Economics Commentary

Starbucks sees premium coffee supply meeting demand

Mon Sep 18, 2006 12:28 PM ET

NEW YORK (Reuters) - The chairman of specialty coffee chain Starbucks Corp. said coffee farmers should be able to meet growing demand for premium coffee, despite some market concerns about tight supply.

Starbucks, with more than 12,000 stores in some 37 countries, has no "concern that we can see or anticipate in terms of lack of supply and lack of opportunity for us to continue to get the kind of coffee that we need," Howard Schultz told Reuters in an interview on Monday.

Schultz said coffee producing countries like Rwanda and Indonesia were stepping up their output of high-quality Arabica beans the company uses for its specialty coffee products.

He declined to comment how much coffee the Seattle-based company purchases each year.

Market sources reckon Starbucks buys between 2 million and 3 million 60-kg bags of coffee annually.

Starbucks this year expects to exceed its 50 percent target of coffee purchases from farmers applying the company's Coffee and Farmer Equity (C.A.F.E) Practices, a set of what the company says are socially and economically responsible buying guidelines.

The specialty coffee industry, which has boomed in the United States and Asia over the past 15 years thanks in part to Starbucks, accounts for less than 10 percent of world supply.

The specialty of the coffee comes from its taste, or acidity, and lack of defects. The best beans are usually grown in high elevations or in volcanic soils rich in minerals.

The International Coffee Organization (ICO) expects global 2006/07 coffee supply to reach 122 million bags, up from 106.9 million bags in the previous season. It sees world consumption rising to 117 million bags in 2006 from 115 million bags in 2005.

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Commentary 1

Demand is the amount of goods/services consumers are willing and able to purchase at various prices over time. Two determinants of demand are the number of buyers and their preferences. For example, the demand for coffee would be more if there are lots of buyers for the product. Supply, on the other hand, is the amount of goods/services producers are willing and able to produce at various prices over time. Two of the determinants of supply are the prices of resources and changes in nature. For example, more coffee will be supplied if coffee cost less to produce. A shift in demand will cause the change in the quantity supplied (the amount of goods/services that producers are willing and able to produce at specific prices at specific time) and a shift in supply will cause a change in quantity demanded (the amount of goods/services that consumers are willing and able to produce at specific prices at specific time). In a free market, equilibrium is where the two curves meet when quantity supplied equals quantity demanded.

According to the article, demand for premium coffee is growing and since the supply hasn't increased, Starbucks will not be able to meet the demand in the short run. According to Schultz, the farmers that provide the coffee beans to Starbucks are increasing the quality of the coffee beans before selling it to them. By doing this, Starbucks is able attract more consumers thus, increasing demand. This will cause an increase of prices from P1 to P2 in Figure 1. However, if supply doesn't increase, a shortage, which is when quantity supplied is smaller than quantity demanded, will begin to form.