Wholesale coffee prices hit 4-year high

Crop, weather warnings from Brazil spur increase

December 21, 2004|By John Schmeltzer | John Schmeltzer,CHICAGO TRIBUNE

Wholesale coffee prices perked to a four-year high last week after warnings that an ebb in crop cycles compounded by weather problems in Brazil, which produces nearly 30 percent of the world's crop, could cut the harvest significantly next year.

For American consumers, the increase set off rapid-fire price increases as large as 14 percent by the nation's three largest coffee roasters - Folger's parent Procter & Gamble Co., Maxwell House-maker Kraft Foods Inc. and Sara Lee Corp., which makes Hills Brothers, Chock Full O'Nuts and MJB.

The upward pressure is expected to continue, with coffee futures jumping to more than $1 a pound after the forecast of supply shortages by the London-based International Coffee Organization. March futures on commercial grade coffee closed at $1.04 per pound Friday, up more than 10 percent from where it started the week at the New York Board of Trade. As jolting as the sudden increases may seem, it's actually a bit of a correction from a period of exceptionally low prices.

In the past seven years, the average wholesale price for coffee typically hovered between 80 cents and $1.25 per pound. It hit a high of $2.50 a pound in 1994 and 1997 when frost hit Brazilian crops. But since 2001, when Indonesia and Vietnam increased production, wholesale coffee prices had been near record lows, or about 40 cents a pound.

Terry Roggensack, agricultural analyst for the Hightower Report, a Chicago commodities research firm, said prices have been so low during the past three years that some coffee growers abandoned their farms. They weren't being paid enough to cover their costs of properly fertilizing and caring for the trees, he said.

And that may have contributed to the poor start for this year's crops.

"The first flowering of blossoms [in Brazil] did not go very well, and as a result, the production forecast came in below expectations," Roggensack said.

The Brazil Agriculture Ministry estimated the country would produce 30.7 million to 33 million bags, the 132-pound units by which coffee is traded. That's down from this year's 38.6 million bags. Worldwide production is expected to total 106 million to 108 million bags, down from 114 million from this year.

That's tough news for the coffee market, which has thinner inventories this year because of the cyclical nature of coffee production. Coffee trees typically produce heavily one year and more lightly the next. Last year's crop should have been a large one but a drought and then flooding hurt the Brazil crop just as the beans were beginning to ripen.

As a result, prices for coffee are up more than 60 percent because of a belief that roasters are going to have to dip more deeply into existing inventories.

The dipping appears to have begun already. U.S. warehouse stocks, which have held steady in recent years, fell by 234,000 bags last month to 5.17 million bags, according to the U.S. Green Coffee Association.

Also helping drive prices higher is a resurgence in demand among American consumers, according to Joseph DeRupo of the New York-based National Coffee Association.

He saidconsumption rose this year to an average of 3.4 servings per day from three cups a day among regular coffee drinkers.

The big growth in consumption is being driven "by a new type of coffee drinker, the occasional drinker," DeRupo said. "People now are looking to it not only as a morning staple, but as a treat or event, and enjoying a wider variety of coffee options."

While Folgers, Maxwell House and Hills Brothers still control 80 percent of the U.S. coffee market, DeRupo said, he expects that will change. Surveys conducted by the coffee association show that 54 percent of Americans say they consume gourmet coffees and commercial coffees, he said.

Coffee bean importer Robert Fulmer, owner of Emeryville, Calif.-based Royal Coffee Inc., said the price spike could hurt the big roasters that have heavily promoted cheap coffee during the past three years.

Even though the run-up in price began in September, the big three have continued to slash prices. This week, a 39-ounce can of Kraft's Maxwell House was on sale for $3.99 in some grocery stores, and another chain was promoting Hills Brothers for the same price. Both have a suggested retail price of $7.49 a can.

Fulmer said that the recent increase in prices, which won't immediately hurt the specialty and gourmet roasters, primarily would hit those roasters that "are competing on price only."

Specialty coffee roasters such as Starbucks will see "their prices go up a little more and they maybe make a little less, but they have been paying higher prices for their coffee than the commercial market right along," Fulmer said.

The Chicago Tribune is a Tribune Publishing newspaper.

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