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Why coffee prices are surging

The world's largest coffee producer was poised for a record crop this year, but Mother Nature had other ideas.

By Money Staff Feb 24, 2014 2:08PM

This post comes from Rob Wile at partner site Business Insider.

Business Insider on MSN MoneyCoffee prices have seen a parabolic run-up in recent weeks as unprecedented hot and dry weather in Brazil has sucked the life out of what was expected to have been a record crop.

Coffee © HD Connelly, Getty ImagesPrices are at $1.75 per pound, up 3 percent today. According to Reuters, last week's 20 percent surge was the largest one-week rally since December 1999.

January was the hottest month on record for parts of Brazil, and the drought was said to be the worst in 50 years.

One estimate said 30 percent of the coffee crop may have been lost.

"Dry, unseasonably warm weather persisted in coffee areas of southern Minas Gerais and Espirito Santo," the USDA said last week (.pdf file).

Here's the map of those two regions. It's basically a direct hit — in contrast to much of the rest of the country, which finally got some rain.

Wikimedia/Rob Wile
Brazil produces nearly 40 percent of the world's coffee.

The impact on consumers is more uncertain. Coffee beans account for no more than 10% of a Starbucks franchise's operating costs, according to the Wall Street Journal, and service providers are usually insulated from short-term price run-ups thanks to futures contracts. But the drought has been so severe that elevated prices may persist and hit coffee fiends' wallets.

Here's what RBC Capital Markets' Starbucks analyst David Palmer said last week about how it will impact that particular company:

Arabica spot prices have risen ~23 percent this year and nearly 35 percent since early November. We believe this to be a near-term positive given 1) Starbucks practice of locking in coffee 12+ months forward, 2) other coffee companies pricing coffee closer to the inflation cycle (meaning more pricing power for Starbucks in the coming quarters), and 3) Starbucks input prices have a floor above current levels, meaning price movements at depressed trading levels have minimal impact on forward input prices. However, a protracted rise in coffee prices would require one or more of Starbucks investment opportunities (e.g. lunch, tea, juice, carbonated beverages) to fill in the gap left by the fading coffee cost tailwind in late fiscal 2015 and beyond.

Last week, Goldman Sachs chief commodities analyst Jeff Currie had raised raised his 3- to 12-month Arabica coffee price forecast from $1.20/lb to $1.30/lb warning he saw "risks to the updated forecast as skewed to the upside."

But Currie noted that there were reasons why prices wouldn't have to go to the stratosphere.

"Our forecast remains below the current forward curve for now as (1) high stock levels after several years of surpluses will help cushion this production shortfall and (2) the current rally has likely been exacerbated by large net short speculative positioning heading into this weather event," he said.

In any case here's the chart from FinViz:

FinViz/Business Insider

More from Business Insider

Feb 24, 2014 4:41PM
Y'know.....I had finally decided not to let global warming bother me as I realized the human race is either too stupid (much of the 99%) or too greedy (all of the 1%) to turn it around. Plus, frankly, I figured all those smart-azzt Gen-Y's and millenials who know everything and don't want to hear from older people about HOW NOT TO MAKE THE SAME MISTAKES that we thought WE wouldn't repeat, either....are gonna be the ones to really have to deal with the consequences. So, in terms of any practicality, all that makes it so for the over-50s, it's no longer our problem. Except for one thing. Now it's messin' with my coffee supply, and pretty soon us old geezers are going to be on fixed income. So now I care again. How depressing. I need another cup of coffee.....
Feb 24, 2014 9:40PM
well, off to the store to stock up on coffee....
Feb 24, 2014 10:54PM
uh? Last month MSN ran a story about far coffee prices would be falling!?!
Feb 24, 2014 5:20PM
I think is more of the Obama economy coming to screw us some more. The libs say the republicans only live for the money but our prices are up a whole lot more under the Obama socialism than ever before. It will only get worse from here.
Feb 24, 2014 11:31PM
Feb 24, 2014 11:34PM
Next these MSN idiots will say due to the fact coffee is used to smuggle narcotics these fools try to justify increases most definately caused by Government regulations!
True American Tim is a true ****! Go take a course in economics you clown. then take a course in English and learn to form a sentence.
Feb 24, 2014 7:07PM
Rousseff's government imposed an excise tariff on the US after the tiff over illegal electronic surveillance.  Expect increased prices for sugar and other coffee related goods.
Feb 25, 2014 8:21AM
Obama made my coffee prices go up. lol
Feb 25, 2014 9:21PM
Coffee, almonds, fruit, vegetables - just a few of the food items that are being adversely affected by rising global temperatures.
Feb 24, 2014 9:56PM
Sprout's on sale @ $3.00 off regular price through 02/26/14.
Feb 24, 2014 5:38PM

weather has nothing to do with coffee prices ,it's their destroying the rain forest and farmlands


Feb 24, 2014 4:01PM

Watch.  Now all the billionaires will buy up a million units of coffee off the commodities market, never take delivery, never use it, the price will go up more since it will appear to be a little scarce, they cause the inflation , sell it at inflated price, make millions, pay a measly 15% income tax if any, nobody gets hired, and we pay a buck more for a 13 oz. pound of coffee.  .... and the ignorant rednecks will STILL vote Republican so those poor little rich guys don't have to pay a fair amount in  taxes...still believing in the fable of "trickle-down economics."

Ain't  America  great?

Feb 24, 2014 9:35PM
Feb 24, 2014 9:24PM

Who gives a crap! It doesn't belong in the human body in the first place. You wanna poison yourself? Pay for it.

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