Coffee Demand Not Slowing Down [Starbucks Corporation, Dunkin Brands Group Inc, Keurig Green Mountain Inc]

coffeeChris Orr: Coffee: I love the stuff. No matter the price, I’ll come up with the money to pay for it every morning, although the thought of a price increase does concern me. And today, a price increase is exactly what we’re seeing.

This year’s coffee crop was shriveled up by the El Niño-induced drought that settled in across Brazil last year. Early this year we saw the price of the commodity rise quickly, though it leveled off as suppliers worked through a vast inventory of Arabica and Robusta beans.

Now, that inventory is shrinking and this year’s crop is coming in at the lowest level in two years. Given these factors, prices are expected to climb significantly higher.

And while El Niño and growing consumer demand are conspiring together to drive the price of your next cup of java higher, we’ve got a great way for you to rake in profits on the price’s rally.

El Niño Shrinks Coffee Harvest

The ocean phenomenon called El Niño, an area of ocean temperatures between Peru and Indonesia that is warmer than normal when the cycle is active, is having a negative impact on the prime coffee regions of the world.

El Niño brought drier-than-normal weather to Brazil, Vietnam and Indonesia — three of the top four coffee-producing countries in the world — for most of this year. El Niño weakened a little this summer, and while the return of rain and the blooming flowers on coffee bushes raised hopes for a good crop, those hopes were diminished by late summer.

Coffee flourishes within a narrow area near the equator, and typically comes in one of two varieties. Arabica coffee, which makes up 70% of the coffee picked, grows at higher, cooler elevations of Latin America. Robusta coffee, on the other hand, comes from trees that are hardy and disease resistant, preferring warmer climates at the lower elevations of Vietnam, Indonesia and Africa. These robusta beans are considered to be lower quality and are used for instant coffee, blends and espresso.

The ideal growing conditions for these crops include a combination of frequent rain — about 60 inches a year — and spells of sunny weather.

Unfortunately, these conditions were not met late this summer when rainfall was below normal across Vietnam, Indonesia and equatorial Africa. That means the supply of both Robusta and Arabica coffee will grow tighter.

To make matters worse, El Niño strengthened again in late August and the drought returned, leaving the plants in rough shape, producing small beans. All things considered, we’re looking at a much smaller harvest.

Coffee Pinching Your Wallet

Looking back at coffee prices from the 1990s to last year, I discovered that prices always go up during El Niño and go down during La Niña, El Niño’s cooler cousin.

The retail price lags behind the commodities market by nine months, so if the price of the commodity keeps going up, you’ll see similar increases at the grocery and specialty shops well into next year.

This summer, Folgers, a J.M. Smucker brand, and Dunkin Brands both raised retail prices at grocery stores. Starbucks raised their prices, too, even though they are heavily hedged with nearly a third of next year’s bean price locked in.

Pages: 1 2

Leave a Reply

Your email address will not be published. Required fields are marked *