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Rising Coffee Prices - Cause & Effect

This may surprise you—coffee prices have been this high before. The last time was 1997. The reason then was the Certified Stocks of coffee in US warehouses had fallen to only 321 bags. Think of Certified Stocks like gold in Ft. Knox. It is what underlies the commodity trading market. There was a definite shortage of coffee and the price shot up. Only two years ago, US certified stocks were approximately 4.7 million bags. Today that number is less than 1.6 million and falling at a rate of 50-100,000 bags every month, with virtually nothing coming in to replace it. Looming shortage? Seems that way and the market is responding to that lop-sided supply/demand curve by driving prices higher. But this time there is a lot more behind the rise. Here are some other things driving coffee prices higher:

Climate change: Weather in coffee producing countries seems t have become less predictable and more volatile. Last year's Kenya crop was poor due to weather problems. In 2009 Colombia lost a large portion of its crop because of excessive rain. This year Sumatra, which relies on a predictable dry season which begins in late November to allow the coffee tree flowering to "fix" and set the stage for the next crop. This year the rains continued for 5 more months. Costa Rica reports this year's crop will be approximately 1 million bags less than last year because of excessive rain. Kenya is experiencing a draught. The Kenya Coffee Exchange recently announced that coffee auctions there will be held every two weeks instead of weekly because of the lack of coffee entering the market. Anomaly or long term? Politics aside, this seems to be occurring repeatedly, and the impact on the coffee crop is huge.

Industrialization, population shift and urban sprawl: Particularly in Costa Rica and Kenya, some of the best producing coffee farms are being replaced with suburban housing and industry. These farms won't be back. Increasing populations need increasing housing. It is a continuing and growing trend in coffee producing countries. An additional pressure is occurring as the children of coffee farmers are more and more opting for life in the city. Farm labor is getting harder to find in some areas. Guatemala has reported that coffee labor costs have risen 200% since 2001.

Aging trees: When coffee prices fell to absurdly low levels at the beginning of the 21st Century, farmers were getting less money for a pound of coffee than it cost them to produce it. They had no funds to plant new trees or purchase new equipment. Again using Guatemala as an example, 35% of the producing coffee trees in the country are 15-25 years old, placing them well past their prime production age. Another 25% are over 25 years old, making it difficult to increase production. Guatemala is not unique with this problem.

Increased demand: The demand for specialty grade coffee is rising every year, although production is falling. Brazil is one of the few countries that will produce more coffee this year, but it is also internally consuming more. This year Brazilians will drink more coffee per capita than Americans. Other coffee producing countries are reporting similar consumption growth. Coffee consumption in countries more noted for tea drinking like China, Russia and India all report booming coffee consumption. Coffee demand is also increasing in the traditional markets of the US and Europe.

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