The prices of coffee have increased so much that it has reached its 12-year high, which is 180 cents (120p), a pound for Arabica coffee. This has been the benchmark bean and this price is three times higher than in 2003. After the raise in tea prices in the past year, the cocoa prices also are driven high. In fact, June 24 of 2010 alone saw a 10% increase.
The main reason behind this 10% rise is as follows. Speculators, in expectation of a slump soon, made a number of short positions, after noticing the sharp rise in June. However, the prices have stayed high, and they covered their positions with other stocks, thus leading to the 10% leap. This is not the only reason. The other reasons can be listed as follows.
• Brazil’s crop was depressed in 2009 and it has recovered currently but the quality is not equivalent.
• The normal annual coffee production is 152-155 million bags of coffee, but there is a 30% drop in production and an 8-10% drop in exports.
• The inventories have been very low and tight.
• In addition to Brazil’s problems, Colombia (the fourth largest producer after Brazil, being the first) is also affected by poor weather and some plantations need to be renovated.
Thus the supply chain is struggling to meet with the demand. However, the benefits of the price bonanza do not reach the growers. The trade approved brands just guarantee a $1.25 per pound to the farmers in addition to 10 cents for any community projects. These farmers just get the same even during this prize bonanza season and this is a great shame.
On the consumer side (which after all is how it relates to our cup holders, the impact is based on the percent increase set by the roasters. On an analysis, Nestle and Philip Morris/Kraft process 13% each of the world’s coffee, Tchibo 4%, Proctor & Gamble 4% in America, and Sara Lee/Douwe Egberts 10% in Europe and South America. Nestle however dominates the soluble coffee market with more than 50% share. The price of a coffee bag or jar has raised 10.9% in Britain.
However, the hike in wholesale prices means little to coffee shops. Coffee just accounts for 2% of the price of a coffee cup, which is very less than the value of the sugar which will be added and the lid. Though there is a drop in sterling’s value, it is tough to inflate the price of a coffee cup. Hence this caffeine rush is very unlikely to affect the prices of Starbucks or Costa.