Coffee price jump puts brakes on Starbucks' buying

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 sidelines.

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.

'Strategic coffee buying practices'

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 this year.

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.

Dairy hedging

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.

Guidance upgrade

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.

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