Coffee prices remain firm: Arabica demand forecasted to exceed supply

01.04.2012

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For the first few months of 2012, coffee prices should not move down until it is certain how the supply gap turns out. While we see the Futures markets softening due to a lot of economic news around the world, it is too soon to expect the softening to be reflected in coffee selling prices. Ingredient costs continue to be high for food companies, consumers, grocers, restaurants — coffee roasters are no exception. Bloomberg News, on December 14, 2011, stated “Arabica coffee demand will exceed supply by 7 million bags this season, equal to a year of Japanese [coffee] consumption.” (Japan is the world’s fourth largest coffee consuming country.)

In 2012, it is safe to anticipate an abundant supply of robusta and lower-grade arabica. The same cannot be said about the higher-quality washed arabica sector. Ongoing supply problems in Colombia and excessive rain in Central America will keep the supply/demand ratio tight and lead to firmer differentials again.

It also serves as a reminder that if anything unusual happens this year that adversely affects the future Brazil crop (frost, drought, etc.), the extremely limited global stocks won’t be able to prevent a price explosion.

Continue reading to see how to best leverage the rebound in coffee sales, demand for quality and the opportunity it provides for profitability improvement.

Coffee stocks and supply revised downward

Current coffee stocks and available supply have been revised downward due to many factors, but primarily adverse weather.

World output of Arabica coffee will shrink 4.3% to 79.6 million bags in the current crop year, which began in October, according to the London-based International Coffee Organization.

Heavy rains, along with coffee rust (roya) and the coffee berry borer, in Colombia have reduced its annual projections by 2.0 million bags (60 kg bags) to 8.5 million bags for the third consecutive lower production year.

Central America was also hit by heavy rains at the start of its harvest in October, which is expected to clip production in El Salvador and Guatemala.

Brazil (supplier of one-third of the world’s coffee supply) is in an off-year low production cycle, estimated at 49.2 million bags of both arabica and robusta coffee, falling short of recent record crops.

Global coffee consumption is growing, especially in Asian markets, whereas North American consumption is relatively stable.

World green coffee bean ending stocks reduced 2.4 million bags to 24.0 million and remain tight, resulting in a lower surplus. (See chart above for trailing six-year view.)

Coffee differentials tightening and increasing

After the markets hit a multi-decades high last summer, it created temporary coffee surplus on the market. That, along with new crop offers, led to differentials softening for a short time.

Currently, differentials at origin have tightened up and recently began increasing, especially following the poor weather conditions and spreading coffee leaf fungus in Colombia.

Consumption growing faster than supply

As the physical supply of arabica coffee tightens around the world, people have also increased coffee consumption, particularly in coffee-producing regions such as Brazil, Southeast Asia and India. This takes coffee supplies out of the market that would normally be available to established roasters.

“We may be approaching a day where top-quality coffee is both rare and expensive,” said Randy Layton, Boyds Coffee Roastmaster. “More countries are developing a new and younger coffee drinking culture. In addition, a number of impacts recently affected the coffee supply: weather, unstable labor, financing options at origin, even pests and plant disease.”

Below is a 35-year graph showing the changes in coffee prices and factors that affect those prices. Graph is courtesy Volcafé-USA.

Coffee drinkers desire better coffees

Current Situation:

  • Coffee consumer surveys continue to report positive trends for specialty-quality coffees, meaning that consumers desire high-quality coffee drinks.
  • In addition, during 2011, the sales recovery for specialty coffees outpaced the rest of the foodservice industry, showing up to six percent growth in some segments (casual, fast-casual and quick serve restaurants).

Opportunity:

  • Capitalize on the profitable coffee sales opportunity by meeting the consumers’ demand for high-quality coffee. By optimizing your coffee program with minimal changes, you can increase your profits.
  • Also, introducing new coffees and featured coffees alongside your consumers’ favorites will help encourage trial and keep your beverage offerings fresh and interesting!

How it works:

  • Upgrade your coffee to attract consumers seeking quality coffees. By raising menu prices slightly, your upgraded coffee should pay off with additional profits!

Economics:

  • See our Profit Calculator to show how Boyd Coffee Company can help you optimize your coffee program.
  • Contact your Boyds Coffee representative for more information on how we can partner with you to improve your coffee profitability.

Below, the coffee profit calculator shows how we can optimize your coffee program profits with minimal changes to the menu price.

Try the Profit Calculator online at www.boyds.com/profit-calculator

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