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Coffee mug and beans. (iStockphoto)
Coffee mug and beans. (iStockphoto)

Beverages

Peak coffee: A cup of trouble Add to ...

At the same time, many farmers are encouraged to move out of coffee production as other agricultural products - from plantain in Colombia, to sugar cane in Brazil - soar in price, and land costs rise.

Colombia's production troubles are shared by other coffee-making countries, including Brazil. Production in Central America and East Africa has been stagnant or down in the past few years, while global demand keeps growing at a rate of about 2.5 per cent a year.

Agricultural experts are warning that the ability of growers to respond to higher prices by increasing supply will be limited by the continuation of poor growing conditions resulting from changing weather patterns and by competition for land use in exporting countries that could limit coffee production.

Growers need to be prepared to adapt to climate change, said Peter Baker, a senior scientist with CABI, a British agricultural institute.

"Is it climate change or not?" Mr. Baker asked of the changing weather patterns. "It's extremely difficult to say but this is exactly what you would expect to happen: That we're going to get more extremes in the weather like this."

Arabica coffee - which must be grown in equatorial zones between 1,200 metres and 1,800 metres of elevation - is particularly susceptible to bad weather, and the extremes of wet and dry lead to more infestations of rust and an insect known as the coffee borer.

Mr. Baker noted that there has been virtually no growth in the production of Arabica coffee in the past 20 years, while countries like Indonesia and Vietnam are boosting production of the Robusta variety. Robusta is favoured in some developing countries and for blends and instant coffee.

The agricultural scientist raised the spectre of peak coffee last year in a speech at a meeting of the International Coffee Organization, which prompted a broader discussion throughout the industry.

In an interview from London, he complained that it is difficult to known the exact status of production and yields because the industry has extremely poor data. But it is clear that growers are having trouble responding to challenges because they tend to be small farmers with little opportunity to invest in higher-yielding varieties.

It takes three years for a new coffee plant to produce a harvest, and many Third World farmers are unwilling to gamble that prices will remain high, especially when they can reap immediate returns from other crops.

"In principle, these prices should make planting more attractive but planting takes a long time to come on stream," said Jose Sette, executive director of the London-based International Coffee Organization.

Meanwhile, as production has failed to keep up with demand growth, the industry has been reducing its inventories of unroasted beans that sit in warehouses around the developing world.

The speculators

With inventories falling to record lows this spring, the price was bound to climb. But many in the industry say coffee price fluctuations - like those of many other commodities - are compounded by speculators.

"Through financial speculation - hedge funds, index funds and other ways to manipulate the market - the commodities market is in a very unfortunate position," Starbucks' Mr. Schultz told reporters in London this spring. "This has resulted in every coffee company having to pay extraordinarily high prices for coffee."

Coffee prices - which went through a prolonged slump between 2000 and 2006 - have doubled since the middle of last year, with Arabica topping a 34-year high of $3.08 (U.S.) a pound earlier this month before selling off with the rest of the commodity market. Arabica now sells on future markets for $2.65 a pound, compared to less than 50 cents a pound at its nadir a decade ago.

"There are certainly fundamental issues - the problem with supply and demand is a real issue," said Ric Rhinehart, executive director of the Specialty Coffee Association of America. "But there is also a speculative component to it."

The coffee futures market is a critical tool for buyers and sellers to hedge their positions, particularly given the long supply lines that exists between equatorial growers and North American consumers. Growers can lock in prices even before they harvest the berries, while buyers can assure not only the price but the supply in an extremely volatile market.

But in recent years, the financial players have overwhelmed the industrial traders. As a result, the coffee market has behaved much as the broader commodity complex, driven by a combination of growing emerging market demand, a lower U.S. dollar and vast pools of capital looking for a home.

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