Coffee reaches a 12-year high

Speculators roasted as low inventories hold up price, reports Sean O'Grady

Time to wake up and smell the coffee? Prices have hit a 12-year high of about 180 cents (120p) a pound for Arabica coffee, the benchmark bean, about three times its level in 2003. But your skinny latte, choco machocinno with double shot or café au lait is unlikely to get immediately much dearer.

Following the jump in tea prices last year, and cocoa also hitting fresh highs this week, well, it's enough to drive anyone to drink...

Wholesale coffee prices eased slightly yesterday compared to Thursday's extraordinary performance, when the price rose 10 per cent in a day. Prices are up about a fifth on the month.

The immediate reason for the spike is a classic short squeeze. Hedge funds and other speculators built short positions once they noticed prices were heading sharply higher earlier this month, on the expectation that they'd soon slump.

But they got their fingers roasted as prices stayed high and there are few stocks out there with which to cover a short position. Hence the 10 per cent leap.

But there are also underlying factors. On the supply side, it's a question of quality and quantity, according to Nestor Oscorio, executive director of the International Coffee Organisation, based in London.

Mr Oscorio explains that the crop in Brazil was depressed last year and, while it has recovered this year, the quality is not there.

"There are no stocks in producing countries. Compared with a normal year's production of 152 to 155 million bags of coffee, production is down about 30 per cent and exports are down by 8 to 10 per cent.

"Inventories are very low. There has been an opportunity for speculators to come in and out of the market. It is very tight."

Problems in Brazil, still the world's largest producer, as celebrated in Frank Sinatra's 1946 hit 'The Coffee Song', are bad enough; but Colombia, the fourth-largest player, has also been affected by poor weather and renovation of some plantations.

However, the benefits of the coffee price bonanza do not always filter though to the growers at the back of the supply chain. "Sadly, the record prices will make no difference to many small growers in places such as Nicaragua," comments Eileen Maybin, a spokeswoman for the Fairtrade campaign. "Though things are better than in 2004, when there was a four-year run of people suffering really bad times because of low prices, the small farmers won't see very much more from the brokers who come to the farm gate to buy their crop." Coffee from Fairtrade-approved brands ensures that $1.25 per pound goes to the farmer, plus another 10 cents to community projects. The usual commercial return would be about half of that.

The impact on consumers depends on how much of the increase the roasters choose to pass on. Nestlé and Philip Morris/Kraft each process 13 per cent of the world's coffee, Tchibo is responsible for 4 percent, Proctor & Gamble sells most of its 4 per cent share in America, while Sara Lee/Douwe Egberts roasts 10 per cent, sold in Europe and South America. Nestlé dominates the soluble coffee market – a market share of over 50 per cent.

The British retail price of a bag or jar of coffee is up 10.9 per cent. But the hike in wholesale prices may mean relatively little for the coffee shops. Coffee itself accounts for only about 2 per cent of the price of a cup from a high street shop, less than the value of the lid and the average helping of sugar, and even the slump in the value of sterling won't be enough to inflate the cost of a cup even further than it has already gone. Coffeephiles can relax.

So the caffeine rush in wholesale prices is unlikely to make a huge difference to Starbucks or Costa. "World consumption has been relatively buoyant for a number of years," adds Mr Oscorio.

Americans consume 400 million cups of coffee per day, or equivalent to 146 billion cups of coffee per year; making the United States the leading consumer of coffee in the world, while 14 billion espresso coffees are consumed each year in Italy; coffee shops are expanding globally at 7 per cent per year, confounding predictions of imminent saturation. Per capita consumption is highest, perhaps surprisingly, in Finland, at about 12kg per Finn per year; Americans only manage to down 4.1kg, the British, 3.2kg. The Irish are sticking to tea, with consumption of only 1.8kg of coffee per person per year.