Coffee-Futures Run-Up Makes Way to Store Shelves

The Wall Street Journal
Bank on This: Coffee prices soar
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Coffee drinkers are getting a taste of higher prices.

J.M. Smucker Co. on Tuesday became the first major U.S. roaster to lift coffee prices in about three years, announcing an average 9% increase in the cost of popular supermarket brands such as Folgers and Dunkin' Donuts.

The price increase is the latest sign that a spike in coffee futures earlier this year is trickling down to consumers. In late April, futures hit their highest price in more than two years as forecasters predicted a drought in top grower Brazil would reduce global supplies of coffee beans. Brazil produces half the world's arabica coffee beans, the variety used by Starbucks Corp. and others.

Retail coffee prices tend to trail the futures market by a few months. Some roasters put off price rises by running through stockpiles of less-expensive beans. But they can hold out only so long, particularly as wholesale roasters start to raise prices.

Prices are beginning to climb in supermarkets even as the coffee-futures rally appears to have peaked. Some forecasters say the drought damage in Brazil isn't as bad as originally thought.

In a report released last week, coffee dealer Mercon Coffee Group, which has offices in Nicaragua and South Florida, lowered its estimate from December for Brazil's arabica crop by 13% to 33.45 million 60-kilogram (132-pound) bags, but said that rains in March and April helped coffee trees recover from hot and dry weather.

"Along the way, we were pleasantly surprised on the general aspect of the trees and how they had recovered compared with the previous trips during the year," Mercon said in the report.

Brazilian growers also are exporting coffee left over from last year's harvest to make up for a smaller-than-expected crop.

Futures entered a bear market on Tuesday, having fallen more than 20% from their April highs. Coffee for July delivery finished the day 0.7% lower at $1.7115 a pound on ICE Futures U.S.

But consumers still are likely to see their coffee prices climb in the coming months. Even after their recent slide, futures are up 55% this year.

Coffee demand is expected to grow by 2% world-wide this year, despite higher prices, according to the International Coffee Organization.

"For me to start curbing my [coffee] drinking, the price would probably have to triple," said Barry Trudell, 63-year-old retiree from Sarnia, Canada, adding that he regularly drinks Folgers coffee. "The price really isn't an issue when I have the craving."

Smucker, one of the biggest sellers of coffee in the U.S. by volume, typically leads the way on prices, with Maxwell House-maker Kraft Foods Group Inc. often following suit.

A Smucker spokesperson declined to comment on prices. Starbucks and Kraft declined to comment on prices.

Some investors are breaking their addiction to caffeine. In early May, money managers had built up their biggest bullish position in six years, according to the Commodity Futures Trading Commission. But the net wager on rising prices has shrunk 9% since then.

The Brazilian drought hit early this year, during a key growth period for coffee cherries, the fruit that contains coffee seeds that are roasted and ground.

But Brazil's exports of unroasted coffee could top 33 million bags this year, 5% more than last year, due to leftover coffee from the previous harvest, said Guilherme Braga, head of the Brazilian Coffee Exporters' Association, CeCafe.

"Coffee's flowing out of Brazil just fine…the new crop is arriving and it's looking good," said Andre Santos, a physical-coffee trader at Ally Brazilian Coffee Merchants in Plantation, Fla.

Jonathan Camarda, executive wealth manager at Camarda Wealth Advisory Group, said he liquidated his bullish coffee wagers at the end of April.

"There was a certain amount of damage [to the crop], but it was so overpriced," said Mr. Camarda, who manages about $200 million.

He had bought shares of the iPath Pure Beta Coffee exchange-traded note, an investment product that tracks coffee prices, in January.

Mr. Camarda expects prices to continue to drop in the short term. "That cup is done and it ain't getting refilled again soon," he said.

Still, the drought is likely to hurt Brazil's coffee production this year.

"Coffee still shows a lot of strength relative to other commodities," said Matt Forester, chief investment officer at CFG Asset Management, an investment adviser in Newtown Square, Pa., with about $335 million under management. His firm bought shares in the coffee ETN in March and continues to hold that position.

Roasters aren't waiting to see where the futures market heads next.

White Coffee Corp. in Long Island City, N.Y., raised prices by around 5% to 7% for clients including local restaurants and diners last month, said Jonathan White, the company's executive vice president. Mr. White said he had to buy coffee to refill his inventories while prices were rising and passed the cost to his customers.

"Customers need coffee all the time," said Mr. White. "You would try to maximize your buys on the dips but it wasn't always possible."

Annie Gasparro contributed to this article.

Write to Leslie Josephs at leslie.josephs@wsj.com and Alexandra Wexler at alexandra.wexler@wsj.com



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