The great coffee rip-off is no myth

Michael Pascoe
September 23, 2013
The Age

Consumers complaining about being charged the same amount for smaller takeaway coffee cups don’t know the half of it – the price of coffee has been plunging for two years without a drop of the fall touching Australian sippers’ lips.

And if that’s not bad enough, the price of chocolate is on the rise again with cocoa beans up 25 per cent from their low earlier this year. What you don’t win on the coffee, you lose on the chocolate hit.

Coffee prices peaked in 2011 and have been cooling ever since. In 1946 Frank Sinatra sang they’ve got an awful lot of coffee in Brazil – right now they’re expecting an awful lot more and that’s after filling US warehouses with beans. US coffee futures are down by a third on this time last year and are about half of their September 2011 level.

Yet at 114 US cents a pound, coffee isn’t far off its 40-year average of 123.3 cents. According to Trading Economics, coffee peaked at 339.9 cents in 1977. (Just as well Australia didn’t have its current barista culture then or the nation would have been bankrupt.) Coffee saw a record low of 42.5 cents in 2001 from which it was a slow recovery to the 2011 high.

Coffee
While the key raw material has been falling in price, Australian coffee prices have continued to rise. Brisbane coffee machine supplier, Gilkatho, started a coffee price index in 2003, initially just recording Brisbane take away cappuccino prices which then averaged $2.37 a cup. (The idea may be been to illustrate how much cheaper and more efficient it was for an office to install a machine from Gilkatho.)

The index has grown to include all capital cities plus the Gold Coast, which has the dubious distinction of serving Australia’s most expensive coffee at an average take away cap of $3.94, one cent more than Perth. And there’s no correlation between Gold Coast prices and quality, in your columnist’s humble experience.

CBD competition and volume makes Sydney the cheapest city for coffee addicts at $3.25 in the June quarter survey, followed by Melbourne at $3.42. Brisbane scored $3.61 for take away, but distinguished itself with the biggest price rise for dine-in coffee over the past financial year – the average cup rising 14 cents to $3.66. Melbourne’s average rose 8 cents to $3.46 while Sydney was the only city to record a fall, down a modest four cents to $3.42.

The stickiness of coffee cup pricing despite falling beans appears to be a global problem. Bloomberg offers a variety of reasons for stable prices for what passes for coffee in the US, including loss aversion.

“People process financial losses differently than gains. Behavioural economists call it “loss aversion”, and the general thesis is that the pain of losing $1 is greater than the joy of gaining $1. When it comes to coffee: The joy of a price cut would be brief and fleeting. If the market turned and the coffee kings eventually had to raise prices, consumers would feel a much more jarring jolt. In other words, over the long term, customers would be more piqued than pleased.”

Sounds like a good excuse to maintain prices except where competition is fierce.

In fairness, the price of the bean is only one part of the java, which is an excuse to mention power prices and a distinguished entry in the Murdoch prize for the best anti-Labor beat up of 2013 – an effort by the Daily Telegraph (where else?) to claim the carbon tax was taking the flavour out of chocolate. No, the Terror really did publish:

“FALLING out of love with your chocolate? It’s not you … It’s the carbon tax.

“Chocolate lovers complaining that the taste of their treat has changed can blame rising electricity prices and a sky-high dollar for forcing chocolate makers to tinker with the production process.
“Manufacturers are devoting less time to “conching”, the stage that grinds the ingredients and breaks down fibres. A leading industry insider said it was common knowledge that leading companies had shortened this stage of the refinement process in an effort to cut costs.”

Cocoa
How the strong Australian dollar was making chocolate more expensive is beyond me, never mind that the carbon tax wasn’t the biggest factor in higher electricity prices, but I don’t work for News Corp and thus can’t hope to understand.

Meanwhile another Murdoch publication, the Wall Street Journal, is reporting that the price of one kilogram of chocolate in the US is expected to rise to US$12.25 this year, up 45 per cent from 2007. Cocoa prices are up by 21 per cent so far this September quarter with dry weather hurting the West African harvest. The supply shortfall is being made worse by a rise in the popularity of dark chocolate, which requires more cocoa than milk chocolate.

“Hedge funds and other money managers are making bullish bets on cocoa futures in unprecedented numbers, wagering that steady economic growth in the world’s developed economies will continue to fuel the rally,” says the Journal. “ Big consumption gains in emerging markets such as Brazil also are lending support to prices.”
The Americans are just lucky they don’t have a carbon tax.

Michael Pascoe is a BusinessDay contributing editor – with a weakness for a good coffee and dark chocolate.

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