Why Are Coffee Prices So High?

Why are coffee prices so high?

Why are coffee prices so high?

We will start our CoffeeKrave economics lesson with the tale of two headlines, spaced almost exactly one year apart:

CNN Money, February 18, 2011, 3:37 PM ET: “Hyper-caffeinated coffee prices hit 14-year high

Bloomberg, Feb 14, 2012, 1:59 PM PT: “Coffee Futures Fall To Lowest In 14 Months: Commodities At Close

In April of 2011, the average monthly composite price for raw coffee reached a 34-year high. Between May of 2011 and May of 2012, Arabica prices dropped more than 35% and Robusta prices dropped more than 10%.

This downward trend is unlikely to continue, and price increases have been projected for the second half of 2012.

 

What Influences Coffee Prices?

The top two influencers of coffee prices are the rainmakers—in both senses of the word.

The weather is a prime determinant. Heavy rains in Brazil, the world’s top coffee-producing region, affect flowering, delay the harvest, damage crops and create spoilage issues due to fungus.

The other “rainmakers” that influence coffee prices are the speculators. Speculator involvement in the market tends to create a disconnect between the traditional price drivers of supply and demand. The cumulative effect of speculator interest is to further increase volatility.

Other factors that influence coffee prices include political tensions, levels of discretionary income, transportation costs and media coverage of the health effects of coffee consumption.

 

Coffee Prices: Bullish, Bearish and Volatile

This post is likely to be outdated shortly after we hit the “publish” button. At the moment of writing, the coffee commodity futures market is (with a hat tip to the Trading Charts analysis):

  • Short term bullish (anticipating price increases)
  • Long term bearish (downward-moving)
  • Volatile (prices changing rapidly and unpredictably)

The World Bank Development Prospects Group’s review of the commodities market for May of 2012 notes that there was a 5% increase in Robusta prices, as producers and traders in Vietnam have been holding back supplies, and a 3.6% decrease in Arabica prices, due to crops in Brazil being better than anticipated.

Why are coffee prices so high?

What’s Ahead for Coffee Prices?

Are coffee prices going up again?

Analysts project coffee price increases within the next year, due to speculator interest, low stockpiles and decreased production creating a supply deficit in 2013. Weather concerns are also likely to drive prices up later this year. Reuters notes that El Nino is a major concern for coffee growing regions, citing the U.S. Climate Prediction Center’s forecast for an El Nino weather striking as early as the third quarter of 2012.

Even when commodities prices fall, consumers do not see an immediate change in line at the coffee counter.

If you are familiar with the theory of a trickle-down economy, you should also know there is a coffee-specific version: the filter-down economy. Changes in the commodity market prices do not have an immediate and direct effect on retail prices.

As one industry insider noted (via The Plain Dealer): “It’s going to take a while to recoup from two awful years. It’s going to take a while for it to filter down to the cup.”

 

Have you adjusted your coffee budget in 2012? Share your thoughts on coffee prices with us in the comments below!

 

Main Photo: DFID – UK Department for International Development

Content Photo: Dennis Tang

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