Where to Invest When Coffee Prices Go North

SJM and KRFT stock are not only not in trouble, but may thrive on what's being viewed as bad news

   
Where to Invest When Coffee Prices Go North

If you’re a coffee drinker, prepare to pay higher prices for Maxwell House when you buy it at the grocery store. Kraft Foods Group (KRFT) announced this week it will be raising prices on its Maxwell House coffee in the near future after wholesale coffee beam prices soared earlier in the year. All told, Arabica coffee prices jumped from $1.20 per pound in January to $2.20 by mid-April.

While wholesale coffee prices have pulled back a little since then, the current price of $1.65 per pound is still too significant to simply absorb and chalk up as the cost of doing business. That’s why J.M. Smucker Company (SJM) also announced last week it would be cranking up prices on its brands.

While the maneuver may make it tougher for coffee drinkers to quench their thirsts for the caffeinated drink, the impact of higher coffee prices on shareholders of KRFT and SJM stock isn’t quite as cut-and-dried.

Just How Out-of-Control Are Coffee Prices?

To hear the cursory news coverage of rising coffee prices and the corner they’ve painted J.M. Smucker Company and Kraft Foods Group into, it would be easy for investors to think both companies — not to mention brewed coffee retailers like Starbucks (SBUX) and Dunkin’ Donuts (DNKN) — are on the ropes here. As is so often the case, though, a little more history and a lot more context may be needed.

Consider the fact that, even with the January-to-April runup, Arabica coffee beans (the proverbial “good stuff” that most processors and consumers want) still came nowhere close to the peak price of more than $3.00 per pound seen in May of 2011. That was the last time either Kraft Foods or J.M. Smucker officially raised their coffee prices.

Another piece of relevant context: When Arabica coffee prices started to subside in mid-2011 all the way to a multi-year low of $1.08 per pound by November of last year, coffee suppliers didn’t lower their retail prices accordingly.

According to data from the Bureau of Labor Statistics, after retail ground coffee prices peaked at $5.76 per pound (all brands) in August of 2011, they never really contracted, and certainly never came close to mirroring the 65% plunge we saw from wholesale coffee prices between mid-2011 and late-2011. The lowest coffee prices — on average that consumers have seen on their grocer’s shelves since 2011 was an average of $4.95 per pound in December of last year. That’s only 14% below peak levels from two and a half years earlier

81014 coffee prices Where to Invest When Coffee Prices Go North

Ditto for Starbucks. The world’s most prolific coffee house didn’t lower its prices last year, either, after raising them in 2011, even though the rising wholesale prices that sparked the price hike had fallen back by nearly two-thirds from their peak.

Point being, if you think Kraft Foods Group, J.M. Smucker Company, and even Starbucks and Dunkin’ Donuts are in trouble now because they’re going to be forced to choose between marketability and profitability, think again. There’s still plenty of room for both in the spread between wholesale and retail coffee prices.

Who Wins and Who Loses?

As for which coffee stocks are in trouble now and which will be fine … truth be told, they’ll all be fine.

Even in 2011, when Arabica coffee prices were soaring, consumers were saying one thing and doing another. How so? Despite retail prices for ground coffee jumping from $3.93 per pound in August of 2010 to $5.76 in August of 2011 (a 46% increase), the ready-to-brew coffee industry’s revenue was up across the board.

Sales grew for everything from ground coffee to beans to the single-serve packets from Green Mountain (GMCR). Ground coffee sales grew 16% in 2011, while whole-bean sales were up 7.6%. The then-burgeoning single-serve movement roughly doubled 2010′s total sales of single-serve coffee pods in 2011.

It wasn’t just the ready-to-brew coffee industry that survived 2011′s price surge either. Starbucks — arguably the name most sensitive to rising wholesale coffee prices — saw higher gross margins in fiscal 2011 than it did in 2012. Gross margins grew from 26.3% in 2010 to 27.2% in 2011.

So much for the theory that coffee was going to price itself out of the market.

Investors searching for opportunities in the fallout may find that SJM stock and KRFT stock are better off than other coffee names in the wake of the price hike, especially now that Arabica coffee prices have pulled back from peak levels hit a couple months ago. Although coffee is only a small part of each company’s business, wider coffee margins should actually help the overall bottom lines for each name, even as both are painting an alarming picture.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2014/06/coffee-prices-sbux-dnkn-krft/.

©2014 InvestorPlace Media, LLC

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