Coffee Prices Getting Squeezed ☕
If you haven't noticed the price of your daily cup of Joe going up, perhaps it's on the way
So what exactly does “TTW” mean? Well, it stands for Trends to Watch. It will be a new series that I send to you all that highlights a trend that I’m noticing/have read about and provides my commentary. The point of these is to shed new light on a potential idea for you to take advantage of if you so choose to act on it yourself.
These won’t be sent on a regular cadence but rather as I see them happening.
Trend to Watch: Coffee Bean Prices
Have you been a part of the group, or even the receiving end, of those that make coffee at home instead of buying because you’ll be saving money?
Well, it seems like even those days might be coming to an end. Just like all the buzz going on these days is that inflation is not transitory and that prices are climbing all over the place. This is happening with coffee and it seems like it will hit towards home as well.
Coffee by the numbers
The United States imports in excess of $4 billion worth of coffee per year.1
Americans consume over 400 million cups of coffee per day making the United States one of the leading consumers of coffee in the world. This averages to about 3 cups of coffee per day, per coffee-drinking American.
On average, 250 cups of espresso and coffee drinks are sold per day at almost any espresso drive-thru business with a great visible location. (500 cups per day is extraordinary.)
Independent coffee shops manage to sell 31% of espresso-based drinks, while the rest is brewed coffee.
The average price for a cup of coffee in the US is $3.93 and about 85% of Americans have at least one cup of coffee at home. Additionally, 60% of Americans also choose coffee over any other beverage when given an option.
Coffea Arabica makes up 60% of the global coffee production. ← Remember this because it’s key to what I’m about to talk about.
So what’s going on with prices?
A global shortage of beans is already threatening to push up prices at cafes and supermarkets.
The world is facing a desperate shortfall of arabica coffee, the variety that gives the smoothest flavor and makes up about 60% of world production. Supplies were decimated after extreme weather destroyed crops, and with a La Nina pattern forecast through early 2022 expected to further hurt yields, it could take years for the market to recover. Arabica prices are surging to reflect the mounting crisis, while global shipping congestion is making it even harder to get beans where they are needed.
The crisis has its roots in Brazil, the world’s main supplier of arabica, where once-in-a-generation frosts followed droughts to wreak havoc on the crops. Crucially, it’s not just the current harvest that farmers have to worry about, some have been “stumping” or removing badly damaged trees; newly planted ones will take several years to mature. On top of that, they’re also grappling with surging costs for fertilizers and labor shortages.
While researchers and analysts are still busy surveying the remnants of Brazil’s damaged coffee harvest, the reports so far are not encouraging.
In the meanwhile, just about everyone in the supply chain is scrambling for beans. Brazil shipments to the U.S. that normally take a month are now taking as long as 100 days due to a tight global supply of containers and vessels. Bad weather and supply chain bottlenecks have led arabica bean prices spiking by about 80% this year.2
While robusta prices have also risen this year, they’ve lagged arabica’s gains and are less than half the price. That makes it increasingly tempting for roasters to use more in their products.
Some cafes and brands focus exclusively on one or the other variety, but many use a blend of both to create a specific taste. Arabica is sweeter and typically used in drinks like cappuccinos and lattes, robusta has traditionally been popular in Italy for espresso or freeze-dried for use in instant coffee.
Either way, it’s looking increasingly likely that coffee retail prices are set to rise.
What does this mean for the market?
So when I was reading this information the other week, I immediately thought of two scenarios;
Retail prices stay the same while company margins compress → business as usual
Retail prices increase in an effort to offset margin compression → sales might take a dip if largely noticeable
Granted, this only applies to certain companies that have coffee exposure, think, Starbucks SBUX 0.00%↑, Restaurant Brands International QSR 0.00%↑ through its various holdings, Dutch Bros BROS 0.00%↑, Black Rifle Coffee Company, and even the soon-to-be publicly traded Panera Bread.
What you do have to account for, is that the bigger players in the space typically buy their beans well in advance.
Starbucks, the world’s biggest coffee retailer, suggested that it won’t need to raise its prices because of Brazil’s lower output. On a call with investors at the height of the Arabica price spike, the Seattle-based coffee chain’s President and CEO Kevin Johnson said
…just to give you some context, on the increasing CIF price of coffee, you should know that over the years….we purchase green coffee 12 to 18 months in advance, and we never stopped buying green coffee through the pandemic. So as a result, we currently have over 14 months of price forward coverage, which means we have price locked on our coverage for the next 14 months which gets us through the rest of fiscal year '21 and most of fiscal year '22.
And I think we may be the only large buyer of green coffee that uses this approach, and that will serve us well as it gives us a significant advantage relative to our competitors who, if they don't buy this far in advance, will certainly not have that cost structure that we put in place.
Smaller guys who don’t have this ability to order that far ahead through economies of scale will definitely start feeling the burden as we inch our way closer into 2022.
What I’m doing about it
I personally don’t drink coffee so fortunately, it won’t affect my wallet anytime soon.
However, there are only a few pure-play coffee companies that are publicly traded and I’ll have to research some more to see if the margin impacts and the proposed hedging techniques implemented by management are enough to protect themselves.
What I will admit to doing is looking into a smaller coffee player that I mentioned above, Black Rifle Coffee Company. I know them from their ridiculous ads that I get targeted by on YouTube and when I heard that they decided to go public via a SPAC, I had to take a look at their investor presentation.
If you haven’t seen it yet, I’ve included it down below for you to read. 👇🏼
Their projections and ambitions are pretty ridiculous (I line them up similar to how AppHarvest labeled theirs and we all know how that turned out - article here) so I’ll be keeping my eye on it to see if there are any valuation re-ratings as they get closer to closing sometime in 2022.
If all checks out, it might be my next short idea.
Although higher coffee prices on the international futures market don’t guarantee that prices at your favorite roaster will go up, it certainly is top of mind for many large-scale and local brewers. The damaged crop in Brazil is still more than a year from harvest, which offers plenty of time for many factors to reverse course.
Higher prices on the international market can often stimulate production — farmers will have more money to invest in their crop — and if there’s more coffee on the market, prices will retreat. But that will also depend on whether the big roasters have enough beans hoarded to get them through however long prices remain elevated.
It’ll be interesting how this plays out but for the immediate term, I’m patiently waiting.