Don’t Sweat Panicked Coffee Headlines

by Dan Burrows | September 11, 2012 10:42 am

The price of coffee (futures, that is, not a hot cup of java) spiked 8% in the last week. But don’t worry just yet — that doesn’t mean your cup of Joe or input costs for the big coffee companies are automatically going to spike, too.

Few things are scarier than food-price inflation. Whether you’re an investor, a trader or just sitting on the sidelines, we all gotta eat. And it gets even more complicated when looking at what higher food costs mean for individual stocks or the larger economy.

Drought in the U.S. has corn and soy futures skyrocketing. That’s hammering the profit outlooks for producers of chicken, beef and pork[1], like Tyson (NYSE:TSN[2]), Smithfield Foods (NYSE:SFD[3]) and Pilgrim’s Pride (NYSE:PPC[4]). When their feed costs go up, their earnings go down.

Looking at the bigger picture, corn and soy are ingredients in just about every food product you can think of[5], at least in the U.S. But it takes a while for those costs to get passed down the food chain to consumers, which is why food prices aren’t forecast to rise until next year.

Which, of course, still is bad news for the economy, since every dollar spent on food is one less dollar spent elsewhere. Consumer spending accounts for about 70% of all economic activity, and retail sales make up about half of that. More spending on food means less spending on retail categories that are not food.

So, back to coffee. Futures have jumped about 8% in the last week on fear that Colombia’s production will come up short of speculators’ forecasts. Never mind that August production rose more than 20% over last year’s rain-soaked season in the Andean nation.

Or that August exports increased 56%.

Or that Colombia has now registered five consecutive months of increased production.

Futures are up because forecasts might — just might — come up short of what of the market was handicapping.

Happily for coffee drinkers and coffee companies like Starbucks (NASDAQ:SBUX[6]), Green Mountain Coffee Roasters (NASDAQ:GMCR[7]), Dunkin’ Brands (NASDAQ:DNKN[8]), Peet’s Coffee & Tea (NASDAQ:PEET[9]) and J.M. Smucker (NYSE:SJM[10]) — the last of which is responsible for Folgers-brand coffee — those futures speculators are handicapping some very easy year-over-year comparisons.

Colombian production and exports are up — and market expectations even higher — because last year was a wash-out; months of heavy rains hurt the coffee crop. (This year, it’s drought that’s messing with production forecasts.)

But here’s the bottom-line good news: Although coffee futures are spiking this week, during the past year they have plunged by about a third. Indeed, no other commodity has logged a worse 52-week performance. Coffee prices are way down from last year.

Like Colombian coffee production, the coffee companies — at least when it comes to input costs — are happily looking at some easy year-over-year comparisons.

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

  1. producers of chicken, beef and pork:
  2. TSN:
  3. SFD:
  4. PPC:
  5. in just about every food product you can think of:
  6. SBUX:
  7. GMCR:
  8. DNKN:
  9. PEET:
  10. SJM:

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