Forget gas prices watch the coffee price

Don't expect your overpriced tipple at Starbucks (NASDAQ : SBUX) to decline any day soon. Robusta coffee prices have hit 7 year highs.

The International Coffee Organisation (ICO)'s indicator price for Robustas reached a level of 78.68 US cents/lb on 22 August 2006, the highest price recorded in the last seven years... and it continues to rise in September.

That is 104% up for August compared with 2005....and it takes 12 months for prices to reach the street.

Like the oil market fluctuations there are a multitude of real and imagined reasons that traders justify an increase..


1. Cutback in exports from Vietnam, due to problems with the climate. Vitenam is now world's biggest grower of the beans used to make instant coffee and espresso,

2. Generally reductions in exports, especially from Africa.

3. A decline in the quality of some of the Robusta stocks held in free port warehouses, particularly in Trieste Italy due to mould formation after floods .

4. Some certified stocks in the London futures market (LIFFE) have been reduced.

5. Cutbacks in the Indian market.

6. Growth in internal Brazilian consumption, reducing stocks for export.

Even so world production estimates have increased for year 2006/7 to 122 Million bags. Brazil which has a bi-ennial crop this year will see 41.6 million bags which will drop back 6 Mn bags next season, and sustain prices.

The International Coffee Organization forecasts a 2 % increase in global coffee consumption to 7 Mn. tons this year and a 1.5 % increase annually in the next ten years.

``If we continue with this trend of a 1.5 % increase in consumption per year, in 10 years the world will need 145 million bags and today they don't exist,'' said Nestor Osorio, executive director of the London-based International Coffee Organisation.

Consumers may not have noticed how shelf prices in the supermarkets for instant coffees based on the Robustas have been rising up to 5% in the last few months. Lattes, capuccinos and all the frothy gunk the trendy cafeterias sell is based on the arabica bean which is dearer but whose price hasn't risen as steeply, but Java coffee recently stuck their prices up 5%.

The continuing demand has meant that the differential in price between Robustas and Arabica and Other Milds (used to make up blends) has fallen from 60.81 US cents/lb in January 2006, was 40.5 cents in June, 42.92 cents in July and has fallen to 38.14 US cents.The composite price for ARabica / Milds in August was 95.78 cents.

No changes are foreseen until the arrival of new Vietnamese coffee from crop year 2006/07 beginning in October 2006.

All this is good news for Nestlé where soaring demand for espresso coffee in Europe has forced thewm to plan for a new Euros 95 Mn. Nespresso factory in Switzerland.

Sales of Nespresso - hermetically sealed aluminium capsules containing ground coffee, have risen more than 30 per cent annually for the last five years. Nespresso capsules are placed in a specially designed Nespresso Smart Machine, penetrating the capsule with a jet of heated water.Nestlé claims the Nespresso capsule protects the coffee from air, light and moisture preserving aromas which coffee bags don't.

Nespresso, dubbed coffee's answer to teabags by their PR / Marketing hoopla merchants, has latched on to the coffee "culture" boosted by Starbucks and the rest of the High Street cafetiers like Café Nero and Costa Coffee.

These chains have also fostered a consumer shift in Britain towards freshly ground "style" coffee, by making Italian-style espresso shots the base of their coffee drinks.

Mintel say retail coffee sales are up in the UK by 5-7%.

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