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

Coffee bean prices top $3 a pound for first time in 34 years

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.