Milk Hurting Starbuck’s

This year the US Ethanol industry will produce over 5 billion gallons and use more than 1.5 billion bushels of corn pushing prices near $4 a bushel. Dairy farmers are seeing the cost of feed jump and are finally able to pass that on to consumers.  After years of flooding international markets with surplus milk products, the European Union, under heavy pressure from within, has curtailed its $59 billion annual subsidy system, at least where dairy is concerned. Combine that with drought conditions in New Zealand and Australia, two big milk-exporting countries, and it makes for tight supplies worldwide, and higher demand for U.S. product. Milk farmers, who collected 12.3% less for their milk in 2006 are fully intent on making that up this year.

"The price this year is not just going to beat the record by a few cents. It’s going to knock it out of the park," said Mike Suever, Senior Vice-President for Milk Procurement at Chelsea, MA based HP Hood. Prices for raw milk are expected to rise at least 25% this year.

Starbucks, who uses an estimated 93 million gallons of milk a year is looking at a $279 million dollar milk bill in 2007. While it may not seem a lot to a billion dollar company, it does equate to 36 cents a share, an increase of about 9 cents or about 10.3% of profits over 2006. This does not include the price increase to be incurred from changing the percentage of hormone free milk from 27% to 37%.  They do charge 50 cents more at some locations for this milk so it must cost considerably more…. no?  When you are predicting 83 to 87 cents a share and 18% growth, the 10% of that in milk costs is huge.

When you ad this to slowing traffic on stores, it is just another headwind for investors and the company

Todd Sullivan

5/7/2007

I hold no position in Starbucks