Why coffee prices are surging
The world's largest coffee producer was poised for a record crop this year, but Mother Nature had other ideas.
This post comes from Rob Wile at partner site Business Insider.
Coffee prices have seen a parabolic run-up in recent weeks as unprecedented hot and dry weather in Brazil has sucked the life out of what was expected to have been a record crop.
Prices are at $1.75 per pound, up 3 percent today. According to Reuters, last week's 20 percent surge was the largest one-week rally since December 1999.
January was the hottest month on record for parts of Brazil, and the drought was said to be the worst in 50 years.
One estimate said 30 percent of the coffee crop may have been lost.
"Dry, unseasonably warm weather persisted in coffee areas of southern Minas Gerais and Espirito Santo," the USDA said last week (.pdf file).
Here's the map of those two regions. It's basically a direct hit — in contrast to much of the rest of the country, which finally got some rain.
Brazil produces nearly 40 percent of the world's coffee.
The impact on consumers is more uncertain. Coffee beans account for no more than 10% of a Starbucks franchise's operating costs, according to the Wall Street Journal, and service providers are usually insulated from short-term price run-ups thanks to futures contracts. But the drought has been so severe that elevated prices may persist and hit coffee fiends' wallets.
Here's what RBC Capital Markets' Starbucks analyst David Palmer said last week about how it will impact that particular company:
Arabica spot prices have risen ~23 percent this year and nearly 35 percent since early November. We believe this to be a near-term positive given 1) Starbucks practice of locking in coffee 12+ months forward, 2) other coffee companies pricing coffee closer to the inflation cycle (meaning more pricing power for Starbucks in the coming quarters), and 3) Starbucks input prices have a floor above current levels, meaning price movements at depressed trading levels have minimal impact on forward input prices. However, a protracted rise in coffee prices would require one or more of Starbucks investment opportunities (e.g. lunch, tea, juice, carbonated beverages) to fill in the gap left by the fading coffee cost tailwind in late fiscal 2015 and beyond.
Last week, Goldman Sachs chief commodities analyst Jeff Currie had raised raised his 3- to 12-month Arabica coffee price forecast from $1.20/lb to $1.30/lb warning he saw "risks to the updated forecast as skewed to the upside."
But Currie noted that there were reasons why prices wouldn't have to go to the stratosphere.
"Our forecast remains below the current forward curve for now as (1) high stock levels after several years of surpluses will help cushion this production shortfall and (2) the current rally has likely been exacerbated by large net short speculative positioning heading into this weather event," he said.
In any case here's the chart from FinViz:
More from Business Insider
weather has nothing to do with coffee prices ,it's their destroying the rain forest and farmlands
Watch. Now all the billionaires will buy up a million units of coffee off the commodities market, never take delivery, never use it, the price will go up more since it will appear to be a little scarce, they cause the inflation , sell it at inflated price, make millions, pay a measly 15% income tax if any, nobody gets hired, and we pay a buck more for a 13 oz. pound of coffee. .... and the ignorant rednecks will STILL vote Republican so those poor little rich guys don't have to pay a fair amount in taxes...still believing in the fable of "trickle-down economics."
Ain't America great?
Who gives a crap! It doesn't belong in the human body in the first place. You wanna poison yourself? Pay for it.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
ABOUT SMART SPENDING
LATEST BLOG POSTS
They are expected to take in a record $2.25 billion in fees and surcharges this year.
VIDEO ON MSN MONEY
BLOGS WE LIKE
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'