Get Ready Coffee Geeks! Your coffee will soon cost more
Expectation of a shortage seems to increase demand, and the rush to buy water and plywood as a hurricane forms in the Gulf rapidly depletes supplies. Fortunately, hurricanes occur only occasionally, but the demand for coffee by 83 percent of Americans occurs every day.
Anticipating Coffee Shortages
Dry weather in Brazil, the source of a third or more of the world’s coffee, has resulted in a decline in production since a high point in 2011. As a shortage increases demand, a price increase usually accompanies it. Starbucks has planned ahead by storing more than $600 million worth of beans in their coffee warehouses and by making deals to invest $519 million more. But coffee drinkers may need to expect a jolt from more than caffeine.
Reuters reported that January of 2014 was the hottest on record in Brazil, and a severe drought has damaged crops. The main water reservoir in the country’s largest city, Sao Paolo, is lower than at any time in 10 years, and meteorologists are not predicting an increase in rainfall.
The situation is expected to impact Brazil’s fragile economy unless weather conditions change soon. Coffee drinkers can anticipate a pinch in their wallets as the price of a cup may rise from 10 to 60 cents, according to the Sydney Morning Herald. The drought is creating fear that the coffee crop may shrink for a second consecutive year, a situation that has not occurred since 1970.
Paying the Price
Coffee chains like Starbucks have an appeal that seems to resist negative reaction to price increases. As one of the most popular coffee brand names, it offers a premium product and charges prices that reflect it. Americans have shown sensitivity to fluctuations in the price of a gallon of gas, already much lower than in many other countries. An increase in the price of a cup of coffee does not seem to cause much concern.
Starbucks and other niche coffee sellers have transformed the commodity from an ordinary one into a premium one by using innovative marketing techniques. By elevating prices and by creating an environment that allows it, they have developed clever incentives like loyalty points that encourage coffee lovers to drink more.
Offering free Wi-Fi and jazz, they keep customers in their comfortable chairs for hours. However, some locations block access to the Internet when sales do not keep pace with expectations.
Cafes, restaurants and corner delis that do not have the name recognition of Starbucks raise prices as well, and they rarely decide to lower them. After instituting a 17 percent increase in 2011 for packaged coffee, Starbucks followed with a one percent increase in about a third of their stores in the United States the next year.
Smaller retailers who do not follow the trend are hard to find, and taking advantage of an opportunity to increase revenues is a normal business activity. Some analysts caution that American consumers may reach a “saturation point” that may not allow for continued price increases.
Even without the expectation of a reduced supply, the demand for coffee is on the rise as the taste for it in countries around the world increases. The International Business Times reported a growing demand in Brazil, China and India as emerging markets join the trend toward coffee drinking.
As long as demand outstrips supply, prices continue to rise. The market responds to supply and demand under normal conditions, and a weather event that affects the supply of coffee impacts its price.
The Guardian anticipated a deficit in coffee production before the drought was a concern, and firms that dealt in commodities trading were on notice to watch the market carefully. The drought in Brazil and the increasing demand for coffee around the world gives coffee drinkers a reason to watch what they spend on a cup of the delicious brew.
Are you getting yourself ready for the price hikes? Personally for me, one way to mitigate the disastrous impact the price appreciation is to upgrade my brewing skill. What is little known to many is it doesn’t take the most expensive gourmet coffee to produce the perfect brew. With the right skill, right coffee maker and meticulous preparation, I can turn my average beans into superior brew!