By Nat
Rudarakanchana
October 23 2013
Coffee is a commodities market to
watch late this year and into 2014, as historically low coffee bean prices
should reach a bottom and revive investor interest, according to one
commodities expert.
Prices have declined from recent
highs of about $2 per pound, and now trade in the range of $1.15 to $1.20 on
the New York ICE Futures exchange.
“You really have to look at the
market and see if this is the bottoming,” Carlos Sanchez, director of asset management
at CPM Group, told International Business Times, referring to recent historic lows in Arabica coffee bean
prices. “It’s something to look out for, a bottom over the next six
months.”
Growing demand in emerging markets
like China, India and Brazil bode well for coffee beans over the long term,
even though coffee companies like Starbucks Corporation (NASDAQ:SBUX) have
saturated developed economies.
“With rising wealth, and increased consumption
of commodities, in developing markets … companies like Starbucks and other
providers of coffee are trying to increase their market share,” said
Sanchez. “That’s just going to continue until, perhaps, you see the
situation here where almost every town, or every other town, has a Starbucks.”
Steadily rising demand, combined
with limited supply from South American countries, particularly Brazil, where
coffee farmers have slowly cut back to favor more profitable crops, will drive
dynamics over the next few years, he said.
To be sure, bumper harvests this
year in Brazil, the world’s largest supplier of Arabica coffee beans, have
helped prices plunge this year. Supply has outpaced demand in 2013, but it’s
unclear how long that can last, said Sanchez.
Commodity market fluctuations,
however, won’t change the price you pay for coffee in the grocery store or at a
café. That’s because coffee shops often incorporate other costs into their cup
prices, while grocers hedge
on commodity prices, fixing them in advance, to stabilize costs.
Starbucks expects to save $100
million in fiscal year 2013 from declining commodity costs, the company told
IBTimes in an email, though this won’t necessarily be passed onto consumers.
“Starbucks takes a holistic approach
to value which includes the quality of our coffee, food and products we sell,”
the company said in the emailed statement. “We approach pricing on a long-term,
product-by-product, market-by-market basis.”
Coffee commodity costs usually
account for less than 10 percent of store expenses, according to Starbucks
spokesman Zack Huston. Starbucks could also see another $100 million in
commodities savings in 2014, as executives mentioned in its last earnings call,
though only its earnings release on Oct. 31 will make this clear.
Dunkin’ Donuts’ (of Dunkin Brands
Group Inc. (NASDAQ:DNKN)) chief supply officer Scott Murphy told IBTimes that
significantly lower coffee costs in 2013, compared to 2012, also won’t
necessarily change its coffee prices, because independent franchisee operators
of Dunkin’ outlets set their own prices.
“As a franchisor, Dunkin'
Brands is mostly isolated from coffee commodity swings in the short
to medium term. Our income is derived from franchisee royalties,” he wrote in
an email. “Our franchisee-owned NDCP [sourcing and distribution co-operative]
continues to buy forward strategically to take advantage of market conditions.”
But coffee drinkers, especially fans
of expensive specialty coffee, should still pay attention to coffee supply and
demand trends around the world.
Specialty coffee production in
places like Costa Rica, a major producer, is declining slowly, falling 35
percent in the past decade. That’s even as demand for luxury coffee explodes,
according to Ken Lander, a small Costa Rican coffee farmer.
“Demand is increasing globally for
specialty coffee, but the economic factors of being a coffee farmer are
lowering the supply,” Lander told IBTimes, citing strong fresh demand from
Chinese, Japanese and South Korean drinkers.
“If we don’t get some kind of
economic stability built into what a farmer can make to grow this highly
laborious product …we’re going to see a continued drop in supply,” he said.
Lander, a retired Georgia trial
attorney, left the U.S. to start THRIVE
Farmers Coffee, a business that helps South American coffee farmers sell
packaged coffee directly to retailers, which pockets them more profits.
Although Brazil is the top producer
of Arabica coffee beans, lower quality Robusta beans often come from Vietnam,
Indonesia and the Ivory Coast, as well as Brazil. Price spreads between the two
types have stuck broadly to historical norms lately, according to Sanchez.
Both Starbucks and Dunkin' buy
Arabica coffee exclusively. Dunkin sources from Central and South America,
while Starbucks buys from Africa and the Asia-Pacific, too, spreading its
sourcing across 29 countries.
Other commodities analysts have
different views from Sanchez.
Goldman Sachs Group Inc. (NYSE:GS)
analyst Damien Courvalin wrote in a research note last week that a coffee
surplus in 2013 and 2014 will leave coffee stocks at their fullest levels in
five years. The bank maintains a three-to-12-month price forecast of $1.20/lb,
citing higher production from Colombia.
Coffee prices could hit $1/lb before
reaching that floor, a price last seen in September 2006, after New York
futures contracts hit a four year low in mid-September, reports the Wall Street Journal.
But even as supply spikes flatten
prices, that should be a signal to the market, Sanchez told a New York
commodities conference in September.
“That’s a market to watch out for,
globally, because demand is always rising for coffee,” he said then. “And
there’s only so much supply to go around, especially at current prices.”