More Expensive Cup of Coffee? Beans Soar to 2 ½ -Year High ...
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By ALEXANDRA WEXLER
CONNECT
Updated Oct. 6, 2014 3:45 p.m. ET
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The sharply rising price for coffee beans means that morning cup of joe could soon get more expensive—again.
Arabica-coffee prices surged to the highest level in 2 ½ years Monday as dry weather in Brazil raised concerns about next year’s crop.
Coffee prices have nearly doubled this year, with thin rainfall clipping output from the world’s biggest coffee grower and fueling worries about how alreadyweakened trees will fare next season.
Brazil is the source of one-third of the world’s coffee and about half of the world’s arabica beans, which are prized
As the price of coffee beans spikes, it should follow that your morning cup of joe is about to get more expensive -- again. WSJ's Alexandra Wexler reports on the News Hub with Sara Murray. Photo: iStock/Eva-Katalin.
for their mild flavor and used in gourmet blends.
Consumers were already hit with a wave of price increases this summer by big roasters such as Starbucks Corp. SBUX -0.98% and Folgers maker J.M. Smucker Co. SJM -0.16% Now, traders and investors say the return of dry weather in Brazil could keep prices high for years to come, particularly if the perennial trees are damaged.
“Brazil is to the coffee market what Saudi Arabia is to the oil market,” said Harish
Sundaresh, commodities strategist at Loomis, Sayles & Co., a Boston investment adviser that manages about $220 billion. “If Brazil falls off a cliff, it would definitely get the market worried.”
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More Expensive Cup of Coffee? Beans Soar to 2 ½ -Year High ...
http://online.wsj.com/articles/coffee-futures-soar-to-2-1-2-year-...
Coffee prices have risen sharply as dry weather in Brazil raises concerns about next year’s crop. Anadolu
Agency/Getty Images
Mr. Sundaresh has placed bets in the futures market that benefit from rising coffee prices and expects arabica prices to trade between $2 and $3 a pound next year.
Arabica coffee for delivery in December ended Monday up 6.9% at $2.2080 a pound, the highest level since February 2012 on the ICE Futures U.S. exchange. The contract rallied as much as 9.2% during the day.
In June, J.M. Smucker became the first major U.S. roaster in nearly three years to lift coffee prices, announcing an average 9% increase in the cost of popular supermarket brands such as Folgers and Dunkin’ Donuts. Kraft Foods Group Inc. and Starbucks followed suit with their own price increases.
KRFT +0.01%
“If there isn’t any rain, then certainly Starbucks and those guys will be feeling some pain,” said Jonathan Camarda, executive wealth manager at Camarda Wealth
Advisory Group. Mr. Camarda, who manages about $210 million, is considering adding to shares he first bought in August in the iPath Pure Beta Coffee exchangetraded note. “You’re looking at definite further upside” for prices, he said.
Smucker and Kraft couldn’t be immediately reached for comment. Starbucks declined to discuss pricing plans or strategy for this article, citing competitive reasons.
However, some traders say thin demand from roasters for the beans at current prices could quell the rally. Many roasters put off increasing their prices by running through stockpiles of less-expensive beans.
“You still don’t have significant demand out there,” said Rodrigo Costa, head of the coffee desk at brokerage Newedge in New York. “It’s too soon to really have an idea of the damage.”
Starbucks said in a July earnings call that it had already fixed prices for 60% of its coffee needs in 2015.
Will Slabaugh, a vice president at Stephens Inc. who covers Starbucks, said at this point the company has locked in prices for 2015 and is beginning to do so for the following year as well. Mr. Slabaugh said that “2016 is looking to present more and more of a headwind.”
Price increases may not quickly reduce demand, however. American consumers are unlikely to cut back on coffee consumption until prices rise by at least 30%, said Thom
Blischok, chief retail strategist at Strategy&, a consulting firm formerly known as Booz
& Co. He said manufacturers and retailers are likely to change the size of coffee packaging to stave off further price increases.
“Coffee is one of these American staples,” Mr. Blischok said. “Giving up their cup of coffee is going to be pretty tough to do.”
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Enlarge Image
Coffee consumers were already hit with a wave of price increases this summer. Agence France-
Presse/Getty Images
The recently ended coffee harvest was
Brazil’s smallest in three years, after the main growing region experienced its worst drought in decades in the spring. In
July, unseasonable rains caused some trees to flower early for the next year’s crop. But dry weather followed, causing some of those trees to drop their flowers, and others to not flower at all. That will prevent development of the coffee cherries that contain the seeds that are roasted to make beans.
“With no significant rainfall in September, an alarming situation with substantial losses for 2015 is projected,” Brazil’s National Coffee Council, a growers’ group, said last week.
Next year is an off-year in Brazil’s two-year coffee cycle, meaning production would already have been lower without the unusual weather. Global coffee production could fall short of demand in the season that began Oct. 1 by the largest amount since the crop year ended in 2006, the International Coffee Organization said in July.
“Brazil is on target to potentially have two deficit years,” said Brian Kurtzer, senior portfolio manager at Durham, N.C.-based Verity Asset Management, which manages about $410 million. “The path of least resistance is still on the upside.”
Arabica coffee is the only commodity that Mr. Kurtzer is betting on to increase in price, he said. He bought shares in the iPath Dow Jones-UBS Coffee Subindex Total Return exchange-traded note, an investment product that tracks coffee prices, in August and added to the position last month.
—Leslie Josephs contributed to this article.
Write to Alexandra Wexler at alexandra.wexler@wsj.com
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Newest
Madelene Teperson
Yet another Obama triumph.
2 hours ago
Alonzo Quijana
" Global coffee production could fall short of demand in the season that began Oct.
1..."
In a socialist economy, yes, I can see how a commodity can "fall short of demand," but in a basically free market? A lower supply means higher prices and demand immediately adjusts downward. Did I miss something in Econ 101?
5 hours ago
John Falck
@ Alonzo Quijana Yup, you missed the time it takes for production. If I remember correctly, arabica coffee trees take 3 to 5 years before they produce fruit, and about 7 years to mature.
On the other side of the equation, my daily coffee consumption varies minimally.
4 hours ago
James Couture
@ Alonzo Quijana Quibble quibble.
4 hours ago
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