10:25 AM EDT on Wednesday, October 27, 2004

BY TOM ABATE
San Francisco Chronicle

If the price of your morning jolt of caffeine is going up, don't blame the poor guy in the tropics who grew the coffee beans.

For that double cappuccino that set you back $3.75, a mere 21 cents went for those ground-up beans. The cost of the milk was nearly double that. The bigger ingredients are labor, rent, overhead -- and profit.

The cost of gourmet drinks is poised to rise after Starbucks' announcement this week that it would boost the average price per cup by 11 cents starting Oct. 6. Given the Seattle chain's market clout, industry watchers expect the increase will ripple through an estimated 11,000 other independent and smaller chain coffee shops nationwide.

Wholesale coffee prices have risen 36 percent in the last year in U.S. commodities markets. But to farmers, especially those who grow the specialty beans prized by coffee aficionados, the recent increases only begin to repair the damage of a disastrous price slump that has devastated regions such as Central America.

"We call it the coffee crisis," said Mike Ferguson, spokesman for the Specialty Coffee Association of America, which represents coffeehouses. "Coffee farmers were literally walking away from farms all over the world."

Jumping bean prices

Yet, even though the wholesale price of beans has jumped lately, coffee itself represents only a tiny fraction of what Americans pay for all those concoctions with the fancy names.

Take that double cappuccino, for instance. According to Ferguson's association, coffee makes up just 5 percent of the cost per cup.

In fact, all the ingredients -- from sugar and milk, which also have experienced double-digit increases over the past year, down to the cup, heat- sleeve and lid -- together make up less than 20 percent of the cost of the cappuccino, according to the association's estimates. Labor and rent account for a far larger share of the cost -- about 46 percent -- and other overhead and profit make up the rest.

Starbucks issued a statement saying the price increase, its first system-wide since August 2000, was "based on increased costs throughout the business."

Trickle-down price rise

Ward Barbee, publisher of Fresh Cup Magazine, a trade publication in Portland that covers the coffeehouse industry, said thousands of independent shop owners would probably follow Starbucks' lead. It's a golden opportunity for them to raise price prices to cover an array of rising costs for such things as workers' compensation and health care coverage that factor into overall labor expenses, Barbee said.

"If you as a retailer don't raise your price, you're foolish," he said.

George Vukasin Jr., coffee-buyer at Peerless Coffee & Tea, a family-owned firm in Oakland, Calif., that roasts specialty brews for restaurants and hotels, said the raw price of coffee had gone up. But he said the hike had barely brought the cost of commercial coffee, called "C" Market, to the mid-80 cent range -- below the average farmer's production costs of roughly 90 cents per pound.

Vukasin said "C" Market prices had last peaked above $3 a pound in 1996 and had steadily declined to around 50 cents per pound in 2000, driven down by surging shipments from Brazil, Vietnam and Colombia.

"A 50-cent market for farmers is horrible," said Vukasin, affecting even those farmers who grow specialty rather than commercial blends, because the price of the higher-quality beans floats above the cheaper grades.

Vukasin said coffee prices had been rising slowly since that trough but started to surge recently thanks to factors ranging from lower harvests in Brazil to the soaring cost of oil, which boosted transportation costs.

The period of collapsed prices wrought havoc for the roughly 20 million small farmers who depend on coffee for their livelihood, "precipitating bank failures, public protests and dramatic falls in export revenues," according to a World Bank report issued in March.