Your morning cup of coffee is getting more expensive. Coffee prices have been on the rise throughout 2014, and the price of Arabica beans is now starting to cut into coffee retailers' profits. Keurig Green Mountain (NASDAQ:GMCR) and Starbucks (NASDAQ:SBUX) have both announced price increases this year, and there may be more to come.
What's caused the increase in coffee prices?
A drought in Brazil has put a severe damper on supply this year, and forecasters are beginning to worry that the effects may carry on into 2015, as well. The country produces around a third of the world's Arabica bean crop. The drought, called the worst in 40 years, has hammered coffee growers. In addition to the localized drought, coffee rust, a fungal infection that attacks coffee plants, has been on the rise globally.
Starbucks announced its increase earlier in the year, bumping bagged coffee prices by 8%. Keurig took a similar line last week, saying that it will raise prices up to 9% on all of its portion packs beginning in November. Keurig said that its green coffee prices have increased 55% in the last year.
It's a tricky situation for coffee producers, as shoppers have options beyond the major chains for their coffee needs. Due to the rise in popularity of coffee, Starbucks now competes with just about every other business in town for coffee dollars. Due to that fact, the company has been hesitant to increase cafe prices as much as it has bagged coffee.
Keurig is also competing against other producers who now produce packs that work with its Keurig brewers. Other retailers may be able to keep costs lower by using a blend of Arabica and Robusta, a cheaper alternative to Arabica beans.
The future of coffee prices
Part of the future of pricing depends on how soon Starbucks and Keurig lock in 2015 prices. On its last earnings call, Starbucks' CFO Scott Maw said that the company had locked in 60% of its 2015 supply at prices that were relatively in line with 2014, but that pricing would depend on how that last 40% ended up. If the company waits too long and the drought is forecast to take a toll on next year's supply in Brazil, you can be sure Starbucks will be talking about a potential increase.
Keurig is actually locked in for all of 2015, according to the company, so its price increase is probably a reflection of its pricing forecasts beyond next year. Betting on higher prices seems like a good call. The drought in Brazil may be an early sign of El Nino, which is bad news for growers. The weather system delays the return of wet weather, often setting in during the rainy season.
For coffee drinkers, it's going to mean watching the price of your cup continue to creep up over the next few years. Retailers are only going to have to fight harder for beans as worldwide consumption rises, especially in Asia. Coffee has been on the rise in Asia, and as the market takes more and more of the available green coffee, prices are going to continue to climb.
Keep an eye Starbucks and Keurig as they continue to come under pressure from coffee pricing. The long-term outlook for your cup isn't cheap, but these two companies are going to try to keep you coming back for more.
Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Keurig Green Mountain, Starbucks, and Tesla Motors. The Motley Fool owns shares of Starbucks and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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