Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Starbucks Corporation (SBUX), Dunkin Brands Group Inc (DNKN): How to Profit From the Coffee Glut

Page 1 of 2

Caffeine addicts rejoice! Coffee prices are in free fall. For savvy investors this presents a potential opportunity.

Starbucks Corporation (NASDAQ:SBUX)

Falling prices

In 2011 poor weather and a fungus outbreak drove the price of Arabica coffee, the preference of java connoisseurs for its richer flavor, above $3.00/lb. Pundits warned of the looming coffee shortage.

Today, Arabica prices are approaching four year lows down 60% from their peak.

The iPath Dow Jones-UBS Coffee Subindex Total Return ETN , which tracks coffee futures prices at the New York Mercantile Exchange, is down 27% over the past year.

Even Robusta prices, a lower quality brand, are also falling due to good harvests in Vietnam and Indonesian.

According to the London NYSE Liffee exchange, speculators have more than tripled bearish bets against Robusta prices. Net-short positions, or wagers that prices will fall, totaled 7,096 futures and options contracts during the period ended June 4. That compares to 2,029 contracts only a week earlier


Several reasons have been given for this decline.

Bumper crop: Record crop yields in Brazil, the world’s largest Arabica coffee producer, has swelled inventories. According to Volcafe, global coffee production is expected to hit 134.3 million bags this year, much higher than the 132 million bags originally projected.

Slowing demand: Global coffee consumption is only expected to increase 1.1% this year. That’s the slowest pace of growth in decades. In addition, dominate players like Nestle anticipate prices to continue to fall and are reluctant to step in with big purchases.

Structure: Unlike core or wheat where seeds are set down every season, coffee plants can return harvests for a least two years. This means it’s easier to raise production when prices are rising than it is to cut production when prices are falling.

Discipline: Most coffee growers are small farmers who have no choice but to sell their crop regardless of the price. Some farmers in Colombia and Ethiopia have actually raised production to offset falling prices.

Subsidies: To support struggling farmers, many governments are subsidizing production to help them ride out the volatility.

Equity implications

So what does this supply glut mean for equity investors? For some coffee distributors and distributors, significantly higher gross margins.

Starbucks Corporation (NASDAQ:SBUX) has yet to fully benefit from falling coffee prices because the company has hedged half of its coffee needs until 2014.

In 2012, Starbucks Corporation (NASDAQ:SBUX) paid an average price of $2.69/lb for coffee. That’s expected to fall to $2.04/lb by 2014. Based on the company’s estimates, that could add more than $200 million to the company’s bottom line.

Page 1 of 2

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!