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Coffee Cravers Ignoring Bean-Price Surge for Caffeine

FixBy Marvin G. Perez and Lynn Doan - Mar 13, 2014

Doreen Cappelli is so hooked on her morning cappuccino that she says shed pay a lot more to get it.

I dont drink wine and alcohol, Cappelli, 52, said after buying the $3.25 drink at Blue Bottle Coffee

at San Franciscos Ferry Building, in the shadow of the Bay Bridge. Coffee is one of my pleasures in

life. I would pay double.

While prices probably wont go up that much just yet, pressure is growing on the $80 billion U.S.

coffee industry as the cost of arabica beans used in high-end brews skyrockets. Futures in New York

jumped 86 percent this year to $2.0595 a pound. By May, they may reach $3, the highest since 2011,

said Judy Ganes-Chase, an industry consultant in PanamaCity, Panama, who has been analyzing

the market for three decades.

Arabica is off to its biggest rally to start a year in at least four decades after drought hurt crops in

Brazil, the worlds top grower. Eventually, that will mean higher bean costs for Keurig Green

Mountain Inc. and J.M. Smucker Co. (SJM), maker of Folgers, the best-selling U.S.brand.

For now, sellers including Starbucks Corp. (SBUX), the largest coffeehouse chain, say theyre in no

hurry to raise prices. Many have stockpiles of cheaper beans from before the rally. Even if they do

start to charge more, history shows thats no deterrent for American consumers, the biggest drinkers.

I need it -- its like crack, said Lindsay Cooper as she stood in line for her morning cup atPhilz

Coffeein Mission Bay, near AT&T Park, the San Francisco Giants baseball stadium. I feel like Im

exposing a deep, dark secret. Is there some sort of coffee rehab? If so, hopefully mine has coffee.

Spending More

In 2011, when futures doubled over 12 months to a 14-year high of $3.089 and retailers including

Smucker and Kraft Foods Group Inc. raised prices, U.S. consumption still rose 1.2 percent from 2010

to 2.916 billion pounds, according to the International Coffee Organizationin London. In the past

decade, as domestic demand jumped 44 percent to 100.3 billion cups last year, spending rose even

more, up 135 percent, data compiled by Cedarhurst, New York-based researcher StudyLogic shows.
http://www.philzcoffee.com/http://www.bloomberg.com/quote/SBUX:UShttp://www.bluebottlecoffee.com/http://topics.bloomberg.com/london/http://topics.bloomberg.com/international-coffee-organization/http://www.philzcoffee.com/http://www.bloomberg.com/quote/SBUX:UShttp://www.bloomberg.com/quote/SJM:UShttp://topics.bloomberg.com/brazil/http://topics.bloomberg.com/panama/http://topics.bloomberg.com/new-york/http://topics.bloomberg.com/san-francisco/http://www.bluebottlecoffee.com/


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Arabica beans accounted for 59 percent of the worlds 153.3 million bags of coffee output last year,

with the rest lower-grade robusta used in instant coffees, U.S. Department of Agriculture data show.

Brazil produced 46 percent of last years arabica crop. A bag weighs 60 kilograms, or 132 pounds.

Global demand for all coffee may exceed harvests in the 2014-2015 season that starts in October in

most countries, estimates Volcafe Ltd. in Winterthur, Switzerland, after a surplus sent prices lower in

2013 for a third straight year.

Starbucks Chief Financial Officer Scott Maw said the Seattle-based company already has secured

more than a years supply of physical inventory and contracts, reducing the need to raise prices for

customers. Coffee accounts for 15 percent to 20 percent of the cost of goodssold and 10 percent of

store operating expenses, he said.

We have virtually all of the 2014 prices locked and 40 percent of the companys needs for 2015 at

prices slightly below the average cost for this year, Maw said March 11 at a presentationto analysts.

Starbucks is in a better position with supplies and costs than it was during the last surge in futures,

during 2010 and 2011, he said.

Enough Inventory

Dunkin Brands purchasing cooperative, owned by the companys franchisees, has locked in coffee for

most of 2014, which will keep costs for this year relatively flat, Paul C. Carbone, the chief financial

officer, said on the Feb. 6 conference call.

Keurig Green Mountain, the Waterbury, Vermont-based seller of single-cup brewing systems and

coffee, has 100 percent of its needs for this year and quite a bit for 2015, Chief Financial Officer

Frances G. Rathke said on a Feb. 5 call.

Prices for the robusta variety are up 31 percent this year on Londons NYSE Liffe exchange. The

premium that arabica fetches over robusta has more than tripled in 2014, reaching a two-year high o

$1.0873 a pound on March 5.

The strong gains weve seen could spur a change among companies to use more robusta coffee intheir blends, Hernando de la Roche, a senior vice president at INTL FCStone in Miami, said in a

telephone interview. This would reduce demand for arabica down the road, stalling the rally.

Price Increases

More-expensive beans tend to mean higher prices for consumers. In 2011, when futures jumped as

much as 61 percent over the six months through March, Kraft raised the U.S. price of its Maxwell

House and Yuban coffees by as much as 22 percent, Smucker imposed an 11 percent increase, and
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Starbucks raised the price of packaged coffees by as much as 12 percent. By the end of the year,

arabica futures were down 27 percent from their peak, and companies rolled back retail increases.

We always try to be transparent with our customers, and we will move on price when we need to,

Mark T. Smucker, president of the Smucker U.S. retail coffee unit, said on a conference call Feb. 14.

The company, which sells Folgers and Dunkin Donuts packaged coffees, cut prices last year when

raw bean costs tumbled.

Quality Pays

We are not afraid of increasing our prices because everyone else will, too, said Aaron Ultimo, 35,

owner of Ultimo Coffee, a cafe in Philadelphia ranked No. 1 among Americas Best Coffee Shops by

The Daily Meal, a culinary website. We usually go for the top-tier coffee, and thats what we offered

to our customers. We wont change the way we buy coffee, and we wont compromise on quality.

Felicia Wong, 24, said she feels the same way about the one or two cups of coffee she buys every day.

If the prices were raised 200 or 250 percent, I would probably drink less, the Brooklyn resident said

while sipping a cup with a friend at one of five outlets in New York city run by Cafe Grumpy. Right

now, I pay about $20 a pound for a Blue Bottle coffee. I believe paying for quality, not quantity.

To contact the reporters on this story: Marvin G. Perez in New York at [email protected];

Lynn Doan in San Francisco at [email protected]

To contact the editors responsible for this story: Millie Munshi at [email protected]

Stroth, Patrick McKiernan

2014 BLOOMBERG L.P. ALL RIGHTS RESERVED.
mailto:[email protected]:[email protected]:[email protected]://ultimocoffee.com/

coffee cravers ignoring bean-price surge for caffeine fix - bloomberg

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