Surging Coffee Commodity Prices Trigger Consumer Pain, Investor Gain

By: Money_Morning

Kerri Shannon writes: Starbucks Corp. (Nasdaq: SBUX) has announced that it will charge more for many of its drinks to compensate for surging coffee prices, which have climbed to their highest level in 13.

The famous coffee chain announced Wednesday it would make "targeted price adjustments on certain beverages in certain markets," according to a press release on its Web site.

Starbucks said it tried to hold off on the change, but the continuing climb of green Arabica coffee bean prices - along with the costs of sugar and cocoa - forced the company to offset rising expenses.

"Over the last six months a highly speculative green coffee market and dramatically increased commodity costs have completely altered the economic and financial picture of many players in the coffee industry," said Howard Schultz, Starbucks chairman, president and chief executive officer. "But the extreme nature of the cost increases has made it untenable for us to continue to do so and we have been forced to take the steps we announced today,"

The company will keep the prices of its tall sized coffee drinks, but raise prices on larger-sized, "labor-intensive" beverages. Starbucks brand products sold at retailers will be unaffected, but the company did not rule out raising the price of packaged coffee in coming months.

Coffee has climbed 54% in the past year, and 41% since June. Money Morning Contributing Editor Jack Barnes, who examined the price surge in an article this week, said three main factors are pushing prices to new highs: Bad weather in Brazil and Colombia, a 10-year low for U.S. stock piles, and the planned supply hoarding by main exporters Brazil and Vietnam. These three countries make up the biggest coffee exporting nations, with Brazil holding 38% of the market, Vietnam with 14.5% and Colombia at 12.3%.

"Little wonder coffee prices are at 13-year highs, and coffee futures have zoomed 44% since June," said Barnes. "Expect the trend to continue. Coffee prices are going to rocket another 30% from here."

Barnes warned that the price climb would result in hikes at local coffee shops and retailers.

"The J.M. Smucker Co. (NYSE: SJM) - parent of the Folgers, Dunkin' Donuts and Millstone brands - has raised prices 10%," said Barnes. "The Maxwell and Green Mountain brands also are raising prices as their margins get squeezed. Trust me, you're going to see many more such announcements come along: These are just the first of many trickle-down price increases for consumers, who can expect a flood of these events in the months to come as retailers pass on the increases to their customers."

Also pushing retailers' prices higher is sugar, which on Friday rose to its highest price in almost seven months. Brazil - the largest grower of sugar - is in a drought that has pushed water levels in the Amazon River to their lowest level since 1963, and may lower its production estimate to about 560 million metric tons from 570.2 million tons.

Cocoa for December delivery rose 0.5% Friday to $2,974 a ton, for a weekly gain of 1.7%.

Dry weather in South America will continue until mid-October, and coffee and sugar prices continue to gain, meaning U.S. shops and retailers that have yet to raise prices might not have a choice in coming weeks.

Of course, what might hurt consumers' wallets could also help their portfolios.

"The price of green coffee beans has a chance to break out to historic high prices in 2011," said Barnes. "While I am bullish on coffee in the intermediate and long terms, I believe there is a very real possibility that we'll see a pullback in the coming days or weeks. Once that occurs, however, I would urge investors to take a really careful look at coffee as a top profit play, particularly given the demand, hoarding and weather-related catalysts - all of which are bullish for coffee prices."

Source : http://moneymorning.com/2010/09/26/coffee-prices-2/

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