Coffee Prices Set to Rise on News of Droughts

We’ve enjoyed relatively low prices on coffee over the last couple years, with production increasing and a relatively uninterrupted supply. The world’s second most traded commodity has seen steady prices, even dropping to fairly low levels over the last decade, but that’s about to change.

Brazil, the world’s largest coffee exporter, is anticipating the worst drought in decades and anticipating a small and weak crop of coffee beans including Brazil Santos. Because Brazil is the world’s largest grower, even small changes in the supply affect the industry as a whole. Over the past year for example, prices have nearly doubled, but this increase in costs has yet to be reflected in the market.

That’s because most coffee importers and roasters buy their coffee in bulk, in advance. With a couple months of inventory on hand, temporary surges in the coffee bean prices can be avoided, as long as they come down again before it needs to be re-ordered. With the way the market is trending and predictions from the coffee exporters, we’re not likely to see a drop any time soon and prices will begin changing over the next couple months. On the flipside, drops in price can take an equal amount of time to be reflected in the market, if for example there’s a higher-than-expected crop yield.

We’ve started seeing signs of the higher prices from suppliers, with notices being sent out and price lists updated.

The news is coupled with an expected extreme El Nino this year, which is linked to extreme weather and droughts throughout the world.

How Much Will The Price Change?

It’s difficult to say right now. When going through with a price increase, coffee bean wholesalers and roasters typically absorb some amount of losses up until the market as a whole starts increasing prices. When it looks like the change will be long-term (12 months+) instead of a temporary blip, most companies will try to issue a single increase that accounts for any anticipated further increases, instead of multiple increases as time passes.

Some analysts are calling for price increases of up to 25% by mid 2014 according to the WSJ. While current prices having gone from about $1.25 to $2.15 recently amount to an almost doubling, the change to the retail price will more closely reflect the absolute dollar-value. While it’s just about a dollar difference currently, as recently as May 2011 the price hit a high of around $3.00 and it could repeat or even exceed that time period. In the end, coffee prices could rise by as much as $2.00-$3.00 per pound for consumers – in line with the predicted 25%.

Part of the increase in costs will be from higher prices for the coffee commodity, and part of the increase in costs will come from buying competition, as the demand remains relatively constant and supply dwindles.

Here at BuyCoffeeCanada we like to stay open and honest, and will inform our existing customers of price increases instead of simply applying them and hoping no one notices. While we can’t accurately predict what will happen (a lot depends on the harvest starting in mid-May in Brazil), we will remain competitive in the market and countinue offering only the high quality Arabica coffees that we’re known for.