When I was in college, coffee was essentially a state-sanctioned performance-enhancing drug - steroids for writers. But coffee's status has changed. You can now attend professionally organized coffee cuppings (think wine tastings for coffee), where, if you're lucky, you could get your palate on rare coffees costing $15 a cup. You can also skip the whole university thing and just go to China, because they just opened the first official Chinese barista school. Once you've got the sheepskin, you can compete in the world barista championships.

Coffee producers and cafés are doing their best to promote the culture of coffee. But one of the mainstays of that culture - Starbucks - is making a few adjustments in its plan to take over the world. This week's headlines about Starbucks' plan to close 600 stores and lay off about 7% of its workforce gives us an excuse to stick a little pod into our one-cup brewer and take a look at what's really going on in the coffee market, our first since January.

Coffee, Weekly Average Price (The Long View)

Soon after we looked at coffee back in January, it hit record prices in February on a combination of supply concerns and inflation hedging. Prices soon retreated off the high, but not back down to levels more typically seen in years before. More recently, things have been looking up.

Coffee (KC, ICE [NYBOT]) Daily Commodity Futures Price Chart: July 2008 Contract

Right now, coffee prices have been edging upward again - this time because of the weaker dollar (surprise - it's not just oil that is priced in dollars); the threat of cold weather in Brazil (it's winter down there, you know); and the expectation that the European Central Bank will raise interest rates. Of those three items, only one - the weather - directly affects the crop. The others are just the price we pay for our global economy.

The Crop

Brazil is the world leader in coffee production and consumption. They grow the most of it as well as drink more of it than any other country as a whole, except for the United States.

Some months ago, Brazilian authorities projected that Brazil's 2008/2009 coffee harvest was going to be around 45.5 million bags, up from 33.7 million bags in 2007/2008. Even with that 35% increase, many people thought the prediction was too low and that we would see even-higher numbers as harvesting commenced. It turns out their instincts were right; Brazil is now projected to harvest 51.1 million bags of beans as a result of coffee trees' natural two-year boom harvest cycle (one good year, one bad year is a biological imperative in Brazilian coffee). But folks bidding up coffee don't think even that will be enough. The coffee market is tight, and Brazil's 2008 year-end inventories are expected to be around 1.5 million bags, down from 8.4 million bags the year before. That's a huge drop in inventory at the same time that the harvest is insanely huge. And because this harvest year is the "heavy" year, next year's harvest will be lower. With such low ending stocks this year, Brazil may not have enough supply to keep itself and its trading partners in coffee next year.

Exports from Brazil were 13% lower in June than in May. Why? Well, the harvest is just beginning in Brazil and it may be a little slow going. This Bloomberg article quotes one grower's group saying that only around 8% of the harvest had occurred by June 24. Last year harvest was 18% in the door at the same time. Big numbers have a way of clogging the infrastructure. Just ask the port of Shanghai.

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