Mon, Sep 27, 2010, 8:44PM EDT - U.S. Markets closed
Time was, the only things you had to worry about when walking into Starbucks were whether there was anything left on your card and the length of the line. These days, you've got to keep tabs on the markets and worry about flooding in India, precipitation in Brazil, and the motives of a sweet-toothed fund manager in London.
In an announcement that gives new meaning to the term "caffeine high," Starbucks (NASDAQ: SBUX - News) last week said it could no longer be expected to eat the rising price of coffee beans. With prices of green Arabica coffee near 13-year highs, the ubiquitous chain announced it will "implement targeted price adjustments on certain beverages in certain markets." While it pledged to hold the price of a tall brewed coffee steady, it would "raise prices of labor-intensive and larger-sized beverages." (Translation: look out Manhattan and San Francisco, you're going to be paying more for your custom-ordered, high-maintenance frothy concoctions.)
For cubicle slaves, stressed out by long hours, job insecurity and an absence of raises, this is another slap in the face. If, like me, you take your caffeine straight up — doppio espresso, no sugar — it's bad enough. But for those who take it with milk and sugar, or who have a weakness for a caffe mocha, the situation is dire. Coffee is getting more expensive. (Here's a 10-year chart for Arabica coffee.) But in its release, Starbucks cited "significant volatility in the price of other key raw ingredients, including dairy, sugar and cocoa."
The upcoming agony of Starbucks devotees offers three fundamental truths that should be apparent to all who pay attention to economic news:
(1) global growth is strong; (2) U.S. growth is weak compared to global growth; (3) the world's national economies and markets have never been more connected or interconnected.
The global economy continues to recover from the plague year of 2009 — the first since 1944 in which the world's economic output shrunk. The International Monetary Fund pegs growth at 4.5 percent for 2010.
In nearly every corner of the world, more people are building and eating more stuff. That has pushed up prices for a range of commodities — steel, copper, cotton, soybeans, wheat, and cotton. Many commodities (notably oil and gold) are priced in dollars. Slow U.S. growth, which weakens the dollar, can also have the effect of making commodities more expensive.
But it's the third factor — the rising tide of globalization — that is making venti-size waves at Starbucks and elsewhere. In an era where production of key staples and finished goods can happen anywhere, so too can problems. Coffee is expensive in part because of poor harvests in Vietnam and Colombia. Bloomberg reported on Monday, that "raw sugar rose to a seven-month high in New York on concern that suppliers will struggle to meet demand." A big part of the problem: "Drought in Brazil, the world's biggest producer of coffee and oranges as well as sugar, is harming crops and drying the Amazon River to its lowest in 47 years." For farmers in Brazil, Antonio Carlos Jobim's Waters of March can't come soon enough.
In other areas, the problem is too much water. Bloomberg notes that "sugar-cane yields in Uttar Pradesh, India's biggest cane producer" could be harmed by recent flooding. The price of a pound of sugar for delivery in October has soared 67 percent in the past few months (For current prices on agricultural commodities, check out the CME Group's website.)
Speculation by giant hedge funds in New York, London, and elsewhere is also contributing to the volatility in commodity prices. Cocoa spiked this summer in part because production has fallen in recent years even as the world's growing middle class acquires a taste for chocolate. But, as the Financial Times reported, a James-Bond-meets-Willie-Wonka scenario was unfolding.
With the price of cocoa having doubled since early 2008, London-based hedge fund Armajaro "has swept up a large chunk of the world's stocks of cocoa beans, helping to drive prices of the basic ingredient of chocolate to their highest level in 33 years," The FT reported in August. One day in July, Armajaro took delivery on 240,100 tonnes of cocoa. . . "equal to about 7 percent of annual global production," according to the FT.
Either Armajaro and its manager, Anthony Ward, were poised to make a massive batch of brownies — or they were trying to influence market prices by snapping up lots of raw materials.
Whatever the motives, the result is the same: Prices are going up for "end users" of most commodities, i.e. you and me, and it's shaping up to be an expensive Halloween.
Daniel Gross is economics editor and columnist at Yahoo! Finance.
Follow him on Twitter: @grossdm. Email him at grossdaniel11@yahoo.com.
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