Coffee roasters keep eye on supplies

By Leslie Josephs

The Wall Street Journal

March 18, 2012

Coffee roasters are battling for both market share and raw materials as supplies of coveted handpicked beans dwindle. The industry will be abuzz over this and other issues facing the changing marketplace at the National Coffee Association's annual conference this week.

Starting Thursday, executives from roasters such as Starbucks Corp., SBUX +0.26% Maxwell House-maker Kraft Foods Inc., KFT +0.21% and J.M. Smucker Co., SJM +0.41% which produces Folgers, will join growers groups, commodity trade houses and banks at the Charleston, S.C., meeting.

Another topic of discussion around the table will be the explosive growth of single-cup brewing machines. Starbucks is at the center of the single-serve frenzy. It currently sells its coffee in K-Cup pods that work with the Keurig machine. The machines, made by Green Mountain Coffee oasters, GMCR +0.90% range in price from $80 to $250. But earlier this month, Starbucks said it would begin selling its own machine, the Verismo, in autumn, sending Green Mountain Coffee Roasters' stock tumbling.

"The premium single-cup segment is the fastest-growing business within the global coffee industry," said Howard Schultz, Starbucks chairman and chief executive, in a news release announcing the product.

A study on coffee-drinking trends by the National Coffee Association last year found that single-serve coffee machines are penetrating the market at 1% a year, and 35% of those with the system purchased one in the last six months.

The big challenge for roasters, though, is the supply of coffee. Torrential rain in Colombia—which produces mild, arabica beans, the type frequently used in gourmet coffee—damaged crops, and coupled with a smaller off-cycle harvest from Brazil, sent prices to 14-year highs last year.

When prices rose, industry insiders say coffee roasters switched their blends. With Colombian beans scarce, and prices high for Central America's volcanic-soil-nourished beans, roasters turned to less expensive Brazilian arabica, which are usually mechanically picked and processed differently.

When those became too expensive, the roasters turned to robusta.

For some coffee connoisseurs, robusta is a dirty word. The easier-to-grow and less expensive cousin of arabica is in ample supply this year, thanks to a strong harvest from the top robusta producer, Vietnam.

But now arabica prices are falling ahead of a what is expected to be a record crop this season out of Brazil, the source of one-third of the world's coffee. Prices are at 16-month lows, and the price difference between arabica and robusta has fallen to the narrowest point since August 2010.

So the question at the National Coffee Association meeting is, will roasters improve the quality of their blends by scaling back their use of robusta and increasing the arabica?

Dealers of specialty coffee at a recent industry gathering in New York seemed to think so.

"I think it's going to help a lot of roasters," said John Coyne, a trader at Edison, N.J., importer Royal Coffee New York Inc. "They might have a little more cash to spend [on better quality beans]."

But it is also possible that coffee companies will announce price cuts at the NCA conference, as they seek more customers. At last year's meeting, Kraft, Starbucks and Massimo Zanetti Beverage USA, the maker of Chock Full o'Nuts, said they were raising prices because coffee-bean costs were so high.

Kraft and Smucker reversed those increases later in 2011 when prices eased.

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Write to Leslie Josephs at leslie.josephs@dowjones.com

A version of this article appeared Mar. 18, 2012, on page B2 in some U.S. editions of The Wall Street Journal, with the headline: Coffee Roasters Keep Eye on Supplies.