U.S. coffee chain Starbucks will pay around $913-million (U.S.) to acquire the 60 per cent of its Japanese unit it doesn’t already own.Yuriko Nakao/Reuters
Beaten-up oil and copper prices have some observers wondering if the long-term commodities "super cycle" is over. Clearly, they're not coffee drinkers: Arabica futures have surged over the past year, and the rally is showing no signs of sputtering.
For coffee drinkers who live for the pricey fresh-roasted beans found in independent urban cafes (cough!), the rise could be painful. And for investors, the pain would likely come from joining a rally too late.
Arabica futures hit their highest level in about two-and-a-half years on Monday, rebounding from remarkable lows seen last November. Since then, they have risen 118 per cent, including a 37 per cent rally since July.
The rise has everything to do with poor weather conditions in Brazil: It is dry in the world's top producer and exporter at a particularly vulnerable time for farmers. The conditions threaten to pull down next year's harvest by 18 per cent, marking the biggest slump in five decades, according to Bloomberg News.
The higher prices are reflected in at least two funds that track coffee. The iPath Bloomberg Coffee total return exchange traded note (ticker: JO in New York) has risen nearly 94 per cent this year, and the iPath Pure Beta Coffee ETN (ticker: CAFE) has risen more than 86 per cent – roughly tracking the rise of futures.
Theoretically, there could be more gains ahead: Arabica futures are about 28 per cent below their recent highs in 2011, suggesting a little more room for the rally. However, the rebound over the past 10 months has been so strong, it is difficult to see the benefits of joining a rally this late – and there is plenty of downside should rain come to Brazil.
Coffee retailers look like a better bet, given that they have been successful at raising prices on drinks and bagged coffee to offset rising input costs.
Starbucks Corp. shares, for example, aren't far from record highs. In the company's fiscal third-quarter results, released in July, it reported that earnings rose 23 per cent over last year. At the same time, the company raised its full-year forecast and bumped up its 2015 earnings-per-share estimate by 20 per cent.
In other words, while coffee prices may not be good news for Starbucks, they're not exerting much of a drag either. And if coffee prices fall – they are volatile, after all – expect a nice caffeinated jolt.