When Your Coffee Price Goes Up, Who You Gonna Blame?

August 27, 2011

The coffee news analysts have been predicting for months that your cup of coffee is going up in price. Daily, reports come out about the crop here and there, whether it’s better or worse than previous years. Are the two types of reports related? Is the upward trend in coffee prices related to smaller crops and therefore a boost in price? After all, one condition that’s NOT in dispute is the growth in demand, with China’s sudden coffee craving being the biggest source of this growth. If supply is indeed down and demand is indeed up, then it’s a no-brainer that price will increase. Except there’s one small detail, a detail involving a difference in opinion between the buyers, the suppliers, the speculators and the producers. Each places the blame for the increase on the other. So what’s the truth? The fact that the retail price of coffee has increased isn’t in dispute. The Bureau of Labor Statistics in fact found that in July, coffee was up 20.7 percent over July of a year ago. If you talk to a spokesperson for the International Coffee Organization, they’ll tell you that global production of bags was up 8.1 % over a year ago. They’ll also tell you that demand grew at a faster rate, so producers are just not keeping up. On the other hand, ask a supplier, and he probably will tell you that the demand and supply tension has been going back and forth, so there’s more to it than that. He might add that the speculators used that pattern as a reason to predict future prices will be higher. The brew thickens, as buyer Howard Schultz, no slouch in the coffee business, stated he had no trouble buying beans in March, concluding there was no such shortage in supply. A Dunkin Donuts buyer, another top retailer, echoed Schultz. They both felt speculators caused the price increases, not supply vs demand. Indeed, even a commissioner on the Commodity Futures Trading Commission (CFTC) commented, “Speculators have influenced coffee prices in commodity markets in a way that isn’t consistent with the fundamentals of supply and demand.” So who IS to blame? Is it the supplier, who’s not supplying all that’s produced; or the producer, who is not keeping up with demand; or the speculator, who’s betting that demand will be so much higher than supply that prices will increase radically? Yes, it can be documented that demand seemed to rise faster than supply, but then, two top buyers – Starbucks and Dunkin Donuts – experienced no shortage of supply this spring. Maybe the top suppliers were able to buy their beans, but smaller buyers were not? Regardless, it’s not crystal clear just what is driving up the prices for future coffee on the market. If new production comes online with bumper crops, and demand levels off, the speculators may lose and the consumer win. Only time will tell. In the meantime, brew carefully to get the most brew from the beans.



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