Arabica versus Robusta – substitution when levels are high

Arabica coffee is the premium bean relative to Robusta, but in the last year premium prices have fall 30 percent versus increases in Robusta based on demand shifts. Coffee prices doubled between 2010 and 2011 only to see a major adjustment in the last year. 

Coffee demand is still growing about 2.5%, but the growth has been in lower income markets and not the developed markets which have seen demand declines between 2 and 6 percent. The developed world is where there is a stronger demand for Arabica. This demand decrease does not seem like a lot, but when there is a new supply coming on line and the market was prepared for higher growth, there will be a price shock. Price is a rationer. When price levels are high, demand will adjust. The effect may not be immediate but consumers will adopt to suit the market situation.