Coffee beans are cheaper, so why isn’t my Starbucks?
2013 was the year commodities prices dramatically took a dive after a long period in the clouds. Corn, coffee and more have dropped substantially. The reason why isn’t terribly complex. Corn and coffee prices are down largely because there’s an awful lot more corn and coffee in the world. Supply has exploded without a similar growth in demand.
News of lower commodity prices is of little comfort for shoppers frustrated with the persistent cost of breakfast cereal or Starbucks drinks. Unfortunately for consumers, lower commodity prices don’t instantly translate into cheaper prices at the cash register.
“People don’t eat commodities. What they do is they eat food,” says Iowa State University economist Bruce Babcock, who watches corn prices professionally and coffee prices personally. “I do know I’m spending 14 dollars a pound on Peet’s coffee and it bears no reflection whatsoever to the price of Arabica beans down in Brazil.”
There are many additional and separate costs involved in transforming commodities to food, from transportation to manufacturing to marketing. Food prices may come down for shoppers, but probably not for a while. And some consumer brands are strong enough that they don’t have to pass the savings on to you.
“The raw commodity, which is coffee, is going down. So your costs are going down, your revenues are staying about the same, which means your profitability is gonna go up,” says Duke University business professor Campbell Harvey.
It’s not just edible commodities that are seeing price decreases. Metals are dropping too, with always volatile gold in a free fall. Then there’s copper, which is sinking as China’s growth slows.
“They’re gonna be pulling back a little bit on some of the spending they’ve been doing to build factories and homes,” says Paul Christopher, chief international strategist at Wells Fargo Advisors. “That’s gonna reduce their demand for copper.”
And in turn, copper’s price will suffer, like so many other commodities these days.
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