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Coffee Prices Surge But Consumers Have Yet to Feel the Burn, Analysts Say

Weather and supply chain problems are heating up the cost of coffee, but industry executives and analysts say the average Joe isn't paying more for a cup of joe yet.

Frank Sinatra used to sing that they've got an awful lot of coffee in Brazil, but Old Blue Eyes might be moved to tears if he saw what has been going on in the South American country lately.

Brazil is the world's largest coffee exporter and the country has been beset by a series extreme weather events that seem almost biblical in nature, including frost and drought.

“This is a really difficult year,” Celírio Inácio, the head of the Coffee Industry Brazilian Association, told the World in September. “We haven’t seen anything like this in a long time. But we believe we are adjusting so that next year our harvest isn’t as bad as people are projecting.” 

In October, coffee prices reached new multi-year highs, according to the World Coffee Association.

"The uncertainty created by weather-related shocks and potential disruptions in trade flows from stricter pandemic-related measures has become a serious threat to the regularity of green coffee supply," the association said.

Moreover, the association said, increasing transaction and production costs, including fertilizers and labor costs, along with substantial increases in the transport costs "are expected to reduce growers’ current gains from increased prices and slow down investments in production."

Andrew Hetzel, coffee market and value chain specialist with Coffee Strategies said Brazil is responsible for roughly 1/3 of the world's coffee supply.

"Harvests were lower in '21 and several trees were killed by extreme weather conditions not seen since 1994 (weakened by earlier drought, finished off by frost)," he said, which are being replanted.

Hetzel noted that it takes about three years for a coffee tree to reach maturity from the nursery. But if anyone can speed that along, he added, "it's Brazil, which is a sophisticated country for tropical agricultural production."

"Brazil's flowering for next year looks strong based on early reports," he said, "but considering the fundamentals, I'm preparing for a prolonged period of higher than typical commodity market prices."

Should the average coffee drinker be nervous by all this dark news?

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The top executive at Starbucks  (SBUX) - Get Starbucks Corporation Report, which said it serves nearly 100 million customer occasions around the world every week, assured analysts during the company's earning call in October.

Kevin Johnson, president and CEO, said "we're 14 months price- locked on coffee with several months of inventory in the warehouse, so, ...there's not a risk on coffee."

"We made significant progress addressing supply chain issues," Johnson added, "and experienced an overall improvement in inventory availability as we move through the quarter by increasing production at existing suppliers, onboarding new suppliers and strategically prioritizing key holiday and Q1 merchandise."

Still, Johnson said Starbucks is remaining "cautious and vigilant as we enter fiscal '22 given the dynamic nature of the situation."

Hetzel said large retailers have sophisticated trading operations that hedge financial risk on futures markets and also have concentrated buying power to negotiate favorable long term purchase agreements.

"There will probably be some additional supply costs, but larger companies are positioned to weather them better than smaller ones," he said.

Hetzel noted that consumers increased their savings during the pandemic and were also willing to pay higher prices for an expanded array of goods.

"Coffee retailers, and particularly low-end grocery store shelf brands, are historically slow to pass along costs to consumers, fearing market share loss," he said. 

"Current conditions may be an opportunity to raise prices with less scrutiny than usual, even if not strictly warranted by the cost of coffee alone."

Still, Hetzel added, the news of rising coffee commodity market prices is out there.

"Everything else is going up, so why not coffee too?" he said.