Price of cup of Coffee Rising--What's Next?

Shortages stir coffee and sugar prices
By Javier Blas and Jenny Wiggins in London

Published: May 10 2009 22:30 Last updated: May 10 2009 22:30

Caffeine addicts face higher prices for their daily fix as the wholesale cost of both coffee and sugar rise sharply because of poor crops and robust demand.

“We are in a dangerous situation,” Andrea Illy, chief executive of Italy’s leading coffee ­company, told the Financial Times, warning that prices could “explode” due to supply shortages.

His comments echo those of other industry players – and point to a sharp shift in sentiment among analysts.

Until recently, it was widely assumed that the global economic crisis would damp consumption and prices for coffee. However, that forecast proved wrong, since demand for coffee has remained high, even while consumers have moved from cafés to home drinking.

International coffee prices last week hit a seven-month high, rising to $1.28 per pound, up 22 per cent from their December low, in New York trading.

Meanwhile, the spot price of Colombian coffee – which commands a premium because it is sought by gourmets – jumped to almost $2.20 a pound, a 12-year high, due to supply constraints.

The crop in Colombia was damaged by heavy rains and the scarcity of supplies from the country is now “absolute”, says Néstor Osorio, head of the International Coffee Organisation.

Kraft, owner of the Maxwell House coffee brands, raised retail prices on its Colombian blend by almost 19 per cent last month due to the rising prices of Colombian coffee beans. Nestlé declined to comment on whether it has been raising prices on Nescafé.

Separately, sugar prices in New York and London rose last week to their highest in almost three years. White sugar prices rose above $450 a tonne, a 52 per cent gain from mid-December, as traders bet that India, the world’s largest consumer, will require hefty imports to compensate for the failure of the local crop.

Swings in Indian sugar output, which move the country back and forth from exporter to importer, are a critical factor in global prices. Traders forecast that the country’s output will drop 40 per cent to about 15m tonnes in the 2008-09 season, well below the country’s consumption of about 23m tonnes a year.

Peter de Klerk at London-based sugar merchants Czarnikow said that importing countries will “need to see retail prices rise to match the surge in the cost of sugar in the wholesale market”.

Traders said that the mood at last week’s sugar dinner in New York, the industry’s annual gathering, showed the market is bullish overall. At present, the International Sugar Organisation predicts a second consecutive market deficit in 2009-10.