Coffee beans are cheaper, so why isn't my Starbucks?

Gold bars are seen at the Czech Central Bank in Prague.

2013 was the year commodities prices dramatically took a dive after a long period in the clouds. Corn, coffee and more have dropped substantially. The reason why isn’t terribly complex. Corn and coffee prices are down largely because there’s an awful lot more corn and coffee in the world. Supply has exploded without a similar growth in demand.

News of lower commodity prices is of little comfort for shoppers frustrated with the persistent cost of breakfast cereal or Starbucks drinks. Unfortunately for consumers, lower commodity prices don’t instantly translate into cheaper prices at the cash register.

“People don’t eat commodities. What they do is they eat food,” says Iowa State University economist Bruce Babcock, who watches corn prices professionally and coffee prices personally. “I do know I’m spending 14 dollars a pound on Peet’s coffee and it bears no reflection whatsoever to the price of Arabica beans down in Brazil.”

There are many additional and separate costs involved in transforming commodities to food, from transportation to manufacturing to marketing. Food prices may come down for shoppers, but probably not for a while. And some consumer brands are strong enough that they don’t have to pass the savings on to you.

“The raw commodity, which is coffee, is going down. So your costs are going down, your revenues are staying about the same, which means your profitability is gonna go up,” says Duke University business professor Campbell Harvey.

It’s not just edible commodities that are seeing price decreases. Metals are dropping too, with always volatile gold in a free fall. Then there’s copper, which is sinking as China’s growth slows.

“They’re gonna be pulling back a little bit on some of the spending they’ve been doing to build factories and homes,” says Paul Christopher, chief international strategist at Wells Fargo Advisors. “That’s gonna reduce their demand for copper.”

And in turn, copper’s price will suffer, like so many other commodities these days.

Mark Garrison: Corn and coffee prices are down largely because there’s a lot more corn and coffee in the world. In New York, I'm Mark Garrison, for Marketplace.

I’m kidding of course. We’ve got 90 seconds, so let’s try a different question, perhaps one you’ve pondered while buying your favorite cereal or a pricey drink at Starbucks. If commodities prices are dropping for companies, how come we’re still paying basically the same price in stores?

Bruce Babcock: People don’t eat commodities. What they do is they eat food.

Iowa State University economist Bruce Babcock points to all the other expenses that go into making food, from transportation to manufacturing to marketing. Professionally, he thinks a lot about corn prices. But personally, coffee.

Babcock: I do know I’m spending 14 dollars a pound on Peet’s coffee and it bears no reflection whatsoever to the price of Arabica beans down in Brazil.

Duke University finance professor Campbell Harvey says some brands are strong enough that they don’t have to pass the savings on to you.

Campbell Harvey: The raw commodity, which is coffee, is going down. So your costs are going down, your revenues are staying about the same, which means your profitability is gonna go up.

Food prices may come down for shoppers, but probably not for a while. And it’s not just edible commodities. Metals are dropping too, with always volatile gold in a free fall. Then there’s copper. Paul Christopher at Wells Fargo Advisors says it’s lower because China’s growth is slower.

Paul Christopher: They’re gonna be pulling back a little bit on some of the spending they’ve been doing to build factories and homes. That’s gonna reduce their demand for copper.

And consequently, its price. I'm Mark Garrison, for Marketplace.

About the author

Mark Garrison is a reporter for Marketplace and substitute host for the Marketplace Morning Report, based in New York.

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