Hackett Advisors in the News

Published On Wed Dec 15 2010

Emily Mathieu
Business Reporter

Kraft Canada boosting coffee price

Canadians will be paying more for store bought coffee in the New Year, as a shrinking global supply and increasing demand continues to push up the price.

A recent spate of extreme weather in Colombia paired with a growing taste for higher quality beans and a diminished global stockpile could result in a 30 to 50 per cent spike in prices, according to one U.S. analyst.

On Wednesday Kraft Canada confirmed that the company’s Maxwell House and Nabob Roast & Ground coffees will go up in price on January 30, 2011, the price of roast and ground coffees will go up 7 to 10 per cent. Distributors were informed of the boost a few weeks ago, the company said.

Kraft Canada said the increase “stems from the significant increase in world prices for green coffee.” The company boosted prices twice on popular coffee brand products in 2010, the last increasing roast and ground coffee by as much as 12 per cent and instant coffee by 16 per cent.

South of the border Kraft Foods Inc. cited the same cause was behind Wednesday’s boost for Maxwell House and Yuban coffees, with roast and ground coffee prices up 12 per cent and instant coffee prices up about 4 per cent.

Shawn Hackett, president of Hackett Financial Advisors, Inc., a brokerage firm specializing in agricultural commodities in Boynton Florida, predicts “actual coffee prices” or the cost of beans and cups of coffee could rise anywhere from 30 to 50 per cent by 2012.

Coffee closed on the U.S. futures market for (U.S.) $2.175 a pound, about double the cost reported the same time last year. That price is well below historic highs of (U.S.) $3.35 per pound reported in 1977.

Hackett said based on current price increases a conservative estimate would be (U.S.) $4 per pound by the end of 2011.

Caffeine addicts should try to relax. Tim Hortons has no immediate plans to charge more.

“Typically, Tim Hortons books its coffee contracts for at least six months at a time, which protects its restaurant owners and customers from jumps in worldwide future markets,” said a spokesperson in an email.

Starbucks said no one was available to comment.

The shortage is being caused by several factors, but poor weather in Colombia is key, he said.

Torrential rainstorms have resulted in loss of life and heavy damage to the current crop. Last year production was down 35 per cent and it was hoped they would recoup those losses in 2010, said Hackett.

Colombia is the largest producer of high-quality, mild washed Arabica. “That is your Starbucks kind of coffee,” said Hackett. “The shortest supply is in that kind of coffee which is in the highest demand.”

In previous years stockpiles of coffee in Brazil were released to relieve pressure when the market became too tight, but those supplies were depleted this year, said Hackett.

He said because of the massive profits large companies like Starbucks make selling coffee most can afford to eat cost increases until prices stabilize.

Ken Hardy, a professor emeritus of marketing for the Richard Ivey School of Business, said the smaller increase like the one from Kraft are unlikely to impact consumer habits.

Hardy, a board member for Williams Coffee Pub, noted that coffee is a central part of our social habits and a slight price hike won’t deter us from buying.

He said if the price for over the counter coffee was going to rise in Canada, the cycle would start with Tim Hortons.

“I think they are the dominant buyer and dominant retail chain . . . they would be the price setter for most coffees.”

If prices do rise above $4 and a hefty price hike is passed down to consumers people may start rethinking how much they drink and from where, he said.

Some companies, like Starbucks, don’t have a great deal of room to manoeuvre, he said.

“They are already near the ceiling of price tolerance.”


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