As if getting up in the morning wasn’t hard enough, your daily java infusion now costs more. Thank the weather patterns in Brazil for this unpleasant news.
A significant drought in eastern South America produced one of the hottest and driest coffee-bean growing seasons in many years. Flooding followed, making the surviving crops harder to harvest. Combined with a previous blight of coffee rust affecting Central American supplies, this bit of bad weather led to a short supply of coffee beans in early 2014.
As a result, commodity prices for coffee beans soared, making coffee one of the best investments of 2014 – at least in the first half of the year. Two coffee ETFs (Exchange Traded Funds) are listed in Morningstar’s top ten performing ETFs year-to-date.
The iPath Dow Jones-UBS Coffee ETF is up almost 43% after reaching even higher levels in the first quarter. It is now in a slow decline but still performing well. iPath Pure Beta Coffee is up a little over 39% for the year, with a similar performance graph to the Dow Jones-UBS ETF.
However, the situation has turned out to not be as dire as first predicted. Growers and dealers in Brazil had a significant backlog of coffee beans warehoused from the previous year’s crop, keeping coffee exports relatively steady.
According to CeCafe, a group of coffee exporters, coffee exports from Brazil actually increased in the month of June by 21% over the previous June, and exports increased by 9.9% in the growing season for 2013-2014 compared to 2012-2013. Not coincidentally, coffee commodity prices were at a six-and-a-half-year low last year.
With the panic partially quelled, coffee futures have been falling – hitting a five-month low from the February peak. Coffee prices are correspondingly lower, down 24% from an April peak. Until the next growing season arrives to reset expectations, most expect that prices for Arabica coffee beans will continue to fall. As a commodity investor, if you missed out on the peak, you probably should not get in now.
Wait, you say as the consumer… if futures and prices are dropping, why does my coffee cost more now? It is the time lag in inventory. Higher-priced beans are now working their way through the system, and while prices are slowly dropping now, they are still up by 47% this year to date.
If you buy your coffee at the grocery store, you have already seen the hit in many products. In June, J.M. Smuckers announced a 9% price increase in the Folgers brand of bagged coffee, and Starbucks announced an 8% price increase on their supermarket coffee products (roast and ground). Other brands are likely to follow suit depending on their foresight in negotiating their commodity coffee prices.
Starbucks has actually done well on that point – their commodity coffee supply prices are locked in far into 2015. Even so, they are raising prices slightly in their stores – mainly because they can. Major competitor Dunkin Donuts had no choice but to raise their prices in June, since they are in a less favorable position on coffee supply prices.
As a consumer, you can probably expect an eventual drop in coffee prices at the grocery store, but it will take a good growing season to stabilize the supply. Those of you who buy at coffeehouses are probably going to deal with the lasting effects – prices don’t often drop there.
If you’re a java junkie who just can’t stop, we suggest drinking your coffee black. To make matters worse, milk and sugar prices are rising as well!