Article

Green coffee: What's driving the increase?

The recent increase in green coffee has its roots in many factors. Here’s a look at a few reasons why.

June 9, 2011 by Valerie Killifer — senior editor, NetWorld Alliance

The recent increase in green coffee has its roots in many factors. The situation is not likely to improve anytime soon as chains such as Starbucks and Dunkin’ Donuts are increasing the price of their retail coffee lines – in some instances by as much as 17 and 38 percent.

This is all happening while consumers are demanding higher quality coffee – and more of it – than ever before. For fast casual operators, who have made concerted efforts to improve their in-store coffee experiences, the increases couldn’t come at a worse time.

Here’s a look at a few of the issues surrounding the price of beans:

Futures & traders

Over the past year, the cost of raw (green) coffee has gone from about $1.30 per pound, where it was in June 2010, to approximately $3.10. One driver of the increase has been the futures market, which has seen an uptick in investments because of an increased interest in commodities.

While there were commodities investments five years ago, the volume of that interest was on a much lower scale, said Randy Layton with Boyd’s Coffee Co.

“As investors looked for ways to diversify their portfolio, they got more interested in commodities. They’re looking for better returns and diversification, and are bringing money into smaller markets,” Layton said.

The cost also is being impacted by what he calls “trader’s disposition” – when people buy and sell coffee based on their general feeling of the marketplace. It’s a buyer’s psychological approach to the market, he said.

The approach, and the impact of the futures market on prices, had Starbucks CEO Howard Schultz criticizing “hedge funds, index funds and other ways to manipulate the market.”

Late last year, Schultz said he believed the increases were a direct result of “extreme speculation” rather than normal market forces. However, Starbucks itself has locked in coffee prices for the year, which also involved the purchase of coffee futures.

The company also will raise the price of its bagged coffee – effective July 12 – by 17 percent in retail locations.

Supply & demand

Another aspect of the market impacting cost is supply and demand. Worldwide, a boost to the coffee market has created an imbalance as higher-end Arabica coffee is becoming less available than beans offering a lower-taste profile.

Consumers have much more sophisticated palates when it comes to their coffee preferences than in years’ past, as validated by the popularity of Starbucks and the complete overhaul of McDonald’s coffee line.

“The openings of McDonald’s McCafe, Dunkin Donuts and other quality restaurant chains have done a good job of improving quality over the past few years, and that’s putting more demand on better coffees,” Layton said. “Those guys have done a good job of improving their products. McDonald’s went up quite a bit in quality for only a very small cost increase. Starbucks is a good marketing company and they’ve built stores well and managed the business well. There’s really not a great way to get more out of their coffee profit-wise other than what they’re doing.”

The majority of coffee exported to the United States comes from about 22 countries. Layton said so far, the Boyd’s team has traveled to Costa Rica, Sumatra and East Africa, and they are heading to Brazil in two weeks.

Many of the farmers Layton has talked with said they have not capitalized on the price increases, mainly because their products went to market prior to the cost increases. However, that could change.

“This year, farmers expect to sell at the high price. So, every farmer thinks they have a pot of gold underneath their coffee tree and they’re just waiting for the right moment,” Layton said. “But they can’t sit on their coffee for too long.”

While roasters also have yet to pass on their price increases, Layton believes more price hikes are around the corner.

“At some point roasters are going to say we can’t absorb this anymore,” he said. “Many folks in the industry have had to change how they do business because they can hardly afford to be in the coffee business anymore. Large or small, their credit lines are being stretched and affecting how they do business. From the farmer’s perspective, they don’t have credit to begin with, so this has really hurt them. It’s changed where coffee has come from.”