Skip to main content

The Globe and Mail

As coffee prices surge, investors watch Starbucks

Shares in the world’s biggest coffee chain fell 3.3 per cent to $78.20.

SUZANNE PLUNKETT/REUTERS

Starbucks Corp. did very well as the price of coffee slid to seven-year lows in 2013. Will the coffee retailer do okay as coffee prices rebound?

On Tuesday, Arabica coffee futures rose as much as 10 per cent for their biggest one-day gain in more than nine years. They rose another 3 per cent on Wednesday.

The latest surge followed news of poor growing conditions in Brazil, the world's largest coffee producer, but the rebound has been going for about three months. Since November, coffee futures have bounced 57 per cent and are now sitting at their highest levels in more than a year.

Story continues below advertisement

That's good news for anyone who has invested in coffee: The iPath Dow Jones-UBS Coffee Subindex exchange-traded note (ticker symbol: JO), which tracks coffee futures, has risen 59 per cent from its low and jumped 6.5 per cent on Wednesday alone.

For coffee retailers, though, one key input cost is now heading in the wrong direction. According to Bloomberg Businessweek, Starbucks buys more than 3 per cent of the world's supply of unroasted beans, or about 500 million pounds of arabica, to keep its 19,000 stores running.

It didn't cut beverage prices when coffee prices were declining in 2013, helping to boost operating earnings by 23 per cent last year, expand operating margins by 150 basis points (to 16.5 per cent) and lift the share price by 46 per cent.

Those gains could be threatened. As Starbucks pointed out in a regulatory filing that highlighted the risks to its operations: "Because of the significance of coffee beans to our operations, combined with our ability to only partially mitigate future price risk through purchasing practices and hedging activities, increases in the cost of high-quality arabica coffee beans could have an adverse impact on our profitability."

Starbucks' share price has moved in the opposite direction to coffee prices – retreating about 10 per cent since November, which is when coffee began its rebound.

For sure, there are other factors at work here: Starbucks has made a big foray into China, where there are persistent concerns about the health of the economy.

As well, the consensus view is that Starbucks customers are not terribly sensitive to price: Since they have been paying a premium since the company was founded, they aren't likely to turn elsewhere should Starbucks offset rising coffee prices with price increases of their own.

Story continues below advertisement

Still, if falling coffee prices gave Starbucks a nice tailwind, it is hard to see rising coffee prices as good news now.

Report an error Licensing Options
About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

Comments

The Globe invites you to share your views. Please stay on topic and be respectful to everyone. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

Please note that our commenting partner Civil Comments is closing down. As such we will be implementing a new commenting partner in the coming weeks. As of December 20th, 2017 we will be shutting down commenting on all article pages across our site while we do the maintenance and updates. We understand that commenting is important to our audience and hope to have a technical solution in place January 2018.

Discussion loading… ✨