High prices jolt coffee market

by Ron Sterk
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It has been a rough year for buyers of soft commodities — coffee, cocoa powder and sugar — with supplies tight and prices at multi-year or historic highs for all three, with more retail coffee price increases the latest iteration in the saga.

Exporting countries were forecast by the International Coffee Organization to produce about 121 million 60-kilogram bags of coffee in 2009-10, which ends Sept. 30, down about 6% from 2008-09. Exports in the first 10 months of the year (through July) were down more than 5% from the same period a year earlier, with shipments of Colombian Arabica down 22% for the period, the I.C.O. said. Exports of robusta coffee from Vietnam were down more than 6% for the 10 months. Arabica coffee is traded on New York’s Intercontinental Commodity Exchange (I.C.E.) and robusta is traded on London’s NYSE Euronext exchange.

Prices for coffee “C” futures traded on I.C.E. hit new 13-year highs last week with the December 2010 contract rising above $1.98 a lb, up more than 15% since late August and more than 40% since early June. Some market analysts expect prices to top $2 a lb, which hasn’t happened since 1997 when there was a drought in top-producing Brazil.

“Price volatility for all four groups of coffee increased in August compared to July, indicating limited availability and considerable speculative activity by investment funds during this period,” I.C.O. executive director Nestor Osorio said in his August report. “During August the upward trend of Arabica prices was accentuated.”

Trade sources indicated commodity funds have actively bought coffee futures since June, contributing to rising prices but also expecting to profit from them.

Dry conditions in Brazil encouraged producers to hold back supplies, hoping for higher prices, according to market analysts. Colombia, the largest grower of Arabica coffee, is expected to see larger output in 2010-11 but is coming off two years of weather-reduced production.

The surge in physical and futures values has been passed to consumers in most cases. Retail prices already were boosted at least once this year and more increases were on the way as green (unroasted) coffee prices continued to climb.

Green Mountain Coffee Roasters, Inc., Waterbury, Vt., said last week consumers “could expect to see a purchase price increase of approximately 10% to 15% over the next several months” as the result of an increase effective Oct. 11 in the price of its K-Cup portion packs for its Keurig Single Cup brewing system.

“Like others in the coffee industry, we have been closely monitoring rising green coffee costs and increases in other input costs like cocoa and packaging for several months,” said Scott McCreary, president of Green Mountain’s Specialty Coffee unit. Green coffee prices increased from $1.45 a lb to $1.90 a lb, or 31%, over the past three months, the company said.

J.M. Smucker Co., Orrville, Ohio, on Aug. 3 announced an average price increase of 9% across its Folgers, Folgers Gourmet Selection, Millstone and Dunkin’ Donuts brands, “driven by sustained increases in green coffee costs.” Smucker also increased prices across the same brands by an average of 4% on May 18.

Kraft Foods Inc., Northfield, Ill., on Aug. 6 increased retail prices of its Maxwell House and Yuban ground and instant coffees by about 10%, also the result of increases in green coffee costs.

Coffeehouse giant Starbucks Corp. said last week it would absorb the latest coffee price increases.

Ironically, global supply situations for coffee, cocoa and sugar all are expected to improve in the respective 2010-11 marketing years. For coffee, the I.C.O. has forecast 2010-11 production between 133 million and 135 million bags, which would be the highest in at least 30 years. But weather problems in a number of exporting countries will result in continued tight stocks and a “precarious equilibrium” between supply and demand next year, the I.C.O. said.

It also was announced last week that Mr. Osorio, executive director of the I.C.O. since March 2002, was leaving the organization to become Colombia’s ambassador to the United Nations on Nov. 1. Jose Sette, a Brazilian who is head of operations for the I.C.O., will fill the position until a permanent executive director is found.

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