(Originally published here.)
The price of arabica coffee, which is used to make most of the brews people buy from coffee shops and restaurants, has jumped 70 percent since the end of January. This raises two questions: What’s going on? And what does it mean for you?
One plausible explanation is that traders are worried about the size of the Brazilian harvest, thanks to a particularly nasty drought. That’s a big deal, because Brazil grew about 29 percent of the world’s total coffee exports last year and an even higher share of the prized arabica species. Sure, there are alternatives: Robusta beans are about half the price of arabica, but they’re mostly used for instant coffee because of their bitterness.
(Let’s pause here to note that coffee beans aren’t really beans at all, but the seeds of a fruit that looks sort of like a cherry, in case you were wondering.)
Another possibility is that speculators are piling into coffee futures simply because it started going up a lot, along with almost every risky financial asset. Trading volume in arabica coffee futures started surging to record highs about the same time emerging market assets stopped plunging in value — the Turkish lira hit bottom against the dollar on Jan. 24, for example.
Here’s something else to support that theory: Shares in Tesla Motors Inc., whose bubbly quality makes it a good proxy for investors’ irrational exuberance, have been moving almost in tandem with the price of arabica coffee over the past six months. That’s not exactly what you would expect if Brazilian droughts were the most important thing going on.
Whatever the reason, the good news is that this spike in coffee prices shouldn’t affect consumers too much — for now, anyway. You could be forgiven for worrying: The coffee sold by Starbucks Corp.,McDonald’s Corp. and Dunkin’ Brands Group Inc. comes from arabica beans. Luckily, the raw cost of the bean is only one piece of the total cost of a cup of joe, which should shield consumers from the wildest price springs. That may help explain why consumer prices of roasted coffee increased by only about 25 percent when arabica prices doubled back in 2010.
The big buyers also seem willing to eat some of the price increases by accepting narrower profit margins, instead of passing all of those swings onto jittery consumers. Starbucks’s annual reports make it clear that movements in the cost of coffee, tea and sugar affect their earnings results each year, although not by much.
A representative from Starbucks explained to me that they lock in their prices well in advance — all of their arabica coffee needs through the end of September 2014 have already been guaranteed, for example, and a quarter of 2015 purchases, too. That may explain why the company’s market value hasn’t budged in response to the soaring cost of coffee.
Consumers don’t need to worry about any of this, but shaky-handed traders should probably be asking themselves why risky assets seem to be going up all of a sudden.
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