Coffee Prices Rising in 2011

by dan on January 13, 2011

Price Spikes Jolt Coffee Retailers and Roasters

United States (Jan 13, 2011) - When talking about coffee retailers one must begin with the world’s leading retailer and roaster, Starbucks, which runs an extensive network of owned as well as franchised coffee and specialty coffee drink retail outlets. Competitors in the specialty coffee market include Peet’s Coffee, McDonald’s, Caribou Coffee and a host of others.

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All of these specialty coffee retailers and roasters are now being impacted by significantly higher commodity costs - coffee prices are up and continuing to rise. These supply and demand problems are occurring in the wake of an 30% increase in coffee prices from 2004 to 2007.

In 2010 coffee prices reached historic highs and the trend is predicted to continue due to the basic laws of supply and demand. Other problems include the generally higher rents as well as increased labor costs, all causing retailers to feel the pinch. Green coffee beans are now at a thirteen year high and profits at the local coffee ship are getting slimmer as are the profits of wholesale coffee roasters.

The fundamental shift occurring due to the expanding markets - particularly China and India - will continue to change the face of the coffee industry as these economies grow and place a significant pressure on the worldwide coffee supplies.

The impending shortage of specialty coffee beans has been reflected in world markets where speculation has caused many to bet on the future price increases, thus creating an influx of money on the Intercontinental Exchange where the buying and selling of coffee futures occurs.

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Starbucks in China - A Growing Market for Specialty Coffee

While Starbucks’ largest growth market in the coming years is believed to be China, Starbucks nevertheless has recently increased the prices of some of its products there. Their sales in China tripled from 2004 to 2009 and they maintain an estimated 70% market share. From 2007 to 2010 the daily number of customers visiting a Starbucks store (worldwide) went from 408 to 434.

Demand for Starbucks Coffee Inelastic in Face of Price Increases

The demand for Starbucks coffee is seen to have a relatively high “inelasticity” with respect to price increases for its products because its customer base tends to be a relatively affluent demographic who have strong brand loyalty. This is expected to occur as well in the emerging markets among the young working professional demographic.

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Due to the traditionally large stockpiles of green coffee beans (unroasted coffee beans), and the long “chain of custody” of coffee beans from soil to sip, it has taken awhile for the price increases - which began well over one year ago - to reach the store shelves and retail coffee shops. However, that time has now come.

The huge existing stock of warehoused coffee beans are being depleted and the big coffee sellers - such as Maxwell House, Folgers and Starbucks - are starting to increase prices across the board.

[Also see: Best Coffee In The World.]

Supply and Demand Dictates Continued Coffee Price Rise

More and more people want their gourmet coffee, not just the low grade bean. Starbucks and other retailers have created a new breed of gourmet coffee lovers and among this group are many affluent people including young professionals not just in the U.S. but in emerging gourmet coffee loving countries including Brazil, India and China.

Meanwhile Europe and the U.S. continue their strong demand for the whole bean experience and the rich, well-brewed cup of premium gourmet coffee.

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And all of this has been occurring during a time when there has been a significant downturn in the world’s economies including recessions, high unemployment, and a housing crisis. When things go bad financially people still will afford themselves the luxury of a cup of gourmet coffee.

Some of the limits on the production side have included rampant rains devastating crops in Central America and Columbia, two powerhouse coffee growing regions.

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Coffee Price Increases in 2011 Amid Increasing Commodity Prices

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Worldwide Coffee Price Spikes Blamed on Various Causes

The shortage of coffee beans leading to higher prices has an array of reasons. Columbia storms creating floods and mudslides and damaging a significant number of coffee crops is one reason, especially since that country is the second largest coffee grower in the world when it comes to the Arabica coffee bean varietal which Starbucks and others use and which sells for the highest prices when it comes to the world coffee market.

Furthermore, if the La Nina weather pattern materializes as predicted by meteorologists then next year in Columbia won’t be any better and they will see more damage that limits the overall coffee harvest. Smaller coffee crops have also been reported in Guatemala, and Costa Rica.

The International Coffee Association has reported on the supply/demand disjunct occurring in the coffee markets and the continuing shortage of specialty Arabica beans that should cause coffee prices to remain high well into 2011 if not beyond.

A smaller potential output of coffee (and thus higher prices) has also been reported by the Columbian National Federation of Coffee Growers.

At the end of 2010 there were also significant price increases in Kenya and in particular for the much-desired Kenya AA Coffee on the Nairobi Coffee Exchange.

Kenya’s prices increases have been blamed on a decrease in coffee farming as well as the wet season. Population increases in coffee growing regions have displaced farmers due to the increased value of the real estate. In central Kenya and western Kenya coffee plants have been uprooted to make way for people.

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