Coffee: 2nd largest commodity in the world! … notice stats at end of article :)

Coffee prices, a sign of a jittery economy

By Conrad Collaco, CBC News.  Posted: May 25, 2012 1:28 PM ET

The spread between robusta and arabica coffee beans has changed drastically this year.

The spread between robusta and arabica coffee beans has changed drastically this year. (Lawrence Libby/CBC)

A single cup of coffee can say a lot about the story of the world’s economy.

The two most commonly produced coffee varieties are the arabica and the robusta. Commodities watchers say more people are buying the cheaper robusta variety as the economy continues to need a jolt. Prices for robusta beans are rising while the higher-end arabica beans have been dropping in price.

“Prices of arabica have come down pretty significantly,” said Mike Pattison, co-owner of the Homegrown Hamilton coffee house. “I choose not to use any robusta. They don’t stand alone.” Pattison said some places that sell coffee will mix the two types of beans but that affects the flavor.

Alexandra Cygal, manager of public affairs for Tim Hortons says the company only uses arabica beans and that any cost savings from bean purchases have been offset by rising labour and energy costs.

Arabica beans come from the Arabian mountains of Yemen and Ethiopia. They tend to be of higher quality and are processed more carefully. Because they only grow at altitudes higher than 610 metres above sea level, they’re a lot more expensive to harvest. Arabica’s spot price hit a 34-year high north of $3 per pound in April of last year.

Most commercial coffee brands use a blend of the two. Robusta beans are easier to harvest and are better able to resist rust disease. The robusta beans are cheaper though most connoisseurs believe they produce an inferior product.

‘People decided it was costing too much to gas up their body.’—Commodities watcher John Stephenson

“Robusta has genes that can give it a wet cardboard, rubbery smell and taste,” says John Rapinchuk, the chief financial officer of San Francisco-based Knutsen Coffees Ltd.

That’s not a description that is likely to sell a lot of coffee yet demand for robusta beans has soared this year, as consumers downgrade their coffee budgets.

Arabica shipments dropped eight per cent over last year while robusta exports are booming — up 10.4 per cent from a year ago.

“The retail buyers see it as too expensive so they’re moving to cheaper options,” says John Stephenson, a portfolio manager with First Asset Investment Management Inc. in Toronto, who watches the commodities market closely. “After arabica was so expensive in 2011, roasters moved away from 100 per cent arabica blends and started using more robusta.”

Shrinking price gap

As the chart above shows, prices of the two beans are heading in opposite directions. The price gap is normally more than $1 and now it’s down to 70 cents. Some experts predict it could drop to as little as 50 cents once a bumper arabica crop from Brazil is harvested this summer.

The erosion of demand by coffee drinkers discovering they can tolerate cheaper (and more caffeinated, it should be noted) robusta hasn’t helped. “People are saying, ‘I need my coffee but maybe I don’t need to buy it at Starbucks,'” Stephenson says. “It’s a bit like how high gas prices holds down driving. People decided it was costing too much to gas up their body.”

Coffee drinkers are consuming more coffee than ever, with the International Coffee Organization estimating that 137 million bags of coffee was consumed in 2011 worldwide, up 1.7 per cent from 2010. During the last 12 years, consumption has increased at an average annual rate of 2.5 per cent.

Have your coffee habits changed?