Coffee Prices Dripping Down For Everyone But Consumers

Prices have slipped considerably over the year. So why is a cup of coffee still expensive?

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Call it declining fuel costs of a sort. Just a year ago, the news was buzzing about the costs of a cup of coffee, amid sharp rises in costs for the caffeinated commodity.

Prices have dropped considerably since then. According to the International Coffee Organization, the average monthly price for a pound of coffee fell by 24 percent between July 2011 and July 2012. But customers waiting for a cheaper latte shouldn't hold their breath.

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One reason for a delay in a price drop is the timing behind coffee chains' supply purchases.

"What they typically do is they buy coffee on a six-to-nine-month-out forward-rolling basis," says Will Slabaugh, research analyst at Stephens Research. "When you see coffee prices dropping now, what you're preparing for is a benefit into next year and then likely into 2014 as well, if prices can stay low."

That means lower prices now could translate into a more comfortable market for chains like Starbucks and Caribou Coffee come 2013.

"Each quarter sequentially will continue to build a tailwind because as we've been building out to our 2013 purchases, they've been at lower levels as you roll through the quarters than what we locked in for 2012," as Caribou Coffee Chief Financial Officer Tim Hennessy said on his company's Monday second-quarter earnings call.

That lag time also applies to bagged coffee on supermarket shelves. According to the Labor Department, coffee is still a little more expensive for consumers than at this time last year, at $5.58 per pound in June, up from $5.23 in June 2011.

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But then, supermarket prices don't move in lockstep with commodity prices.

"People don't automatically lower prices as things change. Prices change daily," says Ernesto Alvarez, chief executive at coffee distributor Coex Coffee International. "Normally that's not passed onto the consumer immediately...it takes some time, both on the way up and on the way down."

So it may be some time before consumers see a dip in their coffee costs, if they see much of one at all. Coffee chains tend to keep their prices "relatively stable," even when market coffee prices change, according to Slabaugh.

It may sound like a way to squeeze extra money out of a caffeine-dependent customer base, but it's more a function of dealing with commodity prices, which can be volatile. That means that customers can take heart—when prices spike for coffee sellers, the blow is often softened for buyers.

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"You look back a couple of years ago, when coffee prices were up 50 percent, ... [coffee chains] were only adding 3 percent pricing to the menu, one-and-a-half percent pricing to the menu, things like that," says Slabaugh. "The pricing they add is always very small on a commodity that can swing."

Holding that price steady even while the market shifts, whether for the better or the worse, is one of the factors that keeps customers coming back, he adds.

"If you're moving prices around on [customers] to where they don't have price certainty ... that would have the potential to scare a customer and lose that price certainty, and that would hurt traffic."

Danielle Kurtzleben is a business and economics reporter for U.S. News & World Report. Connect with her on Twitter at @titonka or via E-mail at dkurtzleben@usnews.com.