Kraft Foods (KFT) has done well to sustain demand in the face of higher coffee prices brought on by rising commodity prices. Kraft is the world's second largest food and beverage company after competitor Nestlé. It also competes with PepsiCo (PEP), General Mills (GIS) and Kellogg (K).

Kraft manufactures both food and beverages, with beverages accounting for nearly 14% of our $32.58 price estimate for Kraft's stock, which reflects a small premium to market price. Chocolate, candy and gum constitute around 31% of our price estimate, with snacks adding 19% and grocery products representing another 14%.

This year we've seen sharp price increases in commodities, especially in the weather sensitive agricultural sector. Coffee and sugar are in the spotlight this week.

Processors who buy raw commodities and process them into consumer products are caught is in a price squeeze. On the one hand they must pay more for the raw product and on the other they are up against consumers who are cost conscious.

Yes, you can expect to pay more for your cup of coffee. Supplies of prized Arabica beans are in short supply, driving prices to a 12-year high. Prices for December delivery jumped 3% to $1.852 per pound. Retail prices can be more than double that price.

J.M. Smucker (SJM), distributor of Dunkin Donuts, Millstone and Folgers, already raise prices by 9%. Kona Haque, commodities analyst for Macquarie, was quoted in the Financial Times, saying: "The coffee futures market had attracted speculative buying. It's completely dominated by funds right now."

The indefatigable Starbucks (NASDAQ: SBUX) has made another strategic business decision ... it has decided to raise the price for some beverages and reduce the cost for others.

What is the line of demarcation? Complexity. Drinks that take more of a barista's time to make (such as Frappuccinos) will now be priced 10 to 30 cents higher, while simple drip coffee and lattes will be priced 5 to 15 cents lower.

Starbucks Corporation (NASDAQ:SBUX) paid way, way more per pound for its coffee in 2006, the company will announce this morning -- more than any other major coffee company (according to Starbucks' own claims, anyway). In 2005 and 2006, the average commodity market price paid for coffee was $1.04 per pound; and, it's certain, far less for The Procter & Gamble Company (NYSE:PG)'s Folgers brand or Kraft Foods Inc. (NYSE:KFT)'s Maxwell House tinned coffee.

Starbucks (the company reports with obvious pleasure) paid a premium price of $1.42 per pound in 2006, up from $1.28 per pound in 2005. In doing so, the company believes it allows coffee farmers to make a profit, and gives them a "sustainable livelihood." The company also reported it had increased its percentage of coffee purchased under purchasing guidelines developed with Conservation International -- C.A.F.E. Practices -- to 53% of its total, or 155 million pounds.

This, while certainly grand, is not an indication that Starbucks is perfect. I'm certainly a fan of sustainability, even if it's trumpeted loud and proud by the corporation which practices it. In late 2006, Starbucks was roundly decried for objecting to Ethiopia's attempt to secure trademark protection for its Sidamo and Harar beans.

It's great that Starbucks is moving in the direction of better trade practices and more fair treatment of hundreds of thousands of farmers in third-world countries around the globe. However, the company needs to go all the way. I'll be chatting later today with Dub Hay, senior vice president coffee, Starbucks Coffee & Global Procurement -- and hopefully, finding out what the company will do to reduce the double-standard impression.