Coffee Prices Percolate To Multi-Decade Highs

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May 11, 2011 11:56am NYSE:CAFE NYSE:JO

Coffee drinkers are finding it more and more expensive to get their caffeine fix. The commodity’s price recently surpassed the key $3 per pound level for the first time in over 34 years. And with roasters scrambling to secure scarce supplies of Arabica beans, costs could remain high for a while. The

 International Coffee Organization (ICO) certainly warns as much. It points to global inventories falling to a mere 13 million bags, their lowest level in 50 years. Worse yet, they have little chance of replenishing those numbers this year.

The Weather Outside Is Frightful

As with so many other commodities, poor weather bears the brunt of the blame for coffee’s price hike.

  • In Columbia, for example, output plunged to a 33-year low of 7.8 million 60-kilogram bags in 2009. Supplies did rise to 8.9 million bags the next year, but it expects to barely match that amount in 2011.
  • Mexico also suffered a bad crop this year due to low temperatures. And several Central American countries have also experienced problems.
  • Then there’s Brazil, the world’s largest coffee producer. It already worried the market recently with its 13 percent production drop in medium quality beans.

Now another weather phenomenon threatens the country’s coffee crop. Local meteorologists explain that as La Niná – a cooling of waters in the Pacific Ocean – weakens this year, it increases the chance of frost.

Should cold weather hit Brazil hard enough, industry analysts expect coffee prices to hit over $4 per pound.

Coffee Demand Is Percolating

This disappointing global coffee crop comes in the face of robust demand, especially in producing countries like Brazil. The uptick in consumer cravings could reshape the market… for good.

In the past, coffee has been grown to satisfy U.S., European and Japanese caffeine fixes. But while these markets remain important today, ICO data shows their demand stagnating.

Asia, Africa and Latin America, on the other hand, are becoming increasingly robust.

Global demand for coffee rose 2.4 percent annually over the past decade. But this number masks the underlying trend…

Consumption in the U.S. and other established markets has been growing a mere 1.1 percent per year. Yet it swelled an impressive 4.3 percent annually in coffee-producing nations and 3.8 percent in other emerging economies.

The Brazilian Coffee Industry Association, for one, expects domestic demand to top 21 million bags next year. If so, that marks a 50 percent increase in the last decade and surpasses even the U.S. – the world’s number one coffee consumer – for coffee cravings.

And don’t discount the growing coffee culture in China. Coffee shop chains now consider Asia a top priority.

Starbucks (NASDAQ:SBUX) CEO Howard Schultz says he is “beginning to see the morning ritual develop” in China. The company now plans to triple its number of stores there to over 1,500 by 2015.

Investing in Coffee with iPath ETNs

In 2010, 53 percent of coffee worldwide was consumed in the traditional markets and 47 percent in the emerging world and coffee-producing countries.

If current trends continue, that difference will first even out, and then switch altogether. Unlike the previous four big coffee market rallies of 1975-77, 1985-86, 1994 and 1997, this one has much broader causes and firmer roots.

In other words: Expect high coffee prices for the foreseeable future.

For investors wishing to sip their coffee and have it too, iPath offers two ETNs that track coffee futures’ performance:

  • iPath Dow Jones-UBS Coffee Subindex Total Return (NYSE:JO)
  • iPath Pure Beta Coffee (NYSE:CAFE)

Good investing,

by Tony D’Altorio, Investment U Research

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