Starbucks revealed it had cut its forward buying of coffee
amid the rally which has taken prices to a two-year highs, saying that stockpiling
at lower levels had afforded it the "luxury" of being able to sit on the
Scott Maw, the Starbucks chief financial officer, said that "over
the last couple of months", during which bean prices have continued a rally spurred
by Brazilian drought, "we haven't been pricing a lot off coffee".
The stand-off from the market had been enabled by the extent
to which the group had already sold forward, with "more than 40%" of coffee
needs for its 2015 financial year, starting in October, already covered, and
only a small amount for the current year still outstanding.
"Because of the length of our position both for this year
and next year, we, a bit, have the luxury of time, if you will, to see how
things settle out in Brazil," Mr Maw told investors.
Troy Alstead, the Starbucks chief operating officer, said
that "while coffee prices remain volatile, our strategic coffee buying practices
have insulated us from an impact this [financial] year and will allow us to
continue to target stronger earnings growth next year".
Starbucks revealed last month that it had "over two times as
much price coverage as we had in 2010 and 2011, when we headed into the last
coffee price increase".
Earlier this week arabica coffee futures for May hit a
two-year high, for a spot contract, of 215.70 cents a pound, with the
better-traded July lot touching 219.00 cents a pound, lifted by a downgrade by merchant Volcafe to 45.5m bags to its forecast for Brazilian production.
Brazil's crop has been badly damaged by a lack of rainfall
in the first three months of 2014, a drought which looks like hurting output in
2015 too, given that next year's coffee cherries will be borne on branches grown
Citigroup on Thursday reduced its estimate for Brazil's coffee production this year to 44.25m bags, comprising 27.55m bags of arabica beans and 16.7m bags of the
conillon robusta type.
Starbucks also revealed that it had some forward coverage of
dairy costs too, although only for "a couple of quarters" ahead, citing the
relative illiquidity of the market.
"We do hedge dairy out about three to six months," Mr Maw
said, adding that the group spent "a lot of time looking at ways we can hedge
and manage dairy costs.
"The challenge of dairy is the market for hedging and price
protecting is just much shallower and much shorter than it is for coffee."
This purchasing had enabled the group "to manage through
some of the price increase that we've seen in dairy", where prices remain historically
high, if well below a February peak.
The comments came as the group unveiled earnings of $0.56 a
share for the first three months of the calendar year, in line with market
expectations, and helped by lower commodity costs.
Revenues rose 9.1% to $3.87bn, a touch behind forecasts.
Nonetheless, the group, noting strong demand for non-coffee
items such as food and juice, raised to $2.62-2.68 a share, from $2.59-2.67 a
share, its forecast for full year earnings.