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Coffee demand outstrips supply; coffee stocks up for commodity squeeze?

Posted Feb 19th 2009 6:22PM by Sarah Gilbert
Filed under: Analyst reports, Starbucks (SBUX), Kraft Foods'A' (KFT), Commodities

Coffee is set to be "one of the most promising commodities of 2009," according to a leading Swiss commodities analyst, who predicts coffee prices will rise, likely squeezing the already-decaffeinated profits at Starbucks (NASDAQ: SBUX) and Kraft (NYSE: KFT), maker of Maxwell House, among other major coffee retailers. Current prices are $1.1305 a pound, only up a 0.9% on the year, but experts predict greatly increasing costs due to declining production in Brazil and Colombia. Coffee futures are currently at $1.20 per pound for December 2009 contracts, and $1.227 per pound for March 2010 contracts.

How much price runup are we talking? It could be increasing a whopping 50% to $1.70 per pound by June 30, according to former Merrill Lynch analyst Judith Ganes-Chase, who runs a consulting firm in Katonah, New York.

Starbucks says it won't have much of an effect on the company's costs (and Starbucks does source much of its coffee through direct-trade agreements which have some insulation from the general commodity markets); the company has already noted that coffee price increases are countering the decreases in milk prices for the coming quarter. In my opinion, this news will have a greater effect on companies like Kraft and Nestle, which are set to stronger competition from Starbucks VIA instant coffee (though the product doesn't at all compete at a similar price point); Maxwell House has already gone up in price twice in the past year due to steadily rising commodity prices. However, given the packaged food sector's recent softening due to concerns over consumer buying power for convenience foods, the stock price may already reflect these concerns.

Just how bad can things get for Kraft and its competitors? Coffee prices may be only one factor in a ever-expanding list of concerns. I don't believe the coffee costs alone will have a huge impact, but their impact in a gathering storm of packaged food pressures is certainly unwelcome news for investors. I would avoid the stock, even at these historically low prices.