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Opinion: When Coffee Giants Like J.M. Smucker Blame the C-Price, We All Lose

Folgers Coffee by Mike Mozart. Creative Commons license.

Folgers Coffee by Mike Mozart. Creative Commons license.

The J.M. Smucker Company announced yesterday that it significantly raised prices, by six percent, of the majority of its packaged coffee products sold in the United States. They stated that the price hike was in response to “sustained increases in green coffee costs.”

It sounds simple enough. But what the company failed to announce to its investors and consumers is that in the past year, commodity coffee has traded at historically average or below average levels.

In fact, it was just last year that J.M. Smucker took advantage of historically low coffee prices to introduce promotional prices for its packaged coffees — a move that a company spokesman told Forbes five months ago represented a 4 percent year-over-year decrease in quarterly earnings for the company.

As of today’s writing, the going futures price for green coffee was $1.40 USD per pound, which is remarkable in that it is actually approximately $0.16 lower than the average C-price for coffee since July 2007, according to historical market data.

Looking back further, the commodity-traded coffee that companies like J.M. Smucker are incorporating into their products — including brand names such as Folgers, Café Bustelo and Dunkin’ Donuts, which have all been affected by the price hike — is today being purchased at approximately the same level that it was in October 2016, in February 2015, in March 2014, in mid 2008, 2005, 1987, 1977, and so on over the decades, with many ups and downs in between.

All of this C-market-related corporate pricing navigation matters to the specialty coffee industry for any number of reasons, not the least of which being implications for coffee producers, many of whom are struggling to keep farms afloat as earnings in many cases stay historically constant despite continuously increasing production costs.

But just as important is the effect this kind of public announcement may have on the collective psyche of consumers. When a company that holds an approximately 27-percent share of the U.S. coffee market announces a six percent price hike, the reverberations run deep.

“Prices increased an average of six percent on impacted items in response to sustained increases in green coffee costs,” the company said in its brief announcement. There’s a simplicity to that statement that completely belies the inherent complexities of a thoroughly broken global coffee market that is so deeply tied to the commodities trade.

A statement like this seems to suggest that Smucker Corp.’s hands are tied; that the company had no choice but to raise prices due to the costs of the raw materials. Yet in reality, the company is merely responding to the market to maintain margins and hit revenue estimates. (It’s worth noting here that J.M. Smucker stock ended yesterday at its highest level in the past month.)

It’s no wonder that so many consumers of commodity-grade and specialty-grade coffee alike feel like they’re being swindled, despite the fact that coffee ought to cost way more than it already does — even the cheap crap.

Comment

3 Comments

roaster

There is some basis behind the increase. Green coffee future prices have already increased about 15% this year. It is anyone’s guess if this is sustainable.

RoasterX

This is a very simplistic review of the economic and financial situation. Typically price increases are based on green coffee replacement costs. Current inventory as well as price-fixed contracts are already considered into to margin levels and profitability. Also, in a volatile commodity market, the manufacturer/supplier usually loses profit as the cost of goods increase, as they are not able to predict the rate or height of the increase, and then they reduce prices slowly on the cost of goods decline to collect the lost profit.

Why is a national brand commercial coffee roaster’s price increase bad for specialty coffee roasters?

I believe that the Folgers increase is good for specialty coffee roasters – as the national media is covering the price increase and consumers will notice it. This allows room in the marketplace for other roasters to follow with price increases, thus hopefully maintaining their profitability. Nobody wants to be the first to raise prices, since cost conscience buyers will change purchase habits. Allowing a national brand to raise prices first clears the way for others to follow without negative impact from consumers.

For specialty producers who sell coffee at fixed-final price and not against the “C” this should not have an impact. For specialty producers or anyone selling coffee against the NY”C” should be able to update the differential prices to cover all fixed and variable expenses including profit margins.

You don’t know their inventory position, you don’t know their cost of goods, and you don;t know their financial situation regarding other fixed and variable expenses. Until you have this data to understand their decision making, you are simply guessing and judging.

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