SAN FRANCISCO (MarketWatch) — Brazilian computer programmer Marcio Carneiro has spent about $4,000 in the last two years selecting just the right equipment to feed his passion: coffee.
To at least some of his countrymen, the object of his affection is so culturally ingrained it doesn’t merit more than a passing thought and a quick trip a corner store.
But Carneiro and other coffee enthusiasts are a big part of what is putting smiles on the faces of Brazilian coffee growers, who are already enjoying coffee prices at multi-year highs. A surge in domestic demand, which is keeping more of Brazil’s export-grade beans at home, may drive coffee prices even higher.“We will likely see new highs until the third quarter of this year,” said Rodrigo Costa, an analyst at brokerage Newedge in New York.
Coffee futures (CC11H 248.05, -2.15, -0.86%) have gained 82% since January 2010. The rally in prices adds to worldwide concerns about inflation, rising food prices, and even a repeat of riots seen in 2008 amid a global food crisis.
In the U.S., several food conglomerates and coffee roasters have announced price increases, and on Tuesday J. M. Smucker Co. (SJM 63.67, +0.80, +1.27%) , the maker of Folgers coffee and the owner of the Dunkin Donuts brand, announced a price hike for the third time in less than year.
The benchmark Arabica coffee for March delivery on Tuesday fell 2.15 cents to $2.476 a pound on the ICE Futures exchange in New York. However, it posted a string of 13-year highs earlier this year, most recently on Thursday, when it settled at $2.51 a pound. At the start of 2010, the benchmark future trading around $1.42 a pound.
Even as prices have climbed, middle-class Brazilians are increasingly willing to pay top dollar for the best Arabica coffee beans grown by their country’s farmers. And mirroring a trend in other emerging markets, they’re now competing with consumers in the U.S. and Europe who have the same thirst for quality beans. Read more on what a rising middle class means for investing in emerging markets.
“We always consumed the worst coffee, but this has improved a little,” said Carneiro. In his city of Sao Paulo, a cosmopolitan, sprawling metropolis, high-end coffee places dishing out espressos and other specialty drinks are starting to replace traditional “cafeterias,” once-ubiquitous stores that served drip coffee in demitasses.
Running dry
Rising domestic demand in Brazil, if it accelerates further, threatens to cut into a global supply of coffee that’s already running lean due to tough weather conditions.
Crops in coffee-producing rival Colombia, for instance, have battled bad weather and disease. Productivity there has also suffered from a program to replace and rejuvenate coffee plants. Production in Colombia has fallen 26%, to 9 million 60-kilogram bags in December 2010 from 12.2 million in 2006-2007, according to the U.S. Department of Agriculture.
And concerns about Brazil’s crop, as plantations faced excessive rains, help drive coffee futures to their recent 13-1/2-year highs. Read earlier story about coffee futures.
Stocks of Arabica, the most common variety grown in the Americas, and robusta coffee stocks have been the lowest since the 2001-2002 crop. Robusta beans, usually used to make instant coffee, mostly come from Asia.
Brazil’s coffee production has actually been growing, setting the country apart from its rival coffee growers. Output has increased 17% to an estimated 54.5 million bags from 46.7 million in the 2006-2007 period, the USDA said.
That’s about on pace with rising domestic demand. Brazil’s consumption of coffee has risen 17% to 19.5 million from 16.7 million in 2006-2007, easily outpacing global demand growth and on track to match U.S. coffee drinkers’ thirst.
Coffee demand worldwide is rising at a rate of about 2% a year, says Newedge’s Costa.
Americans consumed about 24 million bags of coffee in 2010, a number that has remained steady in the last five years.
Even with newfound support from Brazilian drinkers, the rally in coffee prices may start to flag. Coffee prices have been in an uptrend for nearly a year, and Costa said they could stagnate after the third quarter.
Rich brew
Such a plateau would bring relief to coffee drinkers. Roasters and retailers have responded to the higher prices by passing the cost to consumers, and Smucker is just the latest.
Kraft Foods Inc. (KFT 31.13, +0.26, +0.84%) , which owns Maxwell House coffee brand and reports quarterly results later this week, raised prices 12% last month. Before Tuesday’s hike, Smucker raised prices by 13% in January.
Starbucks Corp. (SBUX 33.12, +0.77, +2.38%) last month warned higher prices for coffee, as well as for milk and sugar, will hit its bottom line. Starbucks raised prices last year.Read more on Starbucks.
For now, Brazilian farmers and consumers are enjoying the boom in quality coffee’s appreciation and availability.
“As the economy stabilized and the middle class grew, things that were once superfluous started to become more important,” Carneiro said, who has spent his money on grinders, roasters, and espresso machines, including two antique Italian contraptions he’s slowly bringing back to working order.
Carneiro also has bought award-winning green coffee direct from farming cooperatives and associations, and has taken barista and cupping courses.
Marcio Luiz Favaro, a farmer in southwest Sao Paulo state, says that nowadays even the poorest Brazilians dislike the cheap brews. “Pretty soon there will be no room for farmers who don’t invest in quality,” said Favaro, a son and grandson of coffee farmers.
Favaro bought a mechanical harvester two yeas ago, one of his most pressing needs since farm workers are increasingly hard to come by.
People want to live in the city, where new manufacturing plants have opened up, Favaro said. Nearby orange groves also compete for farm hands in his town, Piraju, 210 miles west of the city of Sao Paulo.
He plans to spend any windfall in the next few years on replanting some of his coffee plants to make more of his properties accessible to the harvester.
“I am happy, this is the line of work I chose, and my hopes are prices are going to continue to go up,” he said.
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