Why your morning cup of coffee might be getting more expensive

 
Peter Spence
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Expect to pay a little more for your caffeine buzz in coming months.

Coffee futures - the prices which traders have agreed to pay for beans in the future - have surged in price, and are at their highest level since February 2012.

That suggests that investors expect coffee prices to move higher still after a series of frothy months.

Futures have been rising throughout 2014, with Bank of America Merrill Lynch analysts naming coffee as its king of commodities for the first quarter of the year. The strong performance has been driven by a severe drought in Brazil - expected to hit coffee bean yields heavily.

While the price increases might already be starting to affect major wholesale vendors, you'll really see the changes feed through in the next couple of months as harvests begin, according to Thomas Pugh, a commodities economist at Capital Economics.

Pugh says that while futures had a volatile month in March, we won't know how bad the damage is until crops are gathered. Until then, it's "all a bit up in the air." And things might not be as bad as futures prices imply.

While futures have risen much higher, they're also just a fraction of the overall market. A lot of the major coffee roasters will have existing contracts at a specified hedged price - so won't be affected by these increases.

Investors may also have overreacted to reports of drought, and bid up prices too far, says Pugh. We'll have to wait for the harvest to find out.

Source: Capital Economics