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Starbucks sees 'no fundamental shortage' in coffee market

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Starbucks, which has slowed its forward coffee purchases as prices have soared, downplayed the threat to supplies posed by Brazil's drought, saying that it saw "nothing" to show a "fundamental market shortage".

The coffee giant's chief financial officer, Scott Maw, said that the group had yet to price about one-third of its coffee needs for its 2015 financial year, which ends on September 30 next year.

"We have largely stayed out of the market this year where the coffee prices have spiked," Mr Maw told investors.

A year ago, the group said it was "essentially fully price-protected" for then newly-started 2014 financial year.

'Been here before'

However, Mr Maw signalled that Starbucks was in no rush to catch up on forward pricing, saying that "we will continue to be patient as we lock in the final one-third of our needs in 2015".

Indeed, the group saw "nothing in current supply dynamics that indicates a fundamental market shortage, including origin-related concerns in Brazil", where persistent drought badly hurt 2014 output and has threatened significant damage to 2015 prospects too.

Mr Maw added that "despite the volatility in coffee markets", which saw New York arabica coffee futures near-double from end of 2013 to a two-year high of 225.50 cents per pound earlier this month, "we do not expect coffee prices to impact our current earnings per share target for 2015.

"We have managed through difficult and volatile markets before.

"We have never reduced our earnings per share target range due to the impact of coffee costs," which represent some 10% of overall costs.

'Rains finally starting'

The comments - which followed the release of results showing a return to fourth-quarter profit, of $587.9m, or $0.77 per share, but on revenues which, while up 10% at $4.18bn, fell short of market estimates – come as rains are returning to Brazil's parched coffee belt.

The region's rainy season, which typically begins in September, "is finally getting started", said Jack Scoville at broker Price Futures Group.

While the rains have largely held off this week, showers are due to return today, and herald widespread rainfall of some 2-3 inches over the next two weeks, according to meteorologists at Brazil-based Somar.

The rainfall has "stimulated new flowering" in coffee trees, after the "abortion" of previous rounds of blossoming "in most producing areas due to severe drought", Brazil's Conselho Nacional do Café producers' group said.

The coffee cherries harvested next year develop from the flowers which in the top producing state of Minas Gerais appear around September-October, as rains hit.

'Will result in losses'

However, observers see little chance of Brazil avoiding another poor harvest next year, given the damage already done to trees by sparse rains since the beginning of the year.

"The high water deficit recorded in important growing areas, and the lack of uniformity of flowering, will result in losses in the 2015 Brazil crop," CNC said.

New York arabica coffee futures, while falling steeply over the past two weeks as rains have arrived, remain at among their higher levels of the last two years.

The December contract stood up 0.8% at 189.15 cents a pound in late deals in New York, recovering from early losses, which took it close to its 200-day moving average, which it has remained above for nine months.

Starbucks shares were 2.2% down at $75.61 in New York.


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