If you follow trading in coffee futures, you may have this big pit in your stomach.The futures price of Arabica coffee, the kind you find at Starbucks and other high-end coffee shops and decent restaurants, closed Tuesday at $2.645 a pound, up more than 40% on the year. The reason: Drought is a big problem in Brazil, and that country produces a third of the world's largest coffee. So if Brazil's crop comes up short, futures traders push prices higher.And now you're thinking: How much will that next grande-size Americano cost at the local Dew Drop Inn coffeehouse?Short answer: about what it cost Monday and maybe last April. And the odds of your paying $10 anytime soon? Not much for now. Here's why: Related: Stock Market Today: Stocks on record watch with Fed rate cut on the horizonPrices for roasted coffee aren't changing much at the retail level, either at your Dew Drop Inn or at the supermarket. In fact, the most recent Consumer Price Index report shows the price of coffee consumed at home fell 2.4% between August 2023 and 2024. (Instant-coffee prices actually went up.) The people who buy and roast coffee regularly contract quantities and prices for their supplies well in advance of need.Coffee beans properly stored can hold their quality for upward of a year. Coffee growing is a hands-on businessBig coffee retailers contract with growers for their supplies long in advance. Starbucks (SBUX) typically contracts to buy coffee beans nine to 18 months ahead of delivery. Moreover, the coffee giant buys coffee from all the world's primary growing regions — Central and South America, Africa and Asia. Vietnam also has emerged as a major coffee producer.Coffee importers, who buy directly from farmers and grower cooperatives and sell beans to smaller roasters, contract their supplies generally before a new growing season begins. In many cases, these contracts evolve from longstanding relationships. Bottom line: If we're going to pay substantially more for our caffeine jolts, it won't be for a while.Small coffee growers are key suppliersCoffee, which has its roots in eastern Africa, is in fact part of a complex market system. It's basically grown worldwide in regions located between the Tropic of Cancer and Tropic of Capricorn. (The only U.S.-grown coffee is produced in Hawaii.) The process starts mostly on small farms. Beans are harvested and and dried and sold to coffee importers. The importers supply beans to roasters, who in turn sell the finished coffee to clients, including restaurants, cafes and retail stores. Central and South America produce the most coffee. The reason for the small farms is that the most prized coffee is grown in mountainous environments.Large, mechanized operations do exist in Brazil, especially in the Minas Gerais state north of Rio de Janeiro, because the terrain is flat or rolling and can support farm machinery.Two kinds of coffee predominate:Arabica, prized by aficionados. This coffee has to be grown and harvested carefully. Robusta, which grows and thrives most anywhere that's warm and wet. It is used to make espresso. More often, it is the bean used to make low-end coffees sold in supermarkets. Vietnam coffee is primarily Robusta.If there's a crop shortage in one area because of drought or frost (as can happen in Brazil), coffee crops elsewhere should be able to pick up the slack.The Covid-19 pandemic disrupted the coffee business with labor shortages and supply disruptions that pushed prices higher.
A worker picks coffee berries from a Robusta coffee farm in India. Abhishek Chinnappa/Getty Images
Once Covid eased, a big problem was rebuilding the transportation infrastructure. There were labor shortages and serious container shortages. Shipping from Africa to Europe has been disrupted by Houthi attacks on ships in the Red Sea. But in the U.S., the retail price pressures were easing this spring.Fund manager buys and sells:Cathie Wood snatches $8 million of battered tech stockTop value fund manager says Google-parent Alphabet is deep-value stockMorgan Stanley reveals top stock picks, including NvidiaWhy the coffee-futures market is importantThe question, then, is what good is the futures trading. The short answer is that the futures price functions as the base price for everyone else. In fact, the contracts between importers and roasters often involve prices couched as a multiple of the prices on a trading floor. Once the coffee is sold to a retailer or a restaurant, selling prices seem to reflect a country's inflation rate, according to Peter Stone, who manages the Specialty Coffee Transaction Guide, based at Emory University in Atlanta. Nonetheless, pay attention to Brazil's weather, advises Scott Richardson, head of wholesale sales and lead roaster at Herkimer Coffee. The small Seattle company operates three cafes and sells coffee to coffeehouses in the Pacific Northwest and elsewhere. Brazil's drought, which Richardson says is tied to global warming, is its worst in seven decades. More than 59% of the country is suffering some sort of stress. The harvest on the 2023-2024 Brazil crop, which starts in April or May, is nearly wrapped up. The drought has hurt some of the yields, although overall production is supposed to be up 5% from a year earlier. Here's the caveat: If rainfall increases and high temperatures don't ease, you will see latte prices start to go up. We can hope it won't reach $10. Related: Veteran fund manager sees world of pain coming for stocks
