x Abu Dhabi, UAEWednesday 24 January 2018

Rising prices jolt coffee industry

Coffee beans are the latest agricultural commodity to hit record highs, with Starbucks warning that a large hit to profits is on the way.

Trouble is brewing in the coffee industry, with the price of the bean soaring to record highs - leading Starbucks to warn rising costs could hit profits this year.

The world's leading coffee retailer said it would not raise prices, but narrowed its earnings forecast of between US$1.44 and $1.47 a share to fall below analysts' expectations.

"Commodity costs … are now expected to have an unfavourable impact on EPS [earnings per share] of approximately $0.20 for the full fiscal year, attributable primarily to higher coffee costs," Starbucks said in a statement to the Nasdaq exchange.

The warning comes as the price of food soars worldwide, causing unrest in Middle East countries that depend greatly on food imports.

An index of food prices compiled by the UN Food and Agriculture Organization rose 25 per cent last month, compared with December 2009.

Coffee futures for March delivery of Arabica beans traded on the IntercontinentalExchangehit $238.15 per contract yesterday, a few dollars shy of record highs reached this month.

Demand from emerging markets, including the Middle East, Thailand, Indonesia and Russia, is a major factor pushing up coffee prices, say analysts.

Coffee consumption in the UAE has almost doubled since 2005, rising to 7,156.4 tonnes last year, according to the market research group Euromonitor. Tea consumption has also increased by 49.8 per cent to 4,785.1 tonnes.

China, which has traditionally favoured tea, accounts for only a small portion of coffee consumption. But Ji Ming, the president of the China Coffee Association, said Chinese coffee consumption is now increasing between 10 and 15 per cent a year.

"Coffee is becoming more and more popular in China," Mr Ji told Bloomberg yesterday. He said coffee would become as important as tea, "with more and more of the younger generation now preferring to drink coffee".

Troy Alstead, Starbuck's chief financial officer, told Reuters the company is "fully locked" for the next year and has bought all the coffee it will need for this year.

But for the UAE's coffee industry, local tastes for high-quality coffees are taking their toll on producers and roasteries.

"Prices have been crazy and it's killing us," said Hussein Awada, the owner and managing director of Lebanese Roastery in Abu Dhabi. "We've met suppliers, farmers, and everyone is thinking strategically.

"In my case it's a bit harder because I'm an end-user supplier. In my case there's more competition, people are sensitive to changes in prices and I'm not willing to change the quality of the coffee that we've been using for 35 years."

Mr Awada also said market rumours suggested the price of this year's crop would be even higher.

The one bright side, he added, is that wealthy customers in the UAE are more capable of absorbing price increases. "It would be harder to sell in Egypt or Lebanon at the same prices."