Coffee Prices Soaring as Supply Can’t Keep Up With Demand

The ever-increasing demand for coffee, coupled with supply constraints around the world, is driving up prices.

Recent storms that have hit Columbia, the world’s second largest producer of mild Arabica coffee, have hampered Columbia’s supply to companiessuch as Starbucks Corp. and Nestle SA.

London-based International Coffee Organization (IOC) says that global coffee consumption rose 2.4 percent to a record 17.7 billion pounds (134 million 60-kg bags) in 2010 and forecasts the upward trend to perpetuate irrespective of the high prices.

According to the IOC in its April Monthly report, “coffee prices, particularly those of Arabicas, reached new highs in April.” The monthly average composite indicator price in April was US$2.31 per pound compared to $2.24 per pound in March 2011, “the highest monthly level recorded since June 1977.” 

The daily average composite price in May has ranged from a high of $2.48 on May 3 to a low of $2.18 on May 20, and stood at $2.22 on May 26, according to data on the IOC’s website.

“There's no impact [from high prices] in terms of a reduction in demand. Demand is still very dynamic," ICO chief economist Denis Seudieu said.

Starbucks, the fifth-largest U.S. restaurant chain with around 11,000 stores in the United States, recently announced that it will raise prices of its pre-packaged coffee in its U.S. outlets by an average of 17 percent, the first price hike since 2009.

Smuckers, maker of Folgers and Dunkin Donuts coffee, announced on May 24 that they will raise prices close to 11 percent on U.S. coffee products.

Australian-owned Gloria Jean’s Gourmet Coffees Corp., which operates in over 30 countries and has 1,000 stores around the world, is continuing with its global expansion, despite price increases. Gloria Jean’s has plans to open coffee stores in Oman, Cambodia, and Bangladesh. However, the company did note the concerns of sourcing certain coffee types due to limited supplies.

“It hasn’t been an easy year and a half on coffee pricing, but more than just the movement in the price, it’s the high specialty of coffee that we buy that is getting less and less available, and more and more competitive,” Executive Chairman Nabi Saleh said in an interview with Reuters.
Storms in Columbia in 2010 that dramatically affected supplies will cut the second-quarter crop by around 10 percent, which is an estimated 2 million bags, according to Colombian National Coffee Growers Federation’s Chief Executive Officer Luis Munoz in a Bloomberg report. Higher farming costs are also contributing to higher prices, said Munoz.

“The final consumer is realizing that you have to pay a bit more for those little enjoyments,” Munoz said in an interview at the federation’s headquarters in Bogota. “Not just Starbucks, but the industry in general, wouldn’t have been able to do anything besides raising prices.”

Arabica coffee is predominantly grown in Latin America and is the preferred choice for specialty coffees, such as many of those sold by Starbucks Corp. Brazil is the world’s largest producer of Arabica beans. Robusta, normally grown in Asia and in various areas in Africa, is a less valued type of coffee, and is more likely to be used in instant coffees and espresso beverages.

The prices between these coffee types can vary dramatically. For instance, the average U.S. market indicator price for Robustas in April was $1.22 per pound, that compares to $3.14 for Columbian Arabicas and $2.71 for Brazilian Arabicas, according to IOC data. The IOC incorporates each of these coffee types when calculating its composite price.