News Article

Coffee and oil: A tale of two commodities

Posted: June 12, 2012

Canada's number one commodity export, crude oil, has been losing value steadily over the past month. Weak economic growth in the U.S. and China is partly to blame, as is the continuing financial mayhem in Europe. Crude dropped to less than US$82 a barrel on June 4, from US $106 a barrel a month earlier. At the same time, the price of one of Canada's favourite imports ó coffee ó has been climbing steadily. And there is no relief in sight ó for either commodity.

Certainly there has been pressure on the U.S. central bank, the Federal Reserve Board, to unveil a stimulus plan that would get the U.S. economy growing ó and Americans buying Canadian oil. But those pleas have fallen on deaf ears; Fed Chairman Ben Bernanke told Congress June 7 that, as yet, no plans have been made.

At the same time, Canada's obsession with the dark drink has intensified. Canada's consumption per capita now ranks second in the world, behind only Italy, a large leap from ninth only five years ago. A survey conducted for McDonald's Restaurants in late 2010 by Ipsos Reid found that almost 90% of Canadians drink at least one cup of coffee a day, with most indulging several times daily. In fact, the average Canadian drinks 3.2 cups a day.

This Canadian obsession is getting expensive, however, as coffee prices climb in the slowing global economy. The highly sought-after Arabica beans, which can only be grown in altitudes above 610 meters, have soared in price ó until recently, that is, when the traditionally less-favoured Robusta beans have overtaken them. In the past year, Arabica shipments have dropped by 8%, while Robusta exports are up 10.4% in the same time period.

 

It seems the price curve of these two beans has been inverting. According to Bloomberg LLP data, coffee is both the best- and worst-performing commodity investment so far in 2012. The spot price for the Arabica beans recently fell to US$1.75 a pound, or 77% of what it was at the start 2012. Traditionally, the floor price for these beans has been about US$2 a pound, with the price hitting an all-time high of US$3 a pound in April 2011. Robusta beans, meanwhile, are priced at US$1.17 a pound, 22% more expensive than they were at the beginning of this year.

As a result, cost-conscious Canadians have begun forsaking their $5 lattes and reverting to their traditional cup of joe. They have even begun brewing their own coffee at home to save money. "People decided it was costing too much to gas up their bodies,î commodities watcher John Stephenson, a portfolio manager with First Asset Investment Management Inc. in Toronto, told the CBC recently.

This is good news for McDonald's and Tim Horton's, those purveyors of lower-priced brews, but bad news for the numerous, independent coffee shops that have popped up throughout Canada during this period of crazy coffee consumption. These small-time players now face penny-pinching Canadians who will either settle for a regular cup of coffee, or simply brew at home. To add to this, McDonald's and Tim Horton's are now pricing their specialty coffee drinks for less than most independent shops.

So, the future of the small Canadian coffee shop may be in jeopardy. John Rufino, who owns Classic Coffee, a roastery that sells its beans to several hundred shops around Toronto, has taken note of the crowded marketplace. When a new shop opens within a certain distance of existing customers, Rufino refuses to sell to it.

"I don't feel its right when they have to compete with the same product,î Rufino told Toronto newspaper, The Grid, recently. "If there's a certain amount of business within a block, and two or three cafés share it, it doesn't make sense. They work 12 hours a day and they won't make it.î

Canadians will be paying close attention to these commodity prices in future months, as they strategize the best route to weather this global financial stalemate.

Greer Jacks is updating jurisprudence in the EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.