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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 <SJM.N> and Maxwell House maker Kraft
Foods Group <KRFT.O> dropped them by around 6 percent. In May 2013,
Starbucks Corp <SBUX.O> 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 <GMCR.O> 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.
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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 <MDLZ.O>, 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 February 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."
THE SOURCE OF THE PRICE SURGE
The velocity of the rally caught the coffee industry off guard after
settling into a long-term bear market as prices fell 65 percent over
a 2-1/2-year period to a five-year low in November near $1 per lb.
It has been fueled by a rush of speculative buying after an
unexpected drought hit top grower Brazil's main arabica region,
damaging beans at a critical stage of their development and
threatening to cut output by 11 percent, from estimates in January,
according to a Reuters poll last week.
The extent of the damage will not be known until harvest begins in
2-3 months.
Traders had already been on high alert due to a leaf rust disease
outbreak in Central America and Mexico, where output of their
high-quality arabica has been reduced.
The arabica price rise has far outstripped gains in robusta, a less
expensive but more bitter bean traditionally processed into instant
coffee that has increasingly been integrated into roasted blends to
cut costs. As a result, arabica's premium over Liffe robusta futures
has soared, hitting a two-year high above $1.08 per lb earlier this
week.
It is too soon, many say, to start seeing roasters who have the
flexibility in their taste profiles to raise the dose of robusta in
their blends in order to reduce costs.
"You wouldn't do it yet based on a drought in Brazil because that
could change pretty quickly," said Ross Colbert, global beverage
strategist for Rabobank International.
(Editing by Chizu Nomiyama)
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