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Coffee Prices Going Up

September 8, 2005

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Coffee prices are set to rise, but this is one price spike you can't blame solely on Hurricane Katrina. Industry analysts have been warning for months that shortages caused by production slowdowns in Latin America would hike prices for your morning java, not to mention that afternoon frappucino.

The storm, to be sure, hasn’t helped the situation, but it now appears the devastation to the Port of New Orleans did not wipe out the coffee stockpiles there. The Reuters news agency quotes a port warehouse spokesman in New Orleans as saying nearly half the unroasted coffee stored in the port is salvageable.

Significant production slowdowns in Brazil and Vietnam, the world's two largest coffee-producing nations, are the main reasons for the spike in prices, analysts say. These slowdowns were already producing higher prices for coffee, on grocery shelves and in trendy coffee shops, long before Katrina stormed ashore.

Brazil has a far smaller-than-usual crop, while a prolonged drought in Vietnam has impacted the harvest there. At a time when coffee demand is rising, the world is producing less.

Fearing that Katrina would shrink the already-small coffee supply even more, U.S. roasters have scrambled, in near-panic mode in the last week, to buy up available supply. Judy Ganes, a coffee analyst quoted by CNN this week, predicts Arabica coffee could increase in price by 45 percent in the coming months.

While much of the coffee stored in New Orleans warehouses remains viable, the warehouses themselves are cut off from supply routes by the high water. Ganes says the uncertainty about its eventual disposition is causing the market additional anxiety.

For example, a dozen coffee roasting facilities in New Orleans employ about 1,000 people, according to figures compiled by the economic development group Greater New Orleans Inc. Those employed by both roasters and warehouses were displaced from their homes and many can't commute due to continued standing floodwaters and evacuation orders from local officials.

The physical condition of the coffee shipping, warehousing and roasting facilities and the near-future availability of housing and easy transportation for employees of the New Orleans coffee industry will determine the extent of increases of gourmet coffee prices. It could take several weeks to assess damage to warehouses and coffee roaster facilities and months to return to normal activity as roads and physical infrastructure are repaired.

It has not been determined how many of the green beans stored in New Orleans warehouses are Robusta beans (used in instant coffee) and how much is represented by the more desirable Arabica beans, which are used in gourmet blends. Robusta beans are used in Proctor & Gamble's Folgers brand and Kraft Foods' Maxwell House brand, while Arabica beans are used in the more desirable gourmet coffees, including those sold by Starbucks and premium coffee houses.

Both Kraft Foods and Procter & Gamble increased prices by 28 percent in the first three months of the year. The increase marks a reversal of several years of lower than usual prices.

Starbucks raised coffee prices last October, the first increase in four years.

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