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Coffeehouse prices rising: Extreme weather and long term demand to blame

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BRAZIL - Saturday, according to the Intercontinental Exchange, the price of coffee per pound rose to $1.72 for March delivery. This is the highest its been in 14 months, and with weather conditions as well as supply demand increasing globally, local coffeehouses may experience a rise in coffee prices in the near future.

Last month northeastern Brazil suffered its worst drought in 50 years. Among the crops that have been hit the hardest, corn, sugar, flour, and soy, coffee farmers have experienced incredible loss. With the destruction of many crop yields coffee prices have already sprung up by more than 50 percent this year and a soon rise in coffee prices should hit your coffeehouse in the next few months.

According to the Folha de S. Paulo newspaper, water is being rationed in 142 cities in 11 states to more than six million people. Reports say that some neighborhoods in the city of Itu in Sao Paulo have been cut down to water once every three days for 13 hours a day. The paper went on to quote water supply companies as saying that reservoirs, rivers, and streams are the driest they've been in 20 years.

“Coffee, for example, must have annual average temperatures between 18°C and 22°C [ 64.4°F and 71°F ].” says Hilton Silveira Pinto, an agro-climatologist who has conducted studies for Brazil’s government. “The crop will not develop outside this temperature range. We sent this information to the computer, and we simulated different scenarios.”

Pinto believes coffee, along with other crops will suffer significant loss over the next six years. He has also been conducting studies; injecting carbon into the atmosphere and recording the results to see how plantations in a controlled environment for the purpose of researching their productivity in currents and future climates.

“By 2020, we will lose 20 to 22 percent of our soybean crop,” Pinto said. “All of them [crops] will suffer significant losses.” Source: Agencia FAPESP

A recent market analysis report by the Hackett Financial Advisors, Inc. reveals that there are other factors which affect and will continue to affect the coffee market including the migration of tree acreage, tree stress and maintenance, as well as the denseness of placement.

Reason For Greater Concern Than Normal’ (excerpt from the Hackett report)

  • Huge migration of coffee acreage to more northern drought prone regions than in past drought periods allowing for greater potential production impairment and lower yields.
  • Due to coffee trees already being stressed as a result of 2 large output years in a row, when combined with reduced inputs and heavy pruning, increases the potential for a greater impact to reduced yields than normal.
  • Tree population per acre are far more dense today than they were in past drought periods allowing for greater yield deterioration as available water resources need to be spread out to a larger number of trees.’ Source: Hackett Financial Advisors, Inc./‘Commodity Market Analysis for Hedgers and Investors’ / pg.23

If weather, crop production, and maintenance issues were not enough stress on coffee farmers and the industry as a whole, a large increase in supply and demand, in addition to these other elements add a greater possibility of rising coffee prices in the long run. With a relatively new taste for coffee in China, especially for lattes, and the increase of coffee drinkers in regions that have been primarily growers, future coffee prices are sure to rise along with the need for more high quality coffee beans.

Kim Elena Ionescu, a Counter Culture coffee buyer and sustainability manager says the new competition for high-quality coffee will be a big factor in future rising prices.

“Regardless of what happens in Brazil now . . . we will see higher prices and more competition for higher-quality coffee,” Ionescu says, “More people are drinking coffee. And more people are drinking better coffee.” - Washington Post

China’s fast growing middle class will change the long term price of coffee. China is the second-largest economy in the world, and boasts the largest populace. Coffee consumption is growing at an amazing rate and is projected to grow at a rate of 9% per year over the next five years.

The Chinese middle class is the main coffee-consuming demographic, a class which is expected to grow from 230 million to 630 million. This will cause a shift in coffee’s supply and demand which some experts say will create a demand greater than the supply and it’ll have to come down to who can pay farmers a better price. Which is wonderful news for farmers who've been on the worse end of the deal for many years. -The Telegraph/ UK

With the short term rise of coffee prices due to extreme weather changes along with experts forecasting a long term rise in prices due to rapidly growing international trends, especially in China, which is projected to reach a demand greater than the ability to supply -- local coffeehouses will feel the effects in the near future.

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