweeping Coffee Price Increases Across the Board
J.M. Smucker, the parent company of Folgers (the top-selling packaged coffee in the U.S.) and Dunkin’ Donuts, rose prices in January, 2010 about 10% because of higher costs for coffee beans. In May of 2010 and August of 2010 Smucker also raised prices, four percent and nine percent respectively.
China and India are Strong Emerging Coffee Markets
In China, where Starbucks controls about seventy percent of the market share, demand has grown at about forty percent in two years. China tripled its sales from 2004 to 2009.
Recently Starbucks announced a deal with India’s Tata Company to enter India’s coffee market which is increasing its demand by about five percent annually.
The rapid increase in the number of gourmet coffee lovers will likely continue to fuel demand and put pressure on worldwide coffee supplies including the specialty coffee products of Bird Friendly Coffee, Organic Coffee (e.g., Fair Trade Coffee), and Shade-Grown Coffee.
Professional coffee tasters, coffee reviewers and the specialty coffee market in general are a bit worried that a sustained shortage of Arabica coffee beans along with huge price increases will produce an incentive for more blending with Robusta and a general decrease in the quality of products being offered as specialty coffee.