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Lindsey Lee's wholesale coffee prices rose 50 percent early this year.

The owner of Cargo Coffee on Park Street and Ground Zero on Williamson Street last week raised his prices on bulk bean coffee by 50 cents, from $7.95 to $8.45. Bakery goods went up 5 cents, too.

But prices on Lee's coffee drinks have not changed.

"It's difficult to raise retail prices because sales have been off and you get scared of losing customers," Lee said.

The rise in cost of goods is squeezing small coffee retailers who now pay more for goods and services -- from milk to linen service and paper goods -- while feeling pressured to hold steady what they charge consumers.

In the case of coffee, a weak U.S. dollar has impacted commodity markets making imported coffee more expensive. Other commodities such as wheat, oil, platinum sugar, tea and cotton have also been affected.

According to Peter Kettler, who runs the Madison office for coffee importer and seller Holland Coffee Inc., (www.hollandcoffee.com) market speculators have driven up coffee prices to levels unseen in the past 10 years. As the coffee commodity market ebbs and flows, prices Holland pays for coffee also fluctuate. Those differences are passed directly to shops and roasters Holland serves.

It's common, Kettler said, to see coffee commodity prices fluctuate one or two cents, but he called recent ups and downs, ranging 15 to 25 cents in recent weeks, unprecedented.

Also compounding the pricing equation: rising transportation costs.

Eventually, Kettler surmised, cost increases will reach consumers.

"As the economy worsens and fuel prices go up and people start to look at budgets, it's really going to be curious to see if one of the first things to go will be the $3.50 latte," said Kettler. "Or will it be an affordable luxury and important for people to have the social interaction of a coffee shop?"

Fair Trade sellers including Equal Exchange, which commits to paying a higher price to coffee farmers, are monitoring the commodity market. Equal Exchange has not increased its retail price on bean coffees, believing the market will correct.

"If it keeps pushing up we'll have to evaluate," said Ron Arm regional manager and worker/owner at Equal Exchanges' Madison office. "If that's happening and we need to absorb margin, we'll need to make sure that we can continue to be profitable."

Like Lee, other local coffee roasters and shop owners have also decided to swallow cost increases.

Ryan Baughn of Ancora Coffee Roasters in Madison said although the coffee commodity market is in a general upturn now, it takes time for the marketplace to reflect those changes.

"For us it has an affect on whole bean coffee while we try to stay as stable as possible with a cup of coffee," Baughn explained. "If the typical consumer sees prices go up all the time, it's tough from a customer loyalty perspective. We try to absorb that as long as we can."

The company adjusts bean coffee prices as they fluctuate. For example, Baughn said the retail price for Yergacheffe increased 50 cents, from $12.25 to $12.75 per pound, about 18 months ago. At the same time, the price for Sumatra decreased from $13.20 to $12.75 per pound.

Last year, Ancora did raise coffee drink prices five to 10 cents as a result of higher prices for paper goods, milk and health care, he said.

Starbucks Corp. last summer said it would raise coffee drink prices an average of 9 cents to help offset the increasing cost of milk and other commodities.

Big roasters including Procter & Gamble Co. and Kraft Foods Inc. this year have also boosted prices they charge for Folgers and Maxwell House brands sold primarily to grocery stores and big retailers.

Metcalfe's Sentry President Tim Metcalfe said suppliers increased coffee prices by 7 percent in February and another 11 percent early this month. Those prices have been passed along to customers who buy canned coffee his grocery stores at Hilldale and Wauwautosa.

Bulk coffee prices, sold in bean form from bins, have not changed, Metcalfe said.

"Everything is going up right now with food inflation running a tad over 5 percent somewhat across the board," Metcalfe said.

But sales of coffee and other groceries have been unaffected at Metcalfe's stores.

"If a recession exists, I don't think the general public is fully reacting to that," Metcalfe said. "They're still eating and, quite frankly, what I think will end up happening if things do get tight is they'll come to us as they prepare more meals at home."

For small coffee retailers like Lee, however, a rough winter has seen sales decrease, thus the reluctance to increase drink prices.

But, eventually, Lee believes he'll have to pass along cost increases.

"We'll do that in the next couple of months," Lee said. "If we're not in a recession, we're definitely not in a boom economy. Prices are going up. Maybe that's a sign that the economy is not so bad."

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This e-mail address is being protected from spam bots, you need JavaScript enabled to view it  —  3/20/2008 10:41 am