Expect to be paying more for a cup of coffee in 2017

Expect to be paying more for a cup of coffee in 2017

For all of you coffee fiends out there, we’ve got some bad news: As reported by Bloomberg last month, it looks like your morning cup of joe is about to get a little more expensive. That’s not all, however, as it looks like the milk you put in your coffee is also about to get a bit pricier to boot. In this post we will attempt to apply economics to something all economists and non-economists can understand: a cup of coffee. We’ll be taking current real-world examples to show how supply and demand can impact the prices of some of the typical ingredients for a cup of coffee and how that is likely to influence how much you pay for one in 2017.

Robusta coffee prices up on supply shortage concerns while Arabica demand increases

First, let’s take a look at Brazil where a severe drought is seriously affecting coffee production. Brazil is the world’s biggest producer and exporter of coffee and more specifically the Robusta coffee bean, which is used in most of the cheaper pre-ground and instant coffee varieties. The drought has gotten so bad in Brazil recently that the government has even set limitations on irrigation from rivers, which is only likely to make things worse for coffee production.

Not only are Brazilian coffee producers having a hard time, but two of the world’s other big Robusta coffee producers, Vietnam and Indonesia, are also in a bind. This time it’s just the opposite, as too much rain in Vietnam and Indonesia is harming coffee crops. This likely means a drop in supply for Robusta coffee for some time. Indeed, last month, Robusta prices on the ICE Futures Europe exchange were at a four-year high on expectations of lower supply.

For all of you high-end coffee drinkers out there, you’re not out of the line of fire. The expected drop in supply for the cheaper Robusta coffee beans is now affecting the good stuff. A domino effect is taking hold as the demand for Arabica coffee beans is now increasing to compensate for the expected shortage of Robusta beans. FocusEconcomics expects the price of Arabica coffee to average USD 154 cents per pound in 2017 after averaging USD 136 cents in 2016 and USD 132 cents in 2015.

JM Smuckers, the company that produces Folgers and Dunkin’ Donuts coffee recently increased the retail price of their coffee by as much as 6 percent while Starbucks had already hiked their prices for the third year in a row last summer. Other retailers won’t be far behind.

World dairy prices increase as global supply and demand tighten

But, that’s not where the story ends. If you take your coffee with milk you may want to start taking it black. According to Robert Cropp, University of Wisconsin agricultural economist, strong butter and cheese sales are boosting milk prices in the U.S.  

“Good sales of butter and cheese and improved exports held up prices [...] the January Class III (milk) price should be about USD 16.50,” Cropp says. “Class III should stay in the USD 16s through May or June and then move into the USD 17s for the remainder of the year. The Class III price could average more than USD 2 higher than 2016.”

With four other major milk exporters — European Union, New Zealand, Australia and Argentina — likely to produce less this year, and stronger demand from China and the ASEAN countries of Southeast Asia, world supply and demand is narrowing, which should mean higher world dairy prices.

In New Zealand, consumers are already starting to see the effects of rising dairy prices. According to the New Zealand Herald, Fonterra, the country's biggest dairy company, is hiking prices across the board on declining production in the world's major dairy producers. 

Soy milk could substitute your coffee creamer

Luckily for the consumer there are substitutes for milk. Soybean prices are likely to come down as the year continues. Soy milk, a derivative of soybeans, might be a good substitute for your coffee creamer. Currently, soybean prices appear to be increasing as demand from China increases and Brazil’s harvest stays off the market because of the strong real (BRL) decreasing the competitiveness of their exports.

Nonetheless, soybean prices should correct downward later this year as Brazil’s harvest will eventually make it to the market. On 10 February, soybeans traded at USD 1,028 cents per bushel, however, we forecast prices to come down to USD 986 cents per bushel in Q4 of this year.

Sugar prices through the roof, but likely to correct downward

For those of you that take sugar with your coffee, you can take solace in the likelihood of sugar prices coming down later this year. Although, sugar prices were going through the roof earlier this year, a number of countries have recently intervened, which has seen prices stabilize.

The Trade Ministry of Indonesia put a price ceiling on sugar, while in India, mounting pressure from the government on the industry helped sugar prices to moderate of late.

The sugar price rally will likely peter out over the course of the year as Brazil—the world’s top sugar producer—is expected to significantly increase its sugar cane harvest. According to Reuters, Brazilian sugar cane production will come in at 35 million tons in 2017, as higher sugar prices will encourage millers to produce more sugar rather than other derivatives such as ethanol. Sugar traded at USD 20.5 cents per pound on 10 February, however, we expect the price to come down to USD 18.6 cents per pound in Q4 2017.

Unfortunately, lower sugar prices aren’t likely to make your cup of coffee much cheaper. To quote the Beastie Boys, unless you take your “sugar with coffee and cream,” expect to be paying a little more for your cup of java in 2017.

If you are interested in more commodities price forecasts and written analysis, take a gander at one of our FocusEconomics Consensus Forecast Commodities reports. We cover 33 commodities, including energy commodities, industrial and precious metals as well as agricultural commodities with five-year Consensus Forecasts on prices. Click on the link below to download a sample report.

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Date: February 21, 2017


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