Look Out, Starbucks Lovers: The Price of Coffee Is on the Rise
Coffee lovers: get ready for a price surge at your favorite coffee shop. Thanks to the worst drought in half a century, Brazilian coffee growers are expecting to see crop reductions. The forecasted reductions have led to prices going up by 90 percent over the past several weeks. While this hasn’t directly translated into a price bump on your drip coffee, it has led to Starbucks (NASDAQ:SBUX) stalling all coffee purchases for the time being.
The drought behind the cost increase is the worst in five decades. Not only have crops been ruined by prolonged dry spells, but concentrated heavy rain storms are also leading to disastrous flooding, leading to even more destruction. In some instances, two month’s worth of rain is falling in a matter of hours, far more than drainage systems can handle, according to ThinkProgress.
It doesn’t stop there, as changing climatic factors have led to beans that usually grow at certain elevations being exposed to new parasites and fungus thanks to warmer temperatures. In some cases, this has led to crop reductions of up to 35 percent for certain beans, according to Bloomberg.
As The Wall Street Journal explains, Starbucks has the advantage of being flexible in such a situation. It contracts and sets prices for its coffee well in advance — up to two years, in fact. While the company has all of its coffee purchases priced for the current fiscal year, it has not done so for even half of the next year’s procurement, due to start on October 1. What does that mean for the prices at the counter?
For now, it seems that Starbucks says it expects things to remain the same. But what does this drought mean going forward? If prices don’t fall, will the increased costs be passed on to the consumer? In all likelihood, the answer is yes.
In addition to the jolt in coffee costs, sugar prices have also gone up by 13 percent since January. As Starbucks refocuses its product line to include more food items, another essential commodity seeing price increases can’t be a good sign for customers. Even as profits grow, an increase in costs of this magnitude can’t be absorbed while keeping the same momentum.
If Starbucks and other coffee retailers that purchase beans from Latin American farmers are forced to respond to increasing commodity costs with price raises of its own, can customers expect to see it come down when the bean shortage ends? Intuition would point to no, as it has been rare to see companies drop prices after raising them. With changing climactic factors worldwide and the looming prospect of an El Nino year that may throw weather patterns even further off balance, the near-term future for coffee farmers across Latin America is uncertain. Other retailers, like McDonald’s (NYSE:MCD) and Dunkin’ Donuts (NASDAQ:DNKN), may be able to dodge much of the shortage, as both purchase most of its coffee from farmers in Asia.
Starbucks executives assure customers that as of right now, prices will remain fixed and that it’s still too early to tell how severe of a shortage farmers will actually have on their hands. But with changing climate conditions and an always volatile commodity market, customers should be ready to see their drinks cost a little more.