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ANALYSIS-Small roaster leads way on price hikes as coffee surges

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NEW YORK, March 14 (Reuters) - The biggest arabica coffee rally in two decades is beginning to force smaller-brand roasters to quietly raise wholesale prices, even as top names such as Starbucks Corp resist.

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One private-label roaster in the New York area is set to raise its prices by 10 percent to 15 percent within the next few weeks, according to a person familiar with the matter who spoke on condition that the firm would not be identified.

"We can't afford to absorb the prices anymore. We need to protect ourselves," said the person, whose company runs several large industrial-scale roasting machines.

Two medium-sized roasters contacted by Reuters said they hoped the dramatic rise in prices, fueled by drought in top grower Brazil, would taper off before they were forced to lift prices. But if it doesn't, they said, higher prices may be the only way to stave off significant losses.

The price of arabica coffee futures, the type used primarily in roast and ground brews, surged 80 percent in less than seven weeks on Wednesday, rising above $2 per lb in the biggest such rally since July 1994.

Major U.S. roasters, by contrast, have thus far held the line, some saying that their exhaustive hedging strategies mean they could ride out the rally without increasing prices.

Many have not changed their list prices since February 2013, when Folgers maker J.M. Smucker Co and Maxwell House maker Kraft Foods Group dropped them by around 6 percent. In May 2013, Starbucks Corp cut grocery list prices by at least 10 percent but raised the price of some of its beverages in U.S. company-operated cafes by as much as 10 cents a month later.

From February through November, arabica prices fell by around 25 percent to a five-year low near $1 per lb, but the large roasters did not reduce their retail list prices, although some offered retail discounts.

Starbucks doesn't plan to raise prices because it has already locked in prices for all of its fiscal 2014 coffee needs and roughly 40 percent of its needs for 2015, a spokeswoman told Reuters. Smucker and Kraft spokeswomen declined to comment on any current or future price moves.

Keurig Green Mountain Inc says it is 100 percent locked for 2014 with quite a bit locked in for 2015.

The last time the companies announced price hikes was in May and June 2011, the fourth straight hike for some of them who responded to the 11-month rally that caused prices to more than double to a 34-year high above $3 per lb in May 2011.

EXPOSED

While major coffee makers typically use long-term hedging strategies that help protect them from sudden price swings, smaller private-label brands are often more exposed, having locked in prices too late or in insufficient volume.

"Roasters have become more used to adhoc purchasing," said Willem Boot, chief executive of consultancy Boot Coffee.

"Longer inventory positions have become more and more taboo. They're looking to fulfill needs on a shorter basis."

If the market remains at these levels for several months, their only options are to raise prices or tweak their blends with cheaper beans, said one coffee analyst.

"These folks were not able to make decisions fast enough when the market strengthened," said the analyst.

Some still don't believe the rally will last, hoping that heavy rain will reach Brazil's coffee belt and cause speculators to take the weather premium out of the market.

"The current market level still feels a bit artificial to me," said a source at one regional roaster. "We may choose to implement a small increase in the near-term and hope that prices return to a more favorable level later in the year."

But even some larger firms are feeling the pinch. Mondelez International Inc, maker of Jacobs and Kenco coffees in Europe, said that coffee prices will likely be a headwind in the first half of 2014 compared with 2013.

"Obviously, the recent spike in coffee prices, if sustained, could change our full year outlook," Mondelez Chief Financial Officer Dave Brearton said on Feb. 12, when the futures market was around $1.40 per lb.

"If it stays there, we would obviously adjust our prices upwards to reflect that because coffee is a pass-through category."

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