By Leslie Josephs
The Wall Street Journal
March 22, 2011
NEW ORLEANS—Some of the world's largest coffee companies are paying farmers more for the increasingly costly beans, but don't chalk it up to corporate responsibility.
Ensuring supplies of coffee in the long term is vital, even at a higher price, executives say.
Coffee prices have surged over the past year, largely due to production shortfalls, burning companies—and consumers—with higher costs.
U.S. coffee roasters and retailers Starbucks Corp., Kraft Foods Inc. and Massimo Zanetti USA raised prices last week under pressure from climbing green-coffee costs.
Arabica coffee futures on IntercontinentalExchange have risen more than 50% over the last six months after bad weather clipped output in top-producing nations such as Colombia.
But the near-record prices fetched by mild washed arabica beans, prized by coffee drinkers for the rich flavors they produce, may not be enough to persuade farmers to expand production. Many growers are wary of coffee's boom-bust cycles and worry that prices will drop by the time new plants bear fruit.
"I think I can count on my hand the number of farmers who'd recommend that their children become coffee farmers," said Nicolas Huillet, a marketing manager for Nestlé SA. Mr. Huillet runs a 10-year, 500 million Swiss franc ($550 million) plan that Nestlé launched in August to double the amount it buys directly from farmers and cooperatives by paying higher prices.
Speaking at the National Coffee Association meeting here Saturday, Mr. Huillet said coffee supplies for the company, which buys 10% of the world's green coffee, could wane "if farmers don't have enough incentive to grow."
Starbucks says it has always paid farmers "equitable prices."
"If you want good coffee, you have to pay," Starbucks Senior Vice President Dub Hay said. He declined to provide the specifics of the contracts but said the company pays some farmers a premium over either the price of ICE's benchmark "C" contract or a flat rate.
But despite high prices and strengthening demand, increasing production is a challenge. Arabica coffee is viewed as the higher-quality cousin of robusta coffee, which is easier to grow. Arabica coffee trees are generally planted in rugged, high-altitude terrain and are costly to maintain.
Some farmers, fearing a sudden drop in prices, don't want to make the investment. A new plant generally takes three or four years to bear a substantial crop.
"Farmers have suffered from bad prices for many years," said Henry Castillo, field manager at Coopeatenas, a large coffee cooperative in Costa Rica's lush Central Valley region. "What people don't want to do is invest and then have prices drop."
Mr. Castillo said that while cooperative members receive a premium of at least $10 above market price per 46-kilogram bag from Starbucks—one of their biggest buyers—many don't encourage their children to stay in the business.
"[Farmers] use that money so they can send their kids to school," he said. "Children of coffee farmers are professionals."
The limited availability of coffee is more worrying to some green-coffee buyers than the high prices, which could help, at least, to keep supplies steady.
"There has to be a base price to keep farmers in the business," said Don Holly, director of roasting and quality at Green Mountain Coffee Roasters Inc. "At this phase, we're more concerned about supplies."
He said the Vermont-based company pays "well over" $3.50 per pound for beans.
On Tuesday, the arabica contract for May delivery on ICE was down 1.3% at $2.7355 a pound.
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Write to Leslie Josephs at leslie.josephs@dowjones.com
The Wall Street Journal
March 22, 2011
NEW ORLEANS—Some of the world's largest coffee companies are paying farmers more for the increasingly costly beans, but don't chalk it up to corporate responsibility.
Ensuring supplies of coffee in the long term is vital, even at a higher price, executives say.
Coffee prices have surged over the past year, largely due to production shortfalls, burning companies—and consumers—with higher costs.
U.S. coffee roasters and retailers Starbucks Corp., Kraft Foods Inc. and Massimo Zanetti USA raised prices last week under pressure from climbing green-coffee costs.
Arabica coffee futures on IntercontinentalExchange have risen more than 50% over the last six months after bad weather clipped output in top-producing nations such as Colombia.
But the near-record prices fetched by mild washed arabica beans, prized by coffee drinkers for the rich flavors they produce, may not be enough to persuade farmers to expand production. Many growers are wary of coffee's boom-bust cycles and worry that prices will drop by the time new plants bear fruit.
"I think I can count on my hand the number of farmers who'd recommend that their children become coffee farmers," said Nicolas Huillet, a marketing manager for Nestlé SA. Mr. Huillet runs a 10-year, 500 million Swiss franc ($550 million) plan that Nestlé launched in August to double the amount it buys directly from farmers and cooperatives by paying higher prices.
Speaking at the National Coffee Association meeting here Saturday, Mr. Huillet said coffee supplies for the company, which buys 10% of the world's green coffee, could wane "if farmers don't have enough incentive to grow."
Starbucks says it has always paid farmers "equitable prices."
"If you want good coffee, you have to pay," Starbucks Senior Vice President Dub Hay said. He declined to provide the specifics of the contracts but said the company pays some farmers a premium over either the price of ICE's benchmark "C" contract or a flat rate.
But despite high prices and strengthening demand, increasing production is a challenge. Arabica coffee is viewed as the higher-quality cousin of robusta coffee, which is easier to grow. Arabica coffee trees are generally planted in rugged, high-altitude terrain and are costly to maintain.
Some farmers, fearing a sudden drop in prices, don't want to make the investment. A new plant generally takes three or four years to bear a substantial crop.
"Farmers have suffered from bad prices for many years," said Henry Castillo, field manager at Coopeatenas, a large coffee cooperative in Costa Rica's lush Central Valley region. "What people don't want to do is invest and then have prices drop."
Mr. Castillo said that while cooperative members receive a premium of at least $10 above market price per 46-kilogram bag from Starbucks—one of their biggest buyers—many don't encourage their children to stay in the business.
"[Farmers] use that money so they can send their kids to school," he said. "Children of coffee farmers are professionals."
The limited availability of coffee is more worrying to some green-coffee buyers than the high prices, which could help, at least, to keep supplies steady.
"There has to be a base price to keep farmers in the business," said Don Holly, director of roasting and quality at Green Mountain Coffee Roasters Inc. "At this phase, we're more concerned about supplies."
He said the Vermont-based company pays "well over" $3.50 per pound for beans.
On Tuesday, the arabica contract for May delivery on ICE was down 1.3% at $2.7355 a pound.
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Write to Leslie Josephs at leslie.josephs@dowjones.com
go coffee!!!
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