Coffee Rises, but Starbucks Hedges

October 7, 2014 by Paul Ausick

When Starbucks Corp. (NASDAQ: SBUX) last raised its coffee prices in late June, coffee was selling in the commodity markets at around $1.76 a pound, after peaking at around $2.12 a pound in April. Coffee was trading at around $2.20 a pound Tuesday morning, its highest price in two and a half years.

In early June, other large coffee marketers like J.M. Smucker Co. (NYSE: SJM), which sells Folgers and Dunkin’ Donuts brand coffees, raised prices by 9% for the bagged coffee and Kraft Foods Inc. (NASDAQ: KRFT), maker of Maxwell House and Gevalia, raised its prices by 10%. Dunkin’ Brands Group Inc. (NASDAQ: DNKN), which licenses its brand to Smucker for bagged coffee, raised prices at its stores “a little bit” in June.

Drought in Brazil, producer of about one-third of the world’s coffee, gets the blame. The current spike is the result of a forecast for another week of no rain in Brazil, where the flowers that recently blossomed may fall off the trees before maturing. Global export production through the first 11 months of the 2014 crop year (October 2013 through September 2014) is down about 2% to 101.04 million 132-pound bags.

Starbucks said in its third-quarter conference call last July that it had hedged 60% of its coffee needs for its 2015 fiscal year, which runs on the same calendar as the coffee year. The Wall Street Journal cites an analyst who said that locking in coffee prices for 2016 presents more difficulties. Producers, especially in Brazil, may want to hold out to see how high the bidding will go. They probably also fear being unable to deliver and getting stuck with paying a hefty penalty.

Consumers shouldn’t expect coffee hedging by Starbucks or any other coffee marketer to keep the retail price of a vente skinny latte from rising. All that hedging will do is moderate the level of the price increases and, perhaps, delay the increases for a while. Until the weather returns to a more normal pattern in Brazil, coffee is just going to get more expensive.

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