Get Ready To Pay More For Coffee Amid Drought In Brazil
NEW YORK ( MainStreet) Prices for coffee beans have been on the rise, which could cause prices to increase at a store near you.
On February 20, arabica prices for futures contracts due in May reached $1.6945 per pound, after settling at $1.5485 just two days prior. While these prices are far from 2011's peak near $3 per pound, the speedy rise is likely to trickle down to consumers.
Coffee prices have been increasing amid a drought in Brazil, the world's largest coffee producer, which has threatened coffee crops in the region. Brazil is known for its abundance of arabica coffee, a premium bean used in upscale coffee shops. A shortage of coffee would not only put upward pressure on coffee prices, other coffee producing countries such as India or Vietnam, could see increased demand.
Coffee companies tend to lock in prices ahead of time, sometimes one year in advance, in an effort to hedge against volatility in the commodities market.
"Historically, the coffee brands in supermarkets tend to be quicker to adjust prices based on the underlying coffee commodity, whereas restaurant players take longer," says Williams Capital analyst Marc Riddick.
If the coffee continues to rise at a fast pace over a short period of time, brace for increases in the prices of ground coffee at your local supermarket.
During the 2011 spike in coffee prices, The J.M. Smucker Company (SJM) announced multiple price increases, to the tune of an 11% increase. The company produces well-known supermarket coffee brands such as Foldgers, Dunkin' Donuts and Millstone. In 2011, coffee crops in Brazil were damaged by frost.
As for a cup of coffee at your local coffee shop, premium brands such as Starbucks (SBUX), Green Mountain Coffee Roasters (GMCR) and Dunkin' Donuts parent Dunkin' Brands Group (DNKN), have higher margins, which act as a buffer should coffee prices increase.
While your morning cup of joe at the coffee shop may not see a price increase just yet, you may notice a slight increase in the bitterness of your coffee. If Brazil continues to suffer from this drought, retailers may start to shift the blend of their coffees, adding more robusta coffee, rather than the higher-end arabica, which is the bean most impacted by this crisis.
"The gap between arabica and robusta had shrunk to a historic low, so companies didn't have to spend much more by using the more expensive arabica bean," Riddick adds. "Now as the spread increases, the blend that companies use may lean more towards robusta."
While coffee prices have been on a sharp incline lately, if prices start to flatten over the next few weeks, coffee manufacturers have other solutions, aside from a burdensome price increase.