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Coffee home - Coffee news - Coffee Prices Fluctuate

Coffee Prices Fluctuate

Coffee Prices Fluctuate
Robusta coffee prices, and trading activity, have climbed sharply in recent weeks. The lower-grade Robusta bean, which is mainly bought by high-volume roasters, sold for 77 cents a pound yesterday, up from 70 cents at the beginning of the month, and 56 cents a year ago.

These are the highest prices paid since 1999 for Robusta, which makes up about one third of the world coffee trade. Is the increase sustainable? Will it spill over to Arabica prices?

Most important - will your daily visit to Starbucks become an even greater luxury?

There are signs that after many years of glut, the coffee industry, which is said to employ 125 million people worldwide and produce $70 billion in retail sales, is at least temporarily approaching equilibrium. The industry suffered a major crisis in the late 1990s brought on mainly by the emergence of Vietnam as a major new producer.

While demand for Robusta, which has a rougher taste than Arabica, was slowly declining, production was rising rapidly. Vietnam's exports soared from 1.1 million bags in 1990 to 11.6 million bags in 2000, while total industry exports grew from 80.6 to 89.2 million bags. Robusta prices sank to all-time lows.

Meanwhile, prices of Arabica also dipped but by a lesser amount, causing an unprecedented split between the two commodities. Roasters took note, and began to blend more Robusta into their mix.

The price of Robusta coffee in the domestic market continued to increase, standing between VND20,500-20,800 per kilo in Central Highlands Lam Dong and Dak Lak provinces - the country's largest coffee growing region.
Experts forecast that local coffee prices remain high until Vietnam's harvest begins in November.

According to the Vietnam Coffee and Cacao Association, the country's coffee output is expected to be 11-11.5 million packages from the current crop and may reach 13.5-14.5 million packages from the next crop.

Meanwhile, coffee prices on the world market reportedly hit a seven-year high in recent days with the price of Robusta coffee rising to $1,585 per tonne, $126 more than last week.

VietNamNet Bridge

Judy Ganes-Chase, head of an eponymous consulting firm, says that prior to this time the large processors such as Folgers used only 28% to 30% Robusta beans in making their coffee. With new taste-enhancing roasting methods, the buyers were able to use more of the low-cost beans, which subsequently made up as much as 60% to 70% of the can.

Now that there is some movement and substitutability between Robusta coffee traded on the Euronext.liffe and the Arabica beans traded on the New York Board of Trade, an arbitrage opportunity exists, and not surprisingly the interchange has been exploited in recent weeks. Jeanette Young, who trades on the NYBOT, says that hedge funds have been active in the space.

The recent run-up in Robusta prices was sparked by the destruction of some inventory warehoused in Trieste, which caused an immediate supply pinch, and by a more profound drop in exports. The price weakness of the past few years has discouraged farmers in Vietnam and elsewhere from pursuing marginal crops, and Brazil is consuming more of its Robusta crop in-house.

Industry observers are the first to admit that these factors may prove temporary, but they are optimistic nonetheless that the market will continue to strengthen. That conclusion is based primarily on consumption trends.

The International Coffee Organization, charged with attempting to organize the 60 or so nations that produce coffee, has seemingly despaired of any real ability to rein in output, and has instead focused their efforts on promoting coffee drinking. Just as commodities stories must necessarily include the activities of hedge funds, so too must they incorporate the Chinese.

The director of the International Coffee Organization, Nestor Osorio, gave a speech last year in which he identified China's growing importance. He acknowledged, however, that a tea-drinking country might require an "education process" before really signing on as coffee enthusiasts. In reality, a steady increase in foreigners living in China, and the increased sophistication of cities like Beijing and Shanghai have already begun to work their magic.

Consumption today in China is small, but growing rapidly.The Chinese report that 2005 imports totaled 322,000 bags, hardly a blip on the 85 million bags consumed by importing countries last year, but up nicely over the 99,000 imported in 2000.

China is not the only country being targeted for promotional activities. The ICO is also optimistic about encouraging consumption in other emerging markets such as Russia, and in other producing nations as well. Among other approaches, the industry is keen to report on the apparent health benefits of coffee. Most of us are all too aware (and grateful for) the beneficial effects of caffeine on our mental alertness. Not everyone, however, is up to speed on a recent study which shows that coffee drinkers are less likely to be diagnosed with alcoholic cirrhosis. Other potential benefits cited on industry Web sites include reducing depression, preventing the onset of kidney stones and asthma, and the possible inclusion of antioxidants.

Americans, among others, appear to be taking note.The National Coffee Association's most recent study finds consumption in America on the rise. Interestingly, 40% of those surveyed in 2006 agreed with the statement "coffee is good for my health" as compared to only 26% in 2005.

Although Americans consume one-fifth of the world's coffee, per capita consumption was only 4.2 kilograms in 2005. The highest intake is by the exceptionally alert residents of Finland, at 12 kilograms.

By far the most vibrant portion of the American market is the high end. Sales of so-called ‘specialty coffees' have steadily increased, as has the number of outlets such as those managed by Starbucks. The specialty market in 2005 amounted to $11 billion, up from $7.8 billion in 2000. Will companies at the high end have to raise prices, possibly undermining that steady growth?

Not unless Arabica bean prices move significantly higher, which would likely require a continued rise in Robusta. Spokesman Andy Fouche of Starbucks notes that his company only uses Arabica beans. Though he would not comment on pricing strategy, he notes that Starbucks negotiates all their purchases directly with farmers; daily fluctuations in the market would not likely impact them.

Moreover, according to Martin Wattam of the ICO, coffee beans are only a tiny percentage of the cost of a cup of coffee - as little as 2%. Roasting, packaging, advertising and other costs are a far bigger component of the retail price.

However, the large producers tend to price their product off an eight week moving average. If you're a Folger's fan, and the market continues to strengthen, you may see prices move up. For many of us, price increases will not impact consumption; coffee is, after all, a necessity.

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