Your Espresso May Get Cheaper – Or Not (SBUX, DNKN, GMCR)

This year’s harvest of robusta coffee is expected to be near 3.4 million metric tons, far outstripping demand. The largest producers are Viet Nam, Indonesia, and Brazil. Coffee purveyors like Starbucks Corp. (NASDAQ: SBUX), Dunkin’ Brands Group Inc. (NASDAQ: DNKN), and Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR) may not share in the savings though.

Robusta beans, which are used to make instant coffee and most espresso beans, are expected to sell for around $1,750/ton by June 2012. Higher quality arabica beans are expected to fail to meet demand by more than 400,000 metric tons. Starbucks, for example, uses the higher quality arabica beans in its espresso drinks.

The current differential between robusta and arabica beans is about $1.32/pound, much higher than the four-year average differential of $0.86/pound. Arabica beans are selling today for around $2.17/pound compared with about $0.86/pound for robusta beans. By March, the more expensive arabicas could be up to around $2.70/pound while the robusta beans will still be falling, on their way to a low of $0.80/pound.

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