The record premium of high-quality arabica coffee prices in New York over lower-grade robusta beans in London means your regular cup of coffee just isn't what it used to be.
That's because soaring prices are prompting some roasters to offset rising costs by buying a bit more of the cheaper beans than they used to, and then steaming them to enhance their flavour, before creating their coffee blends, according to coffee importers and traders.
The incentive is clear: While all coffee prices have surged, making it the best-performing agricultural commodity this year, the rise in New York arabica has far outpaced London robusta. The premium rose to a record high near $1.90 a pound last week -double its 2010 average.
Although U.S. data shows imports from top robusta grower Vietnam set a record last year, and imports from Brazil, which grows a large amount of lower-costing arabica, hit a 38-year high in 2010, public trade data has yet to reveal the full scale of this trend.
But physical coffee dealers say it's only a matter of time. Amid secretive roasters, whose blending mixes are as closely guarded as prized recipes, the best evidence of this cost-cutting measure can be found in steamy warehouses at docks in Vietnam and Brazil.
"Since the arbitrage started opening, we doubled (processing) in Vietnam," Victor Garcez, chief executive of Cafeco in Trieste, Italy, said in an interview. His company, which steams beans, operates plants in both of the world's top two exporters, Brazil and Vietnam.
"It makes sense to steam robustas to replace arabicas with an arbitrage of 40 cents. Imagine with an 'arb' of $1.90," he said. The firm, a unit of warehousing company Pacorini Group, which was bought last year by commodity giant Glencore, is the busiest it has been since the early 1990s, when it entered the steaming business.
Robusta beans, which have a less appealing taste often described as earthy and bitter, are typically processed into instant coffee or used as a lower-cost component in roasted blends. Benchmark prices have risen more than 90 per cent since June, while arabica has surged more than 120 per cent.
As a result, Cafeco is booked with orders through December. "Both plants are ready to be doubled, so it's just a matter of building new equipment. I hope, in 2012, the next shareholders meeting, I'm able to convince them," Garcez said.
Roasters are tight-lipped about their blends as they battle for market share and keep their regular customers happy. Cafeco and others also decline to say how much they process, or how much could be substituted for premium beans in a blend before it loses its distinctive flavour.
A spokeswoman for Kraft Foods, which owns Maxwell House and Yuban brands, said its purchasing strategies and roasting techniques are proprietary. Maxwell switched to a blend of arabica and robusta beans in 2009, reversing its move to use 100 per cent arabica beans in 2007.
Top U.S. packaged-coffee maker J.M. Smucker, which owns Folgers coffee and is the Dunkin' Donuts licensee, declined to comment on its mix of beans. Starbucks, considered a top-of-theline coffee seller, uses only 100-percent arabica beans in its blends and does not speculate about future plans, a spokeswoman said.
The price of washed arabica beans soared to a 34-year high of $3.0890 a pound last Tuesday on ICE Futures U.S., more than double what they fetched 11 months ago. But the price quickly dropped eight per cent in a commodity-wide selling spree, and July arabica futures ended down 0.70 cent at $2.8755 a pound on Friday. Kraft has raised prices roughly 56 per cent since May 2010, while Smucker lifted them by 25 per cent.
But many traders say part of the reason large roasters have managed to contain the price increases they pass on to consumers is by reining in costs, including that of their biggest raw material. "Roasters are experimenting with a lot of different coffees in today's market because of the price," said Mario Acri, president of Sucafina USA Inc., which markets for Cafeco.
Not all companies can easily make a switch. The meteoric rise of coffee shops such as Starbucks over the past two decades popularized higherquality cups of java, and many of today's consumers have come to expect a better-tasting brew.
Some roasters market themselves as 100-per-cent arabica. Unlike 1997, when spot arabica prices last surged to a $1.86 premium to robusta on a weekly chart, roasters now have far less flexibility to use more lower-cost beans, Judy Ganes-Chase of J. Ganes Consulting said in an April report.
"In the 1997 bull run, the price disparity between the two types of coffee was sufficient to make roasters shift blends and helped to stop the bull market in its tracks," Ganes-Chase said. This time around, many companies had already maxed out robusta usage, and were opting to buy lowerquality arabica where possible, she said.
In fact, with the demand growth in emerging markets such as Brazil and China, where premium arabica beans are a harder sell, robusta consumption has expanded globally.
"World demand used to have robusta share of 33-to-34 per cent, but in the past number of years it's come up to maybe 38, maybe 40 per cent of world demand," said analyst Andrea Thompson of CoffeeNetwork, a coffee information company.
Hence the growing desire to upgrade quality where possible. Analysts and traders have been reluctant to estimate how much of the high-quality arabica market could be substituted with lesser grades, but over time it's that kind of fundamental shift that typically allows market distortions to correct. Sterling Smith, analyst with Country Hedging in Minnesota, however, sees room for the arabica/robusta premium to grow.
"I think our tightness of (arabica) beans is going to continue, while the robusta market appears to be a little better supplied and that will drive the New York coffee," Smith said. The bean-steaming process varies, but in general it reduces the undesirable flavours in robusta and lowerquality arabica by treating raw beans with steam at a high pressure and temperature for an hour or two. The beans are then dried and ready for transport and roasting.
"Each roaster usually has their own requirements on the flavour of the final steamed product. Some will want more sweetness, some will want a more neutral product, some more acidity," said Cafeco's Garcez.
As the arabica/robusta spread more than doubled over the past 11 months, traders have been searching for evidence of shifting flows. So far, they have been slow to materialize.
Imports from top robusta grower Vietnam rose to a record last year, but U.S. roasters have not yet increased their overall robusta purchases significantly, according to U.S. Department of Agriculture (USDA) and U.S. International Trade Commission data. The arabica share of imports in the first two months of 2011 is little changed from most of 2010 at just below 75 per cent of the total.
But traders say that's a reflection of the nature of the physical market, which often trades many months forward. "They have increased, but they haven't received the coffee; that's why it doesn't show in the statistics," said Christian Wolthers, of Wolthers America in Florida, a small importer of fine and high-quality beans from Brazil and Colombia.
In 2010, non-arabica U.S. coffee bean imports rose about 14 per cent, but were down 10 per cent from 2008, U.S. International Trade Commission data shows. U.S. imports of arabica beans in 2010, however, slipped less than one per cent from 2009 and were up five per cent from 2008.
"A lot of contracts are already on the books. It takes time to change gears like that," said Ray Keane, a trader with medium-sized importers Balzak Bros. and Co. in South Carolina. Keane said he expects the data will show an increase in robusta imports in the next six months.
Imports from top coffee grower Brazil -which produces a large amount of arabica beans that are grown at lower altitudes than Colombia, and are not currently deliverable against the benchmark ICE Futures U.S. arabica futures contract -were the highest in 38 years in 2010, USDA data showed.
The trend is continuing. In the first three months of this year, Brazil exported 30 per cent more arabica beans to the United States, compared with the first quarter of 2010. Still, for many, there can be no substitute for the aromatic blends that come from the highlands of Central America.
F. Gavina and Sons, a small roaster in California, has raised its prices a number of times in the past year and foresees more price hikes if the rally continues since it refuses to lower the quality of its blends.
"We don't buy steamed (caffeinated) coffee. We don't think it's a good thing," said Pedro Gavina, the company's president. "It's supposed to change the taste, but we don't like it."