Rumors of a Bubble in Coffee Prices Are All Froth

Remy Merritt  |

Intelligentsia. Four Barrel. Verve. The past few years have been huge in the world of coffee, and as new artisanal coffee roasters pop up across the nation, coffee popularity is still on the uptick. The boom in startup shops corresponded to an agreeable drop in the price of coffee beans, which was on a steady decline from October 2012 to December 2013.

A drought in Brazil has meant stores of the Arabica variety of coffee beans have plummeted, and coffee futures in the commodities market have skyrocketed as a result. The question is: will this drought force all coffee roasters — large or small — to raise in-house prices?

Artisanal coffee rosters differ greatly from the industry giants in the volume of beans purchased and the particular farms with which the companies choose to partner. Smaller roasters pride themselves on fresh, small-scale purchases to ensure premium flavor, and often trade directly with farmers to support non-industrial and fair farming practices.

Interestingly enough, though, there isn’t a major difference between the beans used at Portland’s 49th Parallel roastery and those roasted for Starbucks. Most roasters tend to use the Arabica bean variety, generally considered more palatable than its cousin, the Robusta bean. The name “Robusta” should give you a clue as to which coffee variety is the sturdier. The tradeoff for flavor is fragility; Arabica beans are far more sensitive to weather changes, pests, and disease than Robusta.

While Arabica production is strained due to the drought that hit Brazil early this year, recent rains in March and April have helped to recover dehydrated coffee bushes. Still, the future remains uncertain as the onset of El Nino and Brazil’s dry season threaten to further damage Brazilian crops.

The market is responding as it does with all negative news by selling. What was once a bull market seems to have peaked in May 2014 and is slipping into bear territory. Analyst reviews are mixed: Jonathan Camarda of Camarda Wealth Advisory Group told the Wall Street Journal he felt it was time to liquidate, but Matt Forester, chief investment officer of CFG Asset Management expects coffee to hold its strength relative to other soft commodities.

For larger companies like Starbucks (SBUX) that purchase their stocks of coffee well in advance, this rise in coffee prices may not translate into a jump in drink prices at stores across the country. These companies are working through their backstock, holding off purchasing in the expectation that Brazilian coffee production will turn around before stores run low.

J.M. Smucker (SJM) , currently the largest U.S. coffee roaster, held off on price hikes until just this past week. Folgers, a staple in many American kitchens and hardly considered artisan, has been bumped up in price by 9 percent.

Interestingly enough, the cheaper instant coffees like Folgers are often blended with Robusta beans to keep prices low. This is not the first time J.M. Smucker has increased the cost of Folgers; prices have fluctuated since 2010 based on fragile Arabica crops.

For the small artisanal shops that pride themselves on fresh, hand-blended beans, Arabica price bumps may be partially shifted onto consumers. While the price of beans is on the rise, roasters and shops expect to absorb most of the increase themselves. If price hikes ensue on café menu boards, they’ll only be in the range of 5 to 7 percent, the equivalent of $0.15-0.21 for a $3 latte.

However, small independent roasters may begin to find that at $4 for a basic cup of drip brew, individual pour-over coffee is a treat reserved for special occasions. The price for an “artisanal” cup of coffee is already four times higher than the standard 7-11 dark roast.

The bottom line remains: the world seems to need its coffee almost as much as it needs oil. While price hikes are undesirable, it is unlikely that there will be a long-term drop-off in gourmet coffee consumption. The coffee craze is far more sustainable than the waning cupcake fad and the most recent trend of artisanal toast — while a $5 cupcake or a $7 piece of toast isn’t exactly a daily necessity, most people consider themselves nonfunctional without their morning caffeine jolt.

It is relevant, though, to note that artisanal roasters don’t play the futures game. While J.M. Smucker, Starbucks, and the like see their profits affected by the fluctuating soft commodity market, small roasters rely on direct consumer purchases for profit. Because patrons of these stores consider the product entirely differentiated from industrial coffee manufacturers, it is unlikely that the popularity of small, quality roasters will lose steam any time soon.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:

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