Tuesday, June 7, 2011

Why Will my Morning Cup of Coffee Cost me More?

Those who can´t help having a cup of coffee in the morning, before starting their work routine, have now found a good reason to be worried.

The price of coffee beans has reached a peak over the past 34 years, while producers and analysts warn that such increase will be emptying the coffee consumers ´pockets for a long while.

This fact contrasts with the depression that faced the coffee market until just few years ago, when the coffee yield was below its production cost. In Latin America, the depression led to generalized bankruptcy of small producers in particular.

But the picture has changed. Javier Blas, an expert in raw materials with the Financial Times told BBC World that for the first time in nearly a whole generation of producers we can see happy faces, particularly small coffee cultivators in Latin America.

Last year, the prices of Arabica Coffee—the highest quality variety—increased to 125 percent, to reach top level in little over three months. And in the previous five years, this price kept between 1 and 1, 50 dollars a pound.


The current situation has led to a war, at least in terms of words, between coffee roasting plants like Starbucks, which blame speculation, and coffee trading companies that put the blame on the offer-and-demand dynamics.

Starbucks executive director Howard Schultz said that the price hike is the result of extreme speculation and not of market factors. However, analysts say that Starbucks may have contributed to the increase with its decision to buy all the coffee it needed for a whole year, thus inflicting strong pressures on the market.

Other big companies like Starbucks have done the same thing, Javier Blas told BBC World. He said coffee-roasting companies have noted existing structural problems and that these prices will remain for long, so they have made their purchase in the futures market. Their purchases are usually aimed at guaranteeing three-month coverage, but some have bought all they need at the futures exchange for a year, the expert said.

Blas noted that speculation has played its role anyway, but he thinks some more important reasons explain the price increase.


One of these reasons is the decrease in the availability of coffee at the market. The stock lists register their lowest levels in the past 50 years.

In the first place, several Latin American countries reported low harvests.

In Colombia, production fell particularly as a result of heavy rains.

Mexico and Central America also reported a decrease in their harvests, while Brazil did not reach expected production levels.

This fall takes place amidst an important market change, because consumption is rising in emerging countries like Russia, Brazil, China and others.

Brazil is expected to become the world’s main consumer of coffee next year, displacing the United States.


This consumption increase in emerging countries is spreading its influence due to the expansion of coffee culture promoted by coffee shops in the Starbucks style.

Colombia has lost some one million sacks of coffee due to the severe Winter. This means that a Colombia coffee cultivator, who used to produce 20 sacks of coffee, is now producing only 10 sack, though he is able to compensate this difference with the increasing prices, said Andres Valencia, marketing manager of Colombia’s Coffee Producers Federation.

Add to this the increasing consumption in countries where people would traditionally drink tea and they now begin to consume more coffee, he noted.

Valencia told BBC World that many of these new coffee consumers in Asia, the Middle East, or in Eastern Europe are now learning to drink coffee as they are consuming the highest-quality variety, Arabica, which is precisely selling at the highest prices.

Just ten years ago, the usual trend for new coffee consumers was quitting tea for low quality coffee first, and then they would go for the higher quality variety. But with the expansion of coffee shops, these countries are going directly for “express” or high quality coffee.


For Latin America, one of the largest coffee producing regions in the world, this situation could lead to a relative beneficial stage for producers.

Colombia, where coffee stands for 20 percent of the agricultural production, is one of the countries with more benefits because it is the second producer of Arabica coffee.

And this is of great help in a country where the Winter has largely affected the harvest, said Valencia, who noted that in a year’s term, a family of coffee cultivators has been benefitted with an extra 200 dollars for each 125 kilograms of the grain, not pealed.

Finally, while the increase of coffee prices comes as a factor of concern for coffee consumers in Europe and the United States, in times of economic adjustment, it could not have come in a better moment for Latin American producers.

Taken from Granma

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