Why Coffee Is Getting More Expensive

toggle caption Rodrigo Aranguar/AFP

The price of coffee beans hit a 12-year high today. I thought there might be some kind of reclusive-hedge-fund-guy-corners-coffee-market story, like we saw with cocoa earlier this summer.

But the main driver of coffee prices right now is more prosaic: Colombia has had a few years of weak coffee harvests because of too much rain, which has reduced the global supply. And coffee drinkers keep buying coffee, even as prices rise (in other words, demand is inelastic).

The higher price of beans -- up about 40 percent since March -- means higher prices for the coffee you buy by the pound. But it probably won't affect the fancy coffee you buy by the cup.

Smuckers, which sells Folgers and Millstone coffees, recently said it was raising its prices because of the higher cost of beans. Starbucks, on the other hand, said it would absorb the higher cost of beans without raising prices.

"You see it much more in the grocery store because the raw materials are a big component of cost," Jose Sette of the International Coffee Organization told me. "In a coffee shop, your big expenses are rent and labor."

While real-world supply and demand is the big driver of the price of beans, there is some speculative action in coffee futures (see the "non-commercial" positions in this table).

But futures of the high-grade Arabica beans that are scarce right now are traded in the U.S., where regulations prevent speculators from cornering the market (this summer's cocoa market action was in London, which doesn't have the same rules).

That suggests that prices should fall when supply improves -- which may happen next year.

"We're in the middle of a bumper coffee harvest in Brazil," Kona Haque, an analyst at Macquarie, told me. "It should be huge."