Chasing the grind

roastCoffee is many people’s drug of choice. So what happens when supply runs low? The humble cappuccino might soon cost you more than three dollars.

The average punter enjoying their morning cup of coffee is probably unaware that coffee bean production in the two largest producing countries—Brazil and Vietnam—is expected to suffer a significant decline during the next two years due to drought. Regular coffee drinkers may also have no idea that green coffee beans, from which their favourite blend is roasted, is a commodity that trades on the futures exchange. And while consumers remain oblivious to these industry issues at the macro level, some of Australia’s food services businesses may soon experience what a decline in 

production coupled with strong coffee consumption can bring to the industry: an increase in price.

The impact of global coffee bean supply and demand has already been felt in the US, where a major coffee roaster last year raised its retail price for ground coffee by 14 per cent. It then boosted its price another 12 per cent in March this year, due to continued
increases on Arabica coffee beans on the New York Board of Trade. The price hikes have prompted several other large US coffee roasters to follow suit.

Locally, the Australian Coffee Traders Association (ACTA) has kept a watchful eye on the industry and in March this year confirmed that the rise in coffee prices on the New York futures market was fueled by expectations of a global supply deficit. The International Coffee Organisation has since revealed it expects the world’s coffee consumption to reach some 6.9 billion kilograms (115 million 60-kilogram bags), which will exceed the projected supply of beans by almost 480 million kilograms (or eight million bags).

What this all boils down to is a product with limited supply that remains much in demand around the world—and Australia is no exception. Given the price rises in the US, ACTA president John Symon says it’s not unreasonable to assume there will also be a coffee price rise domestically. “I know for a fact that there are a number of roasters who are going to put up their coffee prices,” says Symon.

Frank di Tommaso, former marketing manager at Mocopan coffee distributor, Cerebos, says he’s heard some major players in the market issuing price increase warnings, but says there’s no immediate increase on the cards for Mocopan.

Similarly, a spokesperson for boutique coffee house Grinders said although its prices were steady, an increase could be a possibility. “In Australia, if there are increases in coffee prices for roasters, paying 10 per cent more is quite reasonable for a coffee company.”

Vittoria Coffee CEO Les Schirato holds a different view. He says the higher cost of green coffee is a good thing because it gives producers a more sustainable price. And although Vittoria hasn’t increased any of its prices to the food services market for more than eight years, it claims it isn’t about to do it now. “We have no intentions of implementing a blanket increase in price, given where coffee prices currently stand. If prices continue to escalate then it would be a different ball game,” he says.

“We try to absorb the highs and lows to remain consistent, and to be fair to the food services industry, most haven’t increased their prices either.”

But one of Australia’s largest roasters has recently taken action, with Lavazza increasing its coffee prices to the food services market on June 1 this year.

“We’ve tracked this since November last year and the information coming through was that the US market was moving in terms of pricing. What’s been interesting is that café owners are very aware of what’s going on,” Valcorp Fine Foods training manager John Russell Storey says.

Valcorp—the exclusive distributor of Lavazza coffee products in Australia—plans to absorb some of the increase to keep prices paid by customers to a minimum. “What we pass on to our customers is minimal. We carry more of the pain ourselves, so our percentage price increase going out to customers is in the area of about five per cent,” Russell Storey says.

“It’s the same situation for cafes and it’s highly unlikely that many will pass the price increase from their coffee supplier on to the consumer. They will absorb some of the cost themselves so that a cappuccino stays at three dollars.”

Hold on to your cup

Although an increase in coffee prices may be hard to swallow for some, others in the industry have been expecting it because the coffee business is cyclical and prices have been relatively stable for the past few years. Russell Storey believes more Australian roasters will soon announce price increases, in line with a trend for small companies to follow the movements of larger ones.

Meanwhile, the question of when the market will stabilise remains unanswered. “We are hearing anywhere from one year up to 24 months, but it’s going to be volatile so it’s a hard one to call,” Russell Storey says.

Despite the grim forecast, global coffee price increases are not expected to impact coffee sales—even if the increase ends up being transferred to consumers. Russell Storey predicts consumer demand will continue unchanged, and believes it is unlikely that companies in the roast and ground market will be short of customers.

“I don’t think there is any issue that food services businesses will order less coffee, because consumers aren’t going to stop drinking it. They will continue ordering their latte provided the price doesn’t go up too much,” he says.

Schirato agrees, saying while there is strong pressure on individual coffee outlets, overall coffee consumption is still high.

Russell Storey says if there is price pressure anywhere in the industry, it will come from the wholesale blends market. “At Lavazza we have a number of blends and some might decide to move to a slightly lower priced blend. So instead of buying a blend at $28 they might move to a $24 blend in the interim,” he says.

Good news for local beans

The increasing cost of green beans grown offshore is presenting an opportunity for Australian producers, according to Dale Potts, a local coffee grower and founder of Coffee Nirvana. With a plantation of 55,000 arabica coffee trees in the Northern Rivers area of New South Wales, Potts says Coffee Nirvana has shifted from supplying 90 per cent retail to 70 per cent wholesale to food services businesses since the company was established 12 months ago. The purchase of a processing factory from Brazil and a new harvester from the US has also boosted efficiency and allowed Coffee Nirvana to reduce its prices.

“We can now compete at around $24 a kilo for roasted coffee and green beans at around $7. Our price has come down while international prices have gone up—all of a sudden there’s a balance and we are on par.”

According to Potts, demand for Coffee Nirvana’s green beans in the past two months has been “fantastic” and is coming from other domestic producers needing to top up their supplies.

Symon agrees that as the price for international beans increases, Australian produce becomes more attractively priced. “Australian product is usually a bit more expensive because of its capacity issue and scale of production, so if international roasters increase their prices, local suppliers’ products become more attractive,” he says.

For some of the larger roasters however, sourcing coffee is not an issue—even in the face of a global supply shortage. Lavazza, for example, buys green beans direct from 32 countries. “We have a lot of experience in the highs and lows of the industry,” Russell Storey says, “and we buy green beans up to 12 months ahead based on relationships and contracts with the Lavazza family going back to the 1920s.”

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