Examining The Price Disconnect Percolating In The Coffee Business
STEVE INSKEEP, HOST:
Coffee growers around the world are not happy. It's getting more expensive to produce their beans, but they're getting less money for them in the market, even though coffee retailers like Starbucks and other coffee shops are charging more. So how are growers getting less as the industry grows richer? Here are Stacey Vanek Smith and Sally Herships of NPR's podcast The Indicator from Planet Money.
SALLY HERSHIPS, BYLINE: The price we consumers are paying for a cup of coffee is going up. But the price that farmers are getting for their beans is going down. And they are so upset that the Colombian Coffee Growers Federation says it may stop trading coffee on the New York Stock Exchange altogether.
STACEY VANEK SMITH, BYLINE: Colombian coffee farmers - they've been really struggling. Prices always fluctuate. But for a while now, the market has been trading below cost for many farmers. Last year, the market was trading at $1.20 per pound, but the current price is at a six-year low. Right now farmers in Colombia are selling their beans for just $1.08 a pound.
JUDY GANES: But their costs to grow that coffee is closer to $1.40 a pound.
HERSHIPS: Judy Ganes is a tropical commodities consultant in Panama. There are a number of reasons for this big pricing disconnect. Reason number one - we have too many coffee beans.
GANES: Because the market is in vast oversupply.
VANEK SMITH: Colombia created initiatives to get farmers to grow more coffee. That, plus some good weather, may have worked a little too well. And Brazil stepped up its coffee game.
GANES: Brazil has had tremendous growth. And Brazil is a highly, highly efficient producer.
VANEK SMITH: Now, reason number two for this pricing disconnect is falling demand. And you can see this in this strange, frothy drink...
VANEK SMITH: ...I have in front of me.
GANES: Well, think about - in that drink, where's the emphasis on coffee?
HERSHIPS: Well, Starbucks says nearly 75 percent of all of its sales are beverages, and that a vast majority of those beverages are coffee-based. But just...
VANEK SMITH: Coffee-based.
HERSHIPS: Coffee-based - as we know, there are a lot of other ingredients that go into coffee and drinks. We have eggnog, caramel, salted caramel, hazelnut, gingerbread, cinnamon, the famous pumpkin spice.
VANEK SMITH: The famous pumpkin spice - so now we come to the reason that prices are going up, in spite of the fact that coffee beans are getting cheaper. The cost of a cup of coffee now has very little to do with the price of coffee. In the past year, Starbucks says it increased prices 1 to 2 percent. Here are some of the many reasons that Starbucks cited for its pricing decision - rent, labor, local mandates and regulations, competition, distribution, marketing, and commodities - including coffee - but also other commodities associated with beverages, food, materials, and operations. Milk is probably in there.
HERSHIPS: Judy says the price of coffee, the ingredient, relative to all of these - that is a small cost.
GANES: Their overhead - their fixed costs are high, so they're not making money selling coffee alone. They have to keep evolving.
HERSHIPS: And Starbucks told me it is trying to help the farmers. It says it has invested more than $100 million in programs, like helping to replace trees. It works on ethical sourcing. It provides loans to farmers.
VANEK SMITH: The future might be brighter than it seems right now. Demand for coffee is pretty flat in the U.S. But it's growing in the countries that produce coffee. I don't know. All of this and this weird drink in front of me just really - just, all I really (laughter) want right now is a cup of coffee, Sally.
HERSHIPS: I want a cup of tea (laughter). Sally Herships.
VANEK SMITH: Stacey Vanek Smith, NPR News.
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