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Coffee futures reach multi-year peak in July 2021
Starbucks hits an all-time high in the same month – revenue continues to exceed expectations
The cost of goods sold increases for the company
Inflationary pressures, weather and supply chain issues were bullish for coffee
Businesses will pass on higher costs to consumers – SBUX continues in an uptrend
Starbucks (NASDAQ:) is the most successful coffee chain in the world. In 2020, the company had 32,646 stores. There were more Starbucks locations outside of the United States than in the country where the company is headquartered. In the US, there were 15,328 Starbucks, with 17,318 spread across countries around the world.
Starbucks in Seattle, Washington is all about coffee. The company is the world's largest coffee bean consumer.
Coffee and Starbucks are indeed synonymous. The recent price hike to a multi-year high of over $2 per pound is likely to hurt SBUX's profits. However, the price action in the stock shows that the company has not suffered from the rising price of its flagship product.
Coffee hit its highest price since 2014 in July 2021, when SBUX stock hit another all-time high. While it may be intuitive to believe that higher coffee prices will weigh on SBUX stock, the company will likely pass the cost on to its massive customer base. Coffee futures will reach a multi-year high in July 2021.
Coffee prices exploded to their highest level in years in July on the back of rising inflationary pressures and weather and currency developments in Brazil, the world's largest producer and exporter of coffee beans.
Source: CQG
The chart above shows the rise in ICE coffee futures taking the price to a high of $2,1520 per pound in July, the highest level since October 2014 when they peaked at $2,2525 per pound.
Coffee made quite a comeback as the price more than doubled from June 2020, down 92.70 cents. In Brazil's major coffee-growing areas, a frost pushed the price to over $2 a pound for the first time in nearly seven years. Meanwhile, the appreciation of the dollar against the US dollar increased local production costs, putting upward pressure on coffee futures since the mid-2020 low.
Source: CQG
The chart shows the appreciation of the Brazilian real against the US dollar from May 2020, $0.1673 low to the July, $0.20445 high, up 22.2%. Rising labor costs and other local costs were bullish for coffee futures.
The December near coffee futures contract traded at just over $1.90 per pound on Friday, September 3. Revenues continue to exceed expectations
Because coffee beans are the main product the company offers, Starbucks is a huge coffee consumer. Since the stock market bottomed out in March 2020, SBUX stocks have risen steadily.
Source: bar chart
The chart shows the rise in SBUX stock from a low of $50.02 on March 18, 2020 to a record high of $126.32 on July 23, 2021, a gain of more than 152.5% in the stock.
SBUX continues to exceed analyst earnings forecasts.
Source: Yahoo (NASDAQ:) Finance
The chart shows that SBUX has surpassed consensus forecasts for earnings for the past four consecutive quarters. In the second quarter of 2021, the company made $1.01 per share, 23 cents better than the market had expected.
SBUX traded at the $117.19 level on Friday, September 3. At the time of publication, it has risen to $118.04. A survey of thirty-one analysts at Yahoo Finance found an average price target of $131.40 per share, which would push the stock to a new all-time high. Currency forecasts range from $95 to $148 per share. Coffee beans are an important cost item for the company.
While the recent boom in coffee to over $2 a pound has not impacted earnings, continued soft commodity price increases could weigh on the company's stock price.
The last substantial bull market in coffee futures began in 2008 during the global financial crisis and peaked in 2011.
Source: CQG
As the monthly chart shows, in the wake of the global financial crisis of 2008, the inflation environment has boosted Arabica coffee futures from a low of $1,0170 per pound in December 2008 to a high of $3.0625 in May 2011. The price of the raw material is in two and a half years.
Inflationary pressures, weather and supply chain problems were bullish for coffee
The only difference in the central bank's and government's approach to the global pandemic and the 2008 crisis was that monetary and fiscal stimulus levels were much higher in 2020. Albert Einstein once said that the definition of insanity is doing the same thing over and over and expecting a different result. Monetary and fiscal policy initiatives since March 2020 have ignited an inflationary fuse.
Coffee futures tripled in value from 2008 to 2011. The recent shift to $2,1520 per pound could be the start of a rally that will continue for years to come.
Meanwhile, the coffee futures market has experienced a near-perfect bullish storm. With the prices of other commodities rising, the Brazilian currency is on an upward trend, driving up production costs. The recent frost is likely to put downward pressure on inventories. In addition, as COVID-19 and its variants continue to rage in Brazil, supply chain issues have arisen, making it more expensive and challenging to transport the beans.
Businesses will pass on higher costs to consumers; SBUX continues in a bullish trend
The path of least resistance for coffee futures and SBUX stocks remains bullish. Time will tell whether rising coffee prices will weigh on Starbucks' earnings and the company's stock price. However, inflationary pressures erode the value of money and raise the prices of all assets.
Starbucks will pass on the increase in coffee prices to its loyal customers. With costs on the rise for all consumer goods, SBUX is just another company that will raise prices. The cup of Starbucks coffee is not as elastic because the company offers its customers the product along with an environment that should soften the blow of rising coffee prices.
Inflation seeps through to all goods, services and asset prices. SBUX stocks are likely to follow the general stock market, which remains in a bullish trend, rather than the wholesale price of coffee. The main danger for SBUX is a correction in the stock market, as it will pass on higher coffee prices to its loyal customers.
