A worse than expected drought in Brazil is expected in the coming weeks, causing the price of coffee to rise in expectation of a harvest shortfall.
Brazil’s Arabica crop is expected to fall short as a result of the drought, causing the price to shoot up more than 10 percent on the trading day. Coffee futures went up to $2.29 a pound, their highest price since 2012.
Harish Sundaresh, commodities strategist at Loomis, Sayles & Co, told Marketwatch that “Brazil is to the coffee market what Saudi Arabia is to the oil market.” And that's even a bit of an understatement: Brazil supplies 40 percent of the world's coffee, while Saudi Arabia only accounts for approximately 18 percent of the globe's oil reserves.
As Saudi Arabia has historically benefited from high oil prices, so will Brazil benefit from the coffee price surge. And coffee-loving countries that import large quantities of coffee bean like the US will undoubtedly see the price of an average cup of coffee rise in the near future.
While the amount of the price uptick for the typical cup of coffee is not yet known, In August 2014 Starbucks (SBUX) raised the price of its coffee 8 percent per pound, and between 5 and 20 cents per drink. At that point, coffee was less than $2 a pound.
After touching $3 a pound in 2011 as a result of poor harvests in South America, coffee futures bottomed out to $1 a pound before surging at the beginning of this year. Major coffee retailers like Starbucks and Green Mountain Coffee Roasters (GMCR) have scrambled to keep prices consistent while dealing with an erratic commodity that has been subject to wild swings in the last three years.
It seems however that while the price of coffee will most likely rise if future prices remain high, customers will adapt quickly. Like gas prices, if every retailer raises prices American consumers will accept the uptick, as they did with the Starbucks price hike.
What could change this? Rain. If the drought in Brazil is alleviated, the Arabica crop will hit prior expectations and the wholesale price of coffee will fall. Otherwise, consumers can expect to see another increase in tyour morning cup of joe.
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