Coffee: At Last, Grounds For Celebration

The price of coffee can't come down fast enough for Sid Kahn. A year ago, the soaring cost of beans forced his B&F Coffee Service to charge one-third more for the grounds it delivers to 4,000 Chicago offices. As customers griped, Kahn could only shrug. "We're caught in the middle," he complains.

Now relief is trickling down. By Dec. 5, coffee futures had slid to $1.05 per pound, down from a 1994 peak of $2.74. That's still well above the 75 cents levels that prevailed before coffee took off, but further price plunges may be in the offing as global supplies increase, analysts say. And lower prices likely will halt a recent 6% slide in U.S. consumption prompted by coffee sticker shock.

Flashback to the disastrous summer of 1994. Two frosts and a drought had knocked out the Brazilian coffee crop, which in good years accounts for a third of world output. To make matters worse, virtually every other producer, stung by low prices in previous years, had skimped on fertilizer, pesticide, and maintenance. Their sorry plantations could hardly fill the Brazilian void. As the supply outlook withered, buyers panicked. The cost of java soared.

By the beginning of 1995, though, the market already had begun to adjust. Traders started anticipating better crops ahead, especially since coffee bushes that survive frosts usually respond by producing more the next season. Sure, the Brazilian harvest might be half its usual volume, filling as few as 12 million of the standard 132-pound bags this year. But if Brazil comes back strong, traders reasoned, it could fill 26 million bags in 1996 and 30 million the year after that.

Meantime, producers failed in their efforts to bolster prices by holding beans off the market. The Association of Coffee Producing Countries, a trade group of 29 nations representing about 80% of world production, agreed in July to restrict exports by 10%. But it made several misjudgments: Coffee drinkers, stung by higher prices in the U.S. and Europe, cut their consumption by more than the trade group anticipated. And nonmember producers, such as Vietnam, boosted exports more than expected, prompting dissent within the organization.

Such dissent makes it unlikely the trade group could pull off a more desperate move, such as halting member exports altogether, says analyst Judith Ganes of Merrill Lynch & Co. "If some hold back, others will ship more heavily," she predicts. Even though the group has succeeded in tightening supplies, moreover, traders have kept driving prices down--by 14% in November alone.

SHORT-SELLERS. As prices drop, market forces have reinforced the downward momentum: Roasters such as Kraft Foods Inc. and Procter & Gamble Co., anticipating lower prices, have been less avid buyers, traders say. And producers, also worried about lower prices ahead, have stepped up short-selling to lock in at current levels, pushing the market lower. "The producers are panicking and continuously shorting this market," says Walter Spilka of Smith Barney Inc.

Wholesalers and retailers are just now responding to lower prices. Average supermarket prices have jumped 18% this year, even as futures prices have fallen, partly because costly gourmet coffees have gained market share. As stores use up expensive inventory, though, consumers may soon get a break. Kraft, maker of Maxwell House, has dropped the price it charges retailers by 25% this year. At gourmet shops, price cuts are less certain. Starbucks Corp. "hasn't decided whether to lower prices," says Michael Casey, its chief financial officer. In part, the decision will depend on whether prices stay down, he notes.

For his part, Sid Kahn is mulling a price cut--but not until March. He figures getting burned once by coffee is quite enough.

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