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Starbucks' coffee buying well ahead of year-ago pace

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Starbucks revealed a continued slow pace of coffee buying, despite a further drop in futures, as its strong pace of purchases earlier in the year left it little scope for exploiting the market decline.

Scott Maw, the coffee giant's chief financial officer, said that Starbucks had "over 90% of our coffee costs locked" for the 2016 financial year, which ends next September.

The proportion of forward coffee needs hedged is far greater than a year ago, when the group had yet to price about one-third of its requirements for its 2015 financial year.

However, it follows a buying spree early in the year, as prices continued their fall from a late-2014 price spike prompted by Brazilian dryness fears.

Starbucks had, even by late April, hedged 70% of its needs for 2016, with the figure topping 80% by late July.

Price fall continues

The rapid pace of hedging has prevented the group exploiting the latest chapter of the drop in coffee prices, which in September touched a 21-month low of 113.05 cents a pound, as measured by spot New York arabica futures.

That was half the price futures reached at their peak in October 2014, and own 20% from their value when Starbucks made its late-April statement.

However, Mr Maw added that "the first thing that I'll just remind everyone is coffee in our retail business continues to be a decreasing part of overall COGS [costs of goods sold]".

The group has previously said that coffee accounts for about 10% of the group's overall costs.

And despite the early pace of hedging, "we expect coffee costs to be a little bit favourable as we look forward into 2016".

'Smoothing out those costs'

He also reminded investors that Starbucks' buying strategy had allowed it to minimise buying when arabica futures soared to their October 2014 peak of 225.50 cents a pound.

"Heading into that spike, we were quite long in our coffee inventory and so we didn't buy much coffee at those prices," Mr Maw said.

"We're smoothing out those costs."

By Agrimoney.com

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