Choose Your City
Change City

Coffee fans pay more for a tin, but not a cup

TORONTO - Caffeine junkies can relax for now — the price of a fix at two of Canada's biggest coffee chains won't increase as wholesale coffee prices hover around 13-year highs — but those who prefer to brew at home will be more affected.

TORONTO - Caffeine junkies can relax for now — the price of a fix at two of Canada's biggest coffee chains won't increase as wholesale coffee prices hover around 13-year highs — but those who prefer to brew at home will be more affected.

The December contract price for high quality Arabica beans — the type favoured in coffee shops — closed at US$1.8335 per pound Monday at the Intercontinental Exchange. This is the most expensive the beans have been since 1997.

"Coffee is on an upward move based on some sound fundamentals that are driving the price higher," said Sterling Smith, a commodities market analyst at Country Hedging Inc.

"We have tightness in bean supplies and we have some questions about the quality of beans," he said.

But even as tight supply drives wholesale prices steadily higher, Canadian restaurant chain Tim Hortons (TSX:THI) said it's not planning to raise the price of a cup of coffee.

"Typically, Tim Hortons books its coffee contracts at least six months at a time, which protects our restaurant owners and customers from fluctuations in worldwide future markets," said David Morelli, spokesman for the chain.

"We have no plans to change coffee prices at this time."

Last week, Starbucks Corp. — with more than 785 company-operated stores in Canada — warned of higher coffee prices, but said it would be able to absorb the costs.

The Seattle-based coffee chain said it will be able to offset the "short-term fluctuations'' because it has diversified its coffee purchases into multiple growing regions.

Starbucks pegged the effect of the price hikes in the commodities market at four cents per share.

McDonald's Canada said it is well-positioned to mitigate the impact of higher raw-material costs, including coffee, because no single commodity dominates its menu. The big restaurant chain currently has no plans to hike prices.

Second Cup, the largest Canadian specialty coffee shop, signalled earlier this year that it may raise coffee prices this fall, but could not be reached for comment Monday.

Many large coffee shops choose to eat the costs of raw-material price hikes after weighing the impact on their bottom line, Smith said.

Store-brewed coffee is one of the first novelties recession-weary customers are willing to forgo, opting instead to brew it themselves at a fraction of the price.

"They will continue to buy coffee at the grocery store because it's comparatively cheap, but the willingness to pay $5 for that cup of coffee, you make it $5.50 you will cut people off," Smith said.

"So Starbucks and the upper-end coffee retailers, it will amount to a hit on earnings for them ... they're not going to move prices unless they have to."

But consumers should expect to pay more for a jolt of Joe at home, with the price of both Folgers and Maxwell House brands on the rise.

Smucker Foods of Canada Corp. announced Friday that it will increase the list price across all its Folgers coffee offerings effective Oct. 25 as result of sustained increases in green coffee costs.

Prices will increase about 10 per cent across the board.

Kraft has also raised the price of its Maxwell House brand by about the same amount.

Coffee is considered an inelastic product, meaning that people will still consume it regardless of price fluctuations.

"People aren't going to give it up because right now it isn't that big of an expense," Smith said, adding that one pound of coffee makes about 60 cups.

"Even if it goes up 20, 30 cents a pound that isn't going to deter anyone from throwing it in the shopping cart."

Wholesale coffee prices have risen nearly 45 per cent so far in 2010. The year started with prices hovering around US$1.36 per pound.

Colombia — the world's second largest Arabica bean grower and the biggest producer of Robusta beans, used mainly in instant coffee — is struggling with production after poor crop conditions in the past few years.

There are also concerns over Vietnam's crop levels.

Meanwhile, just as inventories in warehouses are depleted, demand for the commodity is percolating, particularly in regions that grow beans such as Brazil and Vietnam. This is further constraining the supply being shipped out of those countries.

However, the U.S. Department of Agriculture has forecast record harvests in Brazil and worldwide in 2010-11, which should replenish inventories.

Brazil is the world's top coffee producer, followed by Vietnam and Colombia.

You Might Also Like