Coffee Price Too Steep? Blame the Weather

Coffee Price Too Steep? Blame the Weather

To caffeine addicts negotiating the recession, this ought to give you a
jolt: production problems are driving up the cost of coffee and tea on
international markets. Rotten weather in Colombia helped push an index of
coffee prices compiled by London’s International Coffee Organization
to its highest level since September on Wednesday, just as futures prices
for Arabica beans — which make up the bulk of the world’s supply — topped $1.35 per lb. in New York, the highest since October. Recent droughts
from Sri Lanka to Kenya, meanwhile, have constrained tea production, forcing
up crop prices at auction.

Heavy rains suppressed output in Colombia, the world’s third biggest coffee
producer, even as a government plan to replace old coffee trees with new,
higher-yielding ones had put some areas out of production until the young
trees mature. Combined, the twin pressures have squeezed Colombian coffee
output by 16% in the current crop year, according to the ICO, which
represents exporting and importing countries worldwide. Wet weather also
stymied production to the north, in Central America, driving up prices there too.

Could those production snags trickle down to the price of a cuppa joe The signs
are that they are starting to. U.S. food company Kraft upped the price of
its Maxwell House Colombian ground coffees by roughly a fifth in April.
Rival Smucker’s made a similar move earlier in the month for its brand,
Folgers. Tea drinkers are being milked for more too. Responding to
increased market prices, Anglo-Dutch conglomerate Unilever — owner of the
PG tips and Scottish Blend brands — plans to increase the cost of its tea bags by about 10% in the coming weeks. Patrons of Starbucks, a bulk buyer of those Arabica beans, may not notice too much change, insists José Sette, head of operations at the ICO. The cost of the coffee in your Dark
Berry Mocha Frappuccino “is very small,” he says. Expensive store rents and
barista wages, he adds, “are much more important than coffee.”

Still, it’s another challenge for the industry at a time when demand in
mature markets could use its own caffeine kick. While global coffee
consumption grew slightly last year, the level in Europe — which brews up
roughly twice as much as the U.S. in absolute terms — fell by 2%.
“There’s still a bit more to come with regards to demand erosion” in both of
those big markets, says Abah Ofon, a commodities analyst with Standard
Chartered in Dubai. Any growth in demand from developing markets, he says,
is “insufficient to lift a market which is falling.”

For price-conscious consumers in Europe and the U.S., that may augur a shot
of good news. Consider the example of cocoa. Futures prices for the crop
have tumbled in recent weeks amid signs of dwindling demand for chocolate
products in mature markets. The European Cocoa Association said last month
that grinding — the process that turns the crop into cocoa butter or
powder and a handy proxy for demand — by its members fell 11% in the
first quarter of this year. Grinding across the U.S., Canada and Mexico fell
by slightly more in the same period. That’s prompted some manufacturers to
“provide some promotion on their products,” says Laurent Pipitone, senior
statistician at the London-based International Cocoa Organization, “because
they face a difficult situation.”

Read “Why McDonald’s Will Crush Starbucks in Europe.”

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