Global high coffee prices are still showing little sign of falling back. Alex Turner reports

IN A unit at Millers Bridge Industrial Estate, in Bootle, John Pye is showing me how the rising cost of coffee on the world markets is affecting his business.

The co-owner of Joe Black Coffee and Tea pointed at the 60kg sacks that he has in stock, waiting to be blended and roasted, before being packed and delivered to cafes, restaurants, hotels and companies across Merseyside and farther afield.

“That coffee,” he said, “has increased from £1,900 for a metric tonne to £3,000. This one has gone from about £2,000 to £4,500.”

A 34-year-high in coffee prices which has sent prices spiralling to more than double their usual level, meaning he can no longer absorb the costs.

“The price has not really gone down in the last 12 months. It’s just gone up and up,” he said.

“When they go up and down a little, we just leave the prices, but when they go up a lot we have to raise prices.”

He set up the company in 2008 after 12 years working for Liverpool roaster Bellows, which has since merged into his operation.

He supplies his coffee into places as diverse as a Liverpool One outlet and Rothschilds bank in Manchester, while if you get a whiff of coffee while walking along Hope Street, then it’s almost certainly one of his.

He is phlegmatic that while some of his customers, who appreciate the value in Joe Black’s product, will accept the rise, there are others that won’t.

It is a similar situation at Wirral coffee roasters Adams & Russell. Director Frank Eaton recounted the tale of one customer who bought coffee off the internet in search of cheaper prices before realising his mistake when he tasted it.

He has also seen sharp rises in the prices he is buying at, but points out that by the time the roasted bean gets to the cup, the impact on price is minimal.

Mr Eaton said: “Each shot of coffee is seven grammes, so there are 140 shots of coffee in a 1kg bag. Each shot works out at 7-8p.

“It’s very profitable to sell a cappuccino for £2.50 – your coffee is 7p, your milk is 7p, you can make £2 a cup but it’s no good selling 50 cups a day.

“But because they are small value items, they have got to sell a hell of a lot of coffee, so although their margins on each cup are quite high, net margins aren’t because of the retailer’s overheads.

“That’s the big problem. People don’t realise how much business you have to do to cover rents, while the investment in terms of coffee machines is a lot – you can pay up to £10,000.”

However, he is unconvinced that the spike in the global price for coffee is wholly the result of adverse weather or overwhelming demand.

“Because the originating countries are getting more for their coffee, they are going to hold back sales because it will keep the price high,” he said.

“The crop in Columbia has not been as good this year, which is what started a little bit of a run, but it’s the speculators that have forced the price up.” He believes that being small enables Adams & Russell to mitigate against the worst of the rises.

“Because we are small, we have got a bit of flexibility and dip in to the market when the price drops,” he said. “A really big company can’t do that as they have to have the coffee stock.

“Our margins have been hit but we are riding it out and buying when there are dips.

“We have picked up business because our competitors are going out of business or the big boys are insisting on minimum orders because fuel has gone up.”

Schluter is a coffee trader specialising in African coffee. The Swiss company has an office in Speke, headed by Phil Schluter, who is part of the sixth generation of the family firm which has been in existence since 1858.

He points to supply-side problems for causing the spike, as well as the market looking to find a “sustainable” price.

“The fundamental cause is the lack of deliverable coffee – that was what started it,” he said. You could see it first in Columbia. The market price that was quoted for arabica is a deliverable price. It must be a certain grade of coffee to be deliverable.

“Of the deliverable coffee in the world, about one-third is from Columbia. They had a big drop [in its harvest] about two years ago.

“All coffee trades against the market at this base price and then either trades at a premium or a discount.

“Columbian went from trading at the market price for coffee, or a little above, to a 100% premium to the market – that is, double the price – in about February, 2010. On the basis of that, the market started taking up in June, 2010.

“There was a real fundamental reason – it couldn’t produce and deliver at the price the market was quoting.

“The spike in the oil price up to March, 2008, which affects the price of fertiliser, also meant people couldn’t afford to look after their crop.”

While Mr Schluter doesn’t expect the current high levels to become the base level, he does think it will result in a permanent readjustment.

“We are coming out of a 10-year period of low coffee prices,” he said.

“The feeling is that the prices we have lived with were too low, but the current prices are too high.

“The current spike is unsustainable. The new base will be about 150-160¢, up from 100-120¢.”

He added: “The main impact is high volatility. It was up 5% on Friday, down nearly 3% on Monday. The daily movements in coffee is about double the old monthly movements.”

The International Coffee Organisation (ICO) is forecasting high prices to remain for two years, because of the time it takes to increase supply.

ICO estimates that global coffee consumption, which is measured in 60kg bags, rose 2.4% to a record 134m bags in 2010, while world 2010/11 coffee output is forecast at 133m.

UK imports rose 14% between 2007 and 2009, to 3.22m bags, representing 2.5% of world consumption.

As coffee trees take around three years to produce a crop, output is not keeping pace with demand.

“When you invest today, it will take you a three-year minimum to get an output from the investment,” the International Coffee Organisation’s chief economist Denis Seudieu said. “Based on this hypothesis, the relatively high prices will need to be maintained for another two years because the supply response takes time.”

Brazil, the world’s largest coffee producer, is expected to see yields increase on the back of increased fertiliser application and better husbandry, analysts said, although they expect it will not be until the 2012/13 Brazilian harvest that there will be supply-side relief.

Vietnam, the world’s top producer of robusta, a bitter tasting bean often used in instant coffee, is also not in a position to provide immediate relief.

The steep rise in coffee prices has prompted coffee roasters to caution that expensive beans could encourage a boom and bust cycle in the next few years.

Andrea Illy, chief executive of Italy’s Illycaffe, said: “What worries me most is this resulting in an explosion in production, like happened in the last big rise in coffee, in 1998.

“Three years later, the world was flooded with coffee and that led to lower prices and a crisis in coffee.”