Bitter Harvest

No matter how they spend the rest of the day, millions of people around the world start it off with a cup of coffee. Almost one-third of that coffee is grown in Brazil, where the worst drought of the century has recently devastated much of the crop. As a result, caffeine lovers will probably soon be forced to pay more for their morning jolt.

Brazilian production has already been slashed from last year's harvest of 2 million tons to an estimated 1 million tons or less. Said Brazilian Coffee Farmer Paulo Ribeiro last week: "The trees are just dry sticks. They don't have any leaves. It will take three years for the trees to return to 60% of their previous production."

So far, price increases have mainly been at the wholesale level. Since November, when the severity of the damage became evident, Procter & Gamble has pushed up wholesale prices for its Folgers brand from $2.53 to $3.95 per lb. Many grocery stores expect prices to jump more than $1 per lb. during the next month.

By the time the government realized the extent of the crop failure, Brazil had only small reserves of the beans on hand. Some growers are now hoarding their supplies in hopes of higher prices, further exacerbating the shortage. Says Farmer Ribeiro: "I'm not selling for any price at the moment. For us, coffee is like gold."

The disastrous turn in the weather has worsened Brazil's attempts to pay off its staggering foreign debt. Coffee is one of Brazil's major cash crops and a crucial source of hard currency. The country currently owes foreign banks and governments some $100 billion.

The rise in coffee prices could be slowed if other coffee producers, including Indonesia, Colombia and the Ivory Coast, increase exports. The International Coffee Organization, a 75-nation cartel, will meet in London this week to discuss the world market situation in the face of Brazil's drought.

Although other coffee producers may push up exports, coffee prices are likely to be erratic for the next few months. Says Sandra Kaul, a research analyst with Shearson Lehman: "Even if there is plenty of coffee around, the flow of it will not be very smooth." Indonesia and other countries are not set up to ship significantly larger quantities to the U.S.

Some industry watchers think that a run-up in prices may force people to other drinks. Says Jules Rose, chairman of Sloan's Supermarkets, a chain in the New York City area: "Every time there's a noticeable increase in coffee prices, there's a drop in consumption. I think people will decide coffee prices are so high that it would be better to drink tea or soda. It's not the same caffeine kick, but it's a kick."