Coffee prices roasting growers

Premium beans to be emphasized

By Kelly Yamanouchi
Tribune staff reporter

April 9, 2002

Although coffee prices are mired in a more than two-year slump, it's hard to tell from your average Starbucks menu.

Big crops and stepped-up exports from some newer entrants in the market have slashed prices roughly in half since the end of 1999, causing a crisis among coffee growers in Africa, Latin America and Vietnam.

In some cases they no longer earn enough to harvest the beans--leading some growers to abandon their farms and search for some other way to make a living.

In an effort to reverse the trend, many growers have said they would cut production in order to boost prices for coffee on the futures market.

But recent gains in coffee futures prices have eroded and may not recover anytime soon. Growers are hoping to raise prices by improving the overall quality of beans and persuading consumers to pay more for that higher quality.

But unlike oil prices--in which sharp up-and-down movements in futures prices are reflected at the pump--consumers in many cases have seen little benefit from the harsh economic realities that have battered coffee growers.

Although the the International Coffee Organization's composite price of coffee bean futures plunged 57 percent from December 1999 to its low in September 2001, the government said average U.S. retail prices fell less than 10 percent in that span.

The reasons, experts say, are in part due to Americans' taste for premium beans and an intolerance for seeing the price of their beloved cup of joe changing every few days.

For growers, though, the drop in bean prices has been grinding. Less than 2 1/2 years ago, composite coffee bean prices on the New York Board of Trade were more than $1 per pound; despite some recent rallies, the closing price in New York on Monday was 54 cents.

"This recent rally has been due to the fact that we're coming off historical lows," said Boyd Cruel, senior analyst for Alaron Trading Corp. "I don't really see prices moving higher."

Growers hurting

Farmers who rely on coffee for their living have been going bankrupt and abandoning their farms, exacerbating poverty.

"What we have in Latin America, in Central America, in Colombia is a huge social crisis, propelled by local coffee prices," said Luis Samper, executive vice president of the Colombian Coffee Federation, which represents Colombian growers.

Experts said the exodus of coffee growers could intensify the supply shortage of premium quality beans. Some say that could lead to upward pressure on prices for specialty coffee down the road.

"When prices are down, a lot of times the specialty-grade producers are in trouble right away" because the coffee costs more to produce, said Mike Ferguson, spokesman for the Specialty Coffee Association of America.

Premiums for quality coffees already have increased, and that trend is expected to continue this year, Samper said.

Kevin Knox, coffee buyer for Allegro Coffee, supplier to Whole Foods Market, said he expected to see prices for specialty coffee increase as early as this fall.

"There's this delayed reaction when you stop fertilizing, you stop picking, and the plants are really unhealthy," Knox said. "The crisis that you're hearing about ... the human effect is being felt now, but the agricultural effect of people abandoning farms and not growing coffee is just beginning to be felt."

For the broader industry, including the larger commercial coffee market, weather is the main variable that could cause a coffee rally in late April or push prices up later this year.

"The only thing that could push prices higher at this point is a freeze in Brazil," Cruel said. "If we get that freeze and we see future prices rally significantly, then the consumers will really be hit hard."

Many who process and sell specialty coffee say a slight increase in price would be better for the industry.

"In the long run, it's better if prices go up a bit because there'll be a better supply of coffee," said Adam Bezark, co-owner of coffee roaster and retailer Casteel Coffee in Evanston.

"The New York market, when it's at $1, $1.20, is really a good level for everybody--it's good for roasters, it's good for growers," said Brian Gosell, vice president of the Huntley-based Chicago Coffee Roastery, which sells to independent specialty food shops and coffee houses.

Coffee connoisseurs wanted

That's why Central American coffee growers want java drinkers in the U.S. to become coffee connoisseurs. Despite the proliferation of specialty coffee shops, out of 115 million bags of coffee produced annually, only about 7 percent are specialty grade, according to the Specialty Coffee Association of America, though the market is growing.

"We would love to see consumers pay more for their coffee, and we would love to see retailers educating their consumers," Samper said.

But consumers have complained that coffee prices, especially at gourmet retail chains, aren't exactly going down.

"We have a long history of always paying premium prices," said Starbucks spokeswoman Audrey Lincoff. "We'll continue on that strategy."

The Seattle-based chain said it pays an average of $1.20 per pound of coffee, which doesn't drop with the overall price of beans. But during the period of falling coffee prices, its operating income as a percentage of overall revenue has risen steadily.

Consumers, however, have seen some relief at the grocery store, where some coffee prices have declined.

At Northfield-based Kraft Foods Inc., for example, the list price for a 13-oz. can of Maxwell House coffee has declined steadily to about $1.76 from $3.36 in 1997.

Margaret Swallow, spokeswoman for Procter & Gamble Co., which owns the Folgers and Millstone brands, said the company adjusts prices if there are "sustainable changes" in the coffee market, but she would not say whether the company is lowering its prices now.

But changing prices for beans only goes so far. Bean costs are 10 percent of the cost paid at a Dunkin' Donuts counter, for example, and the company said that much of the total cost goes toward labor, marketing, supplies and other costs--and that customers wouldn't stand for dramatic price volatility anyway.


Copyright (c) 2002, Chicago Tribune