Should commodity buyers hedge, or pass on price volatility to
That dilemma came to the fore as JM Smucker, the
biggest US coffee roaster, ground a little deeper into its decision earlier in
the week to raise prices of most if its coffee by 9%.
It doesn't look like Starbucks, one of its main rivals, will
While Starbucks declined to reply to Agrimoney.com's question
on its pricing plans, the word on Wall Street is that the Washington coffee
giant it is to hold fire, so Deutsche Bank analyst Eric Katz revealed to
After all, Starbucks - which was caught out by the 2010-11
spike in coffee prices, which helped cut its operating margins by 10 percentage
points - hedges a massive amount of its needs ahead, as Agrimoney.com has
While Smucker is less open on how much coffee it purchases forward,
the proportion is believed to be significantly less, meaning it relies more on
altering its own prices to protect margins.
"Our restaurant analyst was out there [at Starbucks] earlier,"
Mr Katz told the conference call to discuss Smucker's full-year profits.
"It didn't sound like they were really interested in moving
on pricing," he said, referring of the grocery sector where Starbucks clashes
with Smucker, rather than in the stores.
So what of Smucker's strategy, based more on passing on to
customers movements in coffee costs, through change in prices, of perhaps one
or two a year?
"Do you see the pass-through mechanism as still being kind
of fairly efficient?" Mr Katz asked, noting that the last time Smucker put its
prices up, in May 2011, thanks to rising arabica coffee bean costs "the volume
elasticity was pretty tough".
In plain speak, higher prices did deter some customers.
'Truly the best lever'
Mark Smucker, the head of Smucker's US retail coffee
division said that, "the short answer is we do feel that our ability to pass
through is efficient.
"We did take a 9% increase earlier this week, we did feel
that as we have seen sustained increases or realised cost increases in our
costs that we needed to do that."
Moving the price "in this instance was truly the best lever
to pull being more transparent with our customers".
As for the higher price deterring trade, Vince Byrd, the
group's chief operating officer, reminded that last time the company raised coffee
prices, was as arabica futures were near a peak at some $3 a pound.
"Of course we are not at that level today."
Sales vs profits
The comments came as Smucker unveiled a 10.1% drop to $124.0m
in group earnings for the February-to-April period, its fiscal fourth quarter,
on revenues down 7.9% at $1.23bn.
The drop in sales reflects the group's last cut in coffee
prices, in February last year, reflecting the weakening market, with the drop
in profits an indication that customers got this quarter something of the
better of the deal.
"The expected lower net price realisation more than offset
the benefit of lower green coffee costs," the group said.
Mr Byrd said that the fourth quarter profit decline "primarily
due to timing of the net price realisation versus cost.
However, "we continue to manage the business with an annual
perspective and the price to cost timing impacts have and will continue to
occur from quarter to quarter."
On a full-year basis, profits in coffee retail rose 5.7% to
$641.9m, despite a 6.3% fall in sales, reflecting the lowered prices.