Lower Coffee Futures Prices Reflect Higher Supply Expectations



Coffee struggling

The change in weather conditions in Brazil, the largest producer and exporter of coffee, has caused a dip in coffee prices. This makes coffee the most unstable commodity in the past year. According to the Bloomberg Commodity Index, coffee has fallen by 27% this year, more than other commodities such as oil, gold, and copper.

However, Brazilian coffee supplies are expected to increase in 2015 due to the monsoon in Brazil and lower Arabica coffee futures prices. Futures prices in June were approximately 16% below their last three-year average.


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Effects on these companies

There hasn’t been much effect on the operating margins of major coffee producers because coffee constitutes only a portion of their cost of sales. Starbucks (SBUX) showed an increasing margin, with Kraft (KRFT) showing a stable margin. However, J.M. Smucker (SJM) was most affected as its operating margin fell by 12% since 2014.

Also J.M. Smucker and Kraft Foods are planning a price reversal this year following the dip in coffee prices, with Starbucks leading the coffee market. In a July 1 press release, the J.M. Smucker Company, which makes Folgers coffee, stated that it reduced prices by 6%. This pricing strategy might set an industry trend to trigger price cuts by other major roasters.

Company overviews

The J.M. Smucker Company (SJM) manufactures and markets branded food products worldwide. It provides various consumer food and beverage products. The ETF holding 0.76% of this stock is the Consumer Staples Select Sector SPDR ETF.

Kraft Foods Group (KRFT) is a consumer packaged food and beverage company that manufactures and markets food and beverage products.

Starbucks (SBUX) operates as a roaster, marketer, and retailer of specialty coffee worldwide. The ETF holding 3.01% of this stock is the Consumer Discretionary Select Sector SPDR ETF (XLY), which also holds 4.10% of its major competitor McDonald’s (MCD) stock.


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