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Global coffee prices on the rise

In the past few weeks, the market price for arabica coffee has hit a 13-year high and robusta coffee has hit a 2-year high. In the United States, coffee is a highly traded commodity, only second behind oil, and the global coffee price (and the conditions at coffee farms and markets around the world) will ultimately affect the cost of your daily cup of coffee.

Coffee prices have risen 84 percent, or $102 per metric ton, over the last 12 months, according to TradingEconomics.com coffee charts.  The U.S. Bureau of Labor Statistics reports  that coffee was $180 per metric ton in October and $240 in January.  The historical peaks of coffee (one in the late 1970s and another in the late 1990s) have been above $300 per metric ton, so there may be even more room for coffee prices to increase.

Starbucks recently warned market analysts that the rising cost of coffee beans will eat into its profitability but that they are not yet going to pass the price increase on to its customers. To date, the coffee giant has eaten the additional costs instead of raising prices in its shops, but that may not last forever. Starbucks did not rule out increases in the future on certain products.

For now, Starbucks has already sourced its coffee beans at fixed prices through 2011, so their cost per cup is predictable, but future cost increases will ultimately affect the consumer cost per cup. By contrast, McDonald’s has noted that due to increasing food and coffee costs as part of the expanding food inflation trend, the company may need to increase prices or shrink portions to keep their products profitable.  Some are speculating that food companies in general are afraid to raise prices and are pursuing better efficiencies hoping to avoid a consumer confidence crisis in these rough economic times.

The primary reason for the increase in coffee costs is lower than expected production of high-quality arabica coffee beans.  Coffee prices in Tanzania have set a seasonal high due to short supply in world markets.  Coffee harvests in Colombia are expected to be below expectations due to excess rainfallBrazil, which is the largest coffee exporter in Latin America, expects its production to decline by 13 percent this year. While coffee exports from the Dominican Republic, Columbia, Guatemala, Nicaragua, Honduras, Costa Rica, Salvador and Peru all increased in the last quarter of 2010, even if all of those markets continued to increase their exports, Brazil’s impact in the market is so significant that a decline in Brazil’s production will overshadow all of the other country’s increases and create a global deficit, which in turn raises coffee prices worldwide due to less available supplies.

Interestingly, Brazil’s internal coffee consumption has increased by 5 percent, so Brazil may also use more coffee internally instead of exporting.  Brazil’s coffee consumption rate is higher than all other coffee producing countries, and at its current rate of growth, coffee consumption in Brazil is set to exceed the United States in 2012.  While coffee consumption in Brazil will never hit the highs found in Finland, Norway, and Denmark, where people drink crazy amounts of coffee, Brazil is becoming a world player in coffee consumption, not just production and exporting.

Overall, the coffee markets are very complicated worldwide, and as a coffee drinker, you can expect to see changes in the price of your daily cup of coffee as these effects ripple through the markets.  With sugar prices at a 30-year high and cocoa prices in turmoil, maybe it’s time you just drank your coffee black.