Starbucks Costs Retreat in Coffee Bear Market Slump: Commodities
Like many coffee growers, Nils Solorzano Villareal figured it made sense to expand output as prices surged to a 14-year high in 2011. Now, the 71-year-old Costa Rican farmer is harvesting at a loss.
Record crops from Brazil to Vietnam are compounding a global surplus that drove prices down 27 percent this year, heading for a third annual decline and the longest slump in two decades. Solorzano, who added trees and fertilizer to expand his farm to four hectares (9.9 acres) from three, said he is spending $140 to produce each 60-kilogram (132-pound) bag of arabica-coffee beans that sells for about $132.
“We increased investments in the last few years because we thought prices will stay high,” Solorzano said by telephone from Montes de Oro, where he has been farming for three decades on Costa Rica’s Pacific slopes about 130 kilometers (81 miles) north of the capital, San Jose. “We’re still hopeful that prices will rebound at some point. We can’t do anything else because the land around us is very hilly.”
Global output will exceed consumption for a fourth season in 2014, the longest glut in 11 years, the U.S government estimates. The price of arabica traded in New York will drop 10 percent to 95 cents a pound by March, the lowest since July 2006, based on the median of 13 forecasts in a Bloomberg survey of traders. Lower costs improved profit margins for Green Mountain Coffee Roasters Inc., while Starbucks (SBUX) Corp. and Kraft Foods Group cut the retail cost of packaged beans.
“There’s so much coffee around, all over, that it will take at least one year and a half for supplies to diminish and prices to start rebounding,” said Roberto Higgins, a director at Guide Investimentos SA Corretora de Valores, a broker in Sao Paulo. “There’s nothing bullish in this market.”
Prices closed today at $1.0565 a pound on ICE Futures U.S., heading for this year’s third-biggest loss among 24 commodities tracked by Standard & Poor’s GSCI Spot Index, which fell 4.6 percent. Most agricultural products tumbled this year, with corn down a record 39 percent as global crops rebounded from a 2012 drought. The MSCI All-Country World Index of equities rose 17 percent, and the Bloomberg Dollar Index climbed 3.3 percent.
Global production will expand 3.1 percent to 151.9 million bags (9.11 million metric tons) in the year that began Oct. 1, up 15 percent from 2008, with a surplus of 8.7 million bags, Macquarie Bank Ltd. said in an Oct. 4 report. The glut is enough to supply every coffee drinker for almost a year in Germany, the largest consumer after the U.S. and Brazil. Most of the excess are arabica varieties found in specialty coffees sold by Starbucks and other coffee shops, the bank said.
Brazil, the largest grower and exporter, will reap an all-time high of 59 million bags in the harvest that starts in April, according to the median estimate of eight traders and analysts surveyed by Bloomberg News. Output in the country, which will shift next year to the high-yielding half of the biennial cycle for trees, surged 69 percent in the past decade, U.S. Department of Agriculture data show.
Global inventories will rise to 76.7 million bags by the end of September 2014, boosting the ratio of stockpiles to use to 54 percent, the highest since at least 2008, according to Macquarie, which predicted prices will reach 90 cents by the second quarter.
Hedge funds and other speculators have bet on lower prices since July 2012 and had a net-short holding of 28,289 contracts as of Nov. 5, the most since March, data from the U.S. Commodity Futures Trading Commission show.
Brazil, Latin America’s biggest economy, will seek to ease the glut and limit price declines by increasing reserves. The government sold option contracts in September and October that allow growers to sell beans into state-owned inventories at 343 reais ($147) a bag at the end of March. If all the contracts are exercised, stockpiles would increase by 3 million bags.
With the Brazilian harvest still five months away, the crop remains at risk of drought damage, said Thiago Cazarini, the president of Cazarini Trading Co. in Varginha, Minas Gerais, the nation’s largest arabica-growing state. An outbreak of leaf rust, a crop disease, already reduced output from Costa Rica, Guatemala, Honduras and El Salvador.
Yields also may fall short of forecasts as lower prices encourage growers to cut farming costs. Luz Marina Trujillo Stewart, 60, whose family has grown coffee for more than a century, said she will use less fertilizer at her 726-acre plantation outside of San Jose, Costa Rica.
“We’re in a crisis zone for producers worldwide,” said Christian Wolthers, the president of Wolthers America, an importer in Fort Lauderdale, Florida. “Historically, governments and private initiative tend to unite in such situations to help stop falling prices.”
Lower costs for beans will help boost operating profit margins for Seattle-based Starbucks, the largest coffee-house chain, by as much as 2 percentage points in the fiscal year that began Oct. 1, after rising to 16.5 percent in fiscal 2013, Chief Financial Officer Troy Alstead said on an earnings call Oct. 30. The company in May cut prices for some of its packaged coffee sold in U.S. grocery stores.
Half of the improvement in profit margins this year at Waterbury, Vermont-based Green Mountain (GMCR), the maker of Keurig single-serve brewers, was from cheaper beans it buys from more than 25 countries, CFO Frances Rathke said on a call with investors and analysts Sept. 10. The shares rose 46 percent in New York this year.
“I don’t want to underestimate or minimize the amount that we’re getting” from lower coffee costs, Chief Executive Officer Brian P. Kelley said on the call. “We’re thrilled to have it, and we’ll have it next year as well.”
Prices are dropping because farmers are now seeing the payoff of their investments in trees, fertilizer and improved growing techniques after coffee more than doubled from about $1.30 a pound in mid-2010 to a peak of $3.089 in May 2011.
The number of trees planted in 2013 in Minas Gerais state, which accounts for more than half of Brazil’s coffee output, climbed by 78 million to 3.91 billion, from 3.832 billion a year earlier, according to Conab, the government crop-forecasting agency. In the past five years, yields in the country averaged 22.326 bags per hectare, 24 percent more than the five-year average of 18.026, government data show.
Brazilian farmers will collect in 2014 the high-yielding crop of the biennial harvest, which alternates between a high and low cycle. Plants typically start their productive life after three years, while pruning limbs is typically done to boost yields.
In Colombia, the second-largest arabica producer, output will rise to the highest since 2007, according to the National Federation of Coffee Growers. Yields will gain next year after farmers replaced old trees with disease-resistant varieties that are now bearing fruit, said Luis Fernando Samper, chief communications and marketing officer at the Bogota-based group.
Vietnam, the largest grower of robusta beans, will reap 28 million bags in 2013-2014, matching the record in 2011-2012, according to Olam International Ltd., one of the top three suppliers of all coffee varieties. That includes about 1 million bags of arabica.
“You have a lot of coffee from Vietnam to Brazil,” said Rodrigo Costa, a trading director at Caturra Coffee Corp. a dealer in Elmsford, New York. “Even if producers reduce investments, they typically have reserves of inputs such as fertilizers for a year. Unlike grain crops, coffee production does not respond as quickly to a change in prices because of the lifecycle of trees that are already planted.”
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