Coffee prices get jolt in jittery economy
By Pete Evans, CBC News
Posted: May 25, 2012 5:05 AM ET
Last Updated: May 25, 2012 10:33 AM ET
The slowing global economy is having an effect on the price of coffee, as cash conscious consumers ditch their latte habits in favour of plain old cups of joe.
The two most commonly produced varieties of coffee in the world are arabica and robusta.
Drawing their name from the Arabian mountains of Yemen and Ethiopia, arabica beans tend to be of higher quality and are processed more carefully. Because they only grow at altitudes higher than 610 metres above sea level, they're a lot more expensive to harvest but are prized for their taste — Arabica’s spot price hit a 34-year high north of $3 per pound in April of last year.
While most commercial coffee brands use a blend of the two, robusta beans are easier to harvest and more disease-resistant — which tends to make them cheaper, although most connoisseurs believe they produce an inferior product.
'People decided it was costing too much to gas up their body.'—Commodities watcher John Stephenson
"Robusta has genes that can give it a wet cardboard, rubbery smell and taste," says John Rapinchuk, the chief financial officer of San Francisco-based Knutsen Coffees Ltd.
As unappetizing as that sounds, demand for robusta beans has soared this year, as consumers downgrade their coffee budgets.
Arabica shipments are down by eight per cent over last year’s level, while robusta exports are booming — up 10.4 per cent from where they were a year ago.
That's pushing the price for robusta higher, with the price of beans increasing 22 per cent since January to $1.17 US per pound.
Consumption of the higher-end arabica beans in rich European nations, meanwhile, has cratered since January due to what the International Coffee Organization charitably describes as "macroeconomic turbulence."
"The retail buyers see it as too expensive so they're moving to cheaper options," says John Stephenson, a portfolio manager with First Asset Investment Management Inc. in Toronto, who watches the commodities market closely. "After arabica was so expensive in 2011, roasters moved away from 100 per cent arabica blends and started using more robusta."
Price curve inverting
Needless to say, the price gap between the two varieties is in unfamiliar territory. As the chart above shows, prices of the two beans are heading in opposite directions. What was normally a gap of more than $1 is down to 70 cents. And some experts say it could soon drop to as little as 50 cents once a bumper arabica crop from Brazil is harvested this summer.
Coffee is both the best and worst performing commodity investment of the year, according to Bloomberg data. The spot price for higher-end arabica beans has fallen to 77 per cent of what it was at the start of the year, while normally cheap robusta prices are 22 per cent higher.
“We used to think $2 was the floor for arabica but we’re at $1.75 right now,” Rapinchuk said. “That Brazilian crop is hanging on prices."Coffee fruits in Indonesia's North Sumatra province are harvested. Changing consumer demands have shifted coffee prices this year. (Y.T. Haryono/Reuters)
The erosion of demand by coffee drinkers discovering they can tolerate cheaper (and more caffeinated, it should be noted) robusta hasn't helped. "People are saying, 'I need my coffee but maybe I don't need to buy it at Starbucks,'" Stephenson says.
Coffee drinkers are consuming more coffee than ever, with the International Coffee Organization estimating that 137 million bags of coffee was consumed in 2011 worldwide, up 1.7 per cent from 2010. During the last 12 years, consumption has increased at an average annual rate of 2.5 per cent.
However, consumers are scaling down the amount they’re willing to spend on coffee, it seems.
J.M. Smucker Co. and Kraft Foods — makers of Folgers and Maxwell House, respectively — have each cut their prices twice since August. And robusta-based coffee is becoming popular in emerging markets in Asia.
"Right now robusta still provides a cheaper option for roasters’ blends, as they try to capture emerging market customers as well as cater to the lower-end segment at the traditional markets,” commodities analyst Kona Haque told Bloomberg recently.
The robusta bean’s newfound popularity is going to increase its price at some point, but for now, consumers used to paying premium prices could be the big winners.
"It's a bit like how high gas prices holds down driving," Stephenson says. "People decided it was costing too much to gas up their body."
Top News Headlines
- Obesity now recognized as a disease
- The American Medical Association has voted to recognize obesity as a disease, while doctors in Canada say they also treat it as such. more »
- Neil Macdonald: Washington's obsession with leakers
- Julian Assange and Edward Snowden are just the most prominent targets in an all-out legal and propaganda campaign that America's security apparatus is mounting against leakers everywhere, Neil Macdonald writes. more »
- Caregiving dads stigmatized at work suggests UofT study
- Fathers who participate in child rearing and housework are likely to be labeled slackers and "failed men" at work, according to a study spearheaded by researchers at the University of Toronto and Long Island University. Are active dads the norm at your workplace? more »
- Dolce and Gabbana convicted of tax evasion
- A Milan court has convicted fashion designers Domenico Dolce and Stefano Gabbana of tax evasion, finding the pair guilty of failing to declare €1 billion ($1.37 billion Cdn) in income to authorities. more »
Latest Business Headlines
- Poloz urges 'stability and patience' in 1st public speech
- In his first public remarks since being named governor of the Bank of Canada, Stephen Poloz said the central bank will keep its focus trained squarely on keeping inflation in check. more »
- World's wealthy richer than ever
- The investable wealth of the world's richest people reached a record high of $46.2 trillion US in 2012, a report by RBC Wealth Management and the consulting firm Capgemini has found. more »
- Orascom withdraws bid for control of Wind Mobile
- Orascom Telecom Holding announced Wednesday that it is pulling back its application to acquire full control of Wind Mobile Canada, in which it already holds a partial interest, saying it made the decision after a review process and discussions with the federal government. more »
- Loblaw testing small discount-store format in Calgary
- Loblaw Cos. Ltd. , Canada's largest grocer, is trying out a new discount small-store format in Calgary in a bid to attract more customers in urban areas. more »
Lang & O'Leary Exchange
The data on this site is informational only and may be delayed; it is not intended as trading or investment advice and you should not rely on it as such.
- Bob Rae quits as MP in 'very emotional' decision
- 2 men jailed in Dominican wedding fight back in Canada
- B.C. teacher duct-taped students' mouths
- Wearing a mask at a riot becomes a crime today
- Half of First Nations children live in poverty
- Obesity called a disease by U.S. doctors group
- Huge ancient city at Angkor Wat revealed by lasers
- Are e-cigarettes safe to puff?
- How open is Ottawa's new 'open data' website?