Coffee prices expected to rise as a result of poor harvests and growing demand

The price of a cup of coffee is likely to go up further as coffee prices have topped $3 a pound for the first time in more than 34 years. Poor harvests of high-grade arabica coffee beans and a growing taste for gourmet coffee among burgeoning middle classes in China, Brazil, Indonesia and India are behind the sharp rise.

New York's July arabica contract hit $3.025 (£1.85) a pound on Wednesday, the highest since 1977 when prices fell in the aftermath of a devastating frost two years earlier in Brazil, the world's biggest producer, which accounts for a third of all coffee. Coffee futures inched lower to $2.94 on Thursday.

Investors have been encouraged to buy arabica beans by a weaker dollar, which makes dollar-denominated assets less expensive to buyers in other currencies. They are also buying commodities as a hedge against inflation. Coffee prices have more than doubled in the past seven months. Supplies are running low because heavy rain led to worse than expected harvests in Colombia, the second-largest producer of arabica beans after Brazil, Indonesia, Mexico and Vietnam.

"We expect prices to hit further highs on production downgrades, the decline in global stocks and supply tightness that should keep markets fearful of any disruptions," said Sudakshina Unnikrishnan, commodities analyst at Barclays Capital. "This is likely to be reflected in higher retail prices which operate with a lag."

Supermarket coffee prices have been going up around the world. In Britain, a 227g bag of ground filter coffee cost £2.60 in March, compared with £2.28 a year ago, according to the Office for National Statistics. A 100g bag of instant coffee was £2.47, up from £2.27. Most of the coffee drunk in Britain is instant.

Experts believe that supermarket prices will continue to rise, while the cost of a latte or cappuccino at a coffee shop is expected to increase less – only a small part comes from coffee, while the rest mostly reflects rental and staff costs.

Costa Coffee owner Whitbread claims the price of a small cappuccino (£2.10) has not gone up for two years, apart from the impact of the recent VAT increase. However Starbucks has started charging more for packaged coffee.

"Globally, you will see increases in all coffee-based product prices," said Paul Rodin, head of supply chain and procurement at Cafédirect, which buys coffee from cooperatives.

Small farmers are benefiting from higher wholesale prices. "They will be getting a lot more if they have coffee to sell. It is good news for farmers who were affected by natural disasters and lost their crops. But if more people are planting coffee, in two to three years prices will inevitably come down."

The latest surge in coffee prices comes only days after the International Coffee Organisation, which represents producers and consumers, warned that scarce supplies of arabica beans continued to "support high price levels". The London-based group does not expect that coffee stocks, which are at their lowest level for 50 years, will build up this year.

Demand is likely to outstrip supply again this year – the fifth consecutive deficit. The arabica harvest is about two weeks away in Brazil, while picking of robusta beans is already under way.

(Source: http://www.guardian.co.uk/business/2011/apr/21/commodities-coffee-shortage-price-rise-expected)