NEWS

Coffee prices get jolt in jittery economy

05/25/2012 06:03 EDT | Updated 07/25/2012 05:12 EDT

The slowing global economy is having an effect on the price of coffee, as cash conscious consumers ditch their latte habits in favour of plain old cups of joe.

The two most commonly produced varieties of coffee in the world are arabica and robusta.

Drawing their name from the Arabian mountains of Yemen and Ethiopia, arabica beans tend to be of higher quality and are processed more carefully. Because they only grow at altitudes higher than 610 metres above sea level, they're a lot more expensive to harvest but are prized for their taste — Arabica’s spot price hit a 34-year high north of $3 per pound in April of last year.

While most commercial coffee brands use a blend of the two, robusta beans are easier to harvest and more disease-resistant — which tends to make them cheaper, although most connoisseurs believe they produce an inferior product.

"Robusta has genes that can give it a wet cardboard, rubbery smell and taste," says John Rapinchuk, the chief financial officer of San Francisco-based Knutsen Coffees Ltd.

As unappetizing as that sounds, demand for robusta beans has soared this year, as consumers downgrade their coffee budgets.

Arabica shipments are down by eight per cent over last year’s level, while robusta exports are booming — up 10.4 per cent from where they were a year ago.

That's pushing the price for robusta higher, with the price of beans increasing 22 per cent since January to $1.17 US per pound.

Consumption of the higher-end arabica beans in rich European nations, meanwhile, has cratered since January due to what the International Coffee Organization charitably describes as "macroeconomic turbulence."

"The retail buyers see it as too expensive so they're moving to cheaper options," says John Stephenson, a portfolio manager with First Asset Investment Management Inc. in Toronto, who watches the commodities market closely. "After arabica was so expensive in 2011, roasters moved away from 100 per cent arabica blends and started using more robusta."

Price curve inverting

Needless to say, the price gap between the two varieties is in unfamiliar territory. As the chart above shows, prices of the two beans are heading in opposite directions. What was normally a gap of more than $1 is down to 70 cents. And some experts say it could soon drop to as little as 50 cents once a bumper arabica crop from Brazil is harvested this summer.

Coffee is both the best and worst performing commodity investment of the year, according to Bloomberg data. The spot price for higher-end arabica beans has fallen to 77 per cent of what it was at the start of the year, while normally cheap robusta prices are 22 per cent higher.

“We used to think $2 was the floor for arabica but we’re at $1.75 right now,” Rapinchuk said. “That Brazilian crop is hanging on prices."

The erosion of demand by coffee drinkers discovering they can tolerate cheaper (and more caffeinated, it should be noted) robusta hasn't helped. "People are saying, 'I need my coffee but maybe I don't need to buy it at Starbucks,'" Stephenson says.

Coffee drinkers are consuming more coffee than ever, with the International Coffee Organization estimating that 137 million bags of coffee was consumed in 2011 worldwide, up 1.7 per cent from 2010. During the last 12 years, consumption has increased at an average annual rate of 2.5 per cent.

However, consumers are scaling down the amount they’re willing to spend on coffee, it seems.

J.M. Smucker Co. and Kraft Foods — makers of Folgers and Maxwell House, respectively — have each cut their prices twice since August. And robusta-based coffee is becoming popular in emerging markets in Asia.

"Right now robusta still provides a cheaper option for roasters’ blends, as they try to capture emerging market customers as well as cater to the lower-end segment at the traditional markets,” commodities analyst Kona Haque told Bloomberg recently.

The robusta bean’s newfound popularity is going to increase its price at some point, but for now, consumers used to paying premium prices could be the big winners.

"It's a bit like how high gas prices holds down driving," Stephenson says. "People decided it was costing too much to gas up their body."

MORE:cbcNews