Consumers will likely see a jolt in how much they pay for their daily coffee fix.
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Coffee futures have shot up on the back of a report out of Brazil, the world’s largest producer of arabica coffee beans, released on Thursday, that called for a smaller-than-expected crop harvest. The government's crop supply agency, Conab, forecasts a coffee crop of 44.6 million bags in 2014, down from a report in January calling for 46.4 million to 50 million bags.
This new report comes after more data was gathered regarding a drought that hit the region. The report also said Brazil’s 2014 arabica coffee harvest was expected to fall to 32.2 million bags and its 2014 robusta coffee harvest would rise to 12.3 million bags.
Coffee is up nearly 75% so far this year, skyrocketing from $1.11 a pound at the end of 2013 to $1.94 cents as of 8:30 a.m. in New York.
“We believe coffee is in the beginning stages of a larger move higher, and is really just waiting for major fundamental news to drive prices above and beyond the $2.20 level,” said Jason Rotman, President of Lido Isle Advisors. “If coffee can hold above $2.20, we could see prices test the $2.60 area.”
This doesn’t mean you are likely to pay more for your morning coffee right away, but analysts agree that a price shock could happen in the near future.
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“In general, big companies use the futures market to do things like lock in prices. We may see consumers see a jolt in coffee prices down the road as future hedging would need to take place at higher prices,” Rotman added.
“For every new specialty coffee drink that Starbucks, Dunkin Donuts, Tim Horton's, and the rising number of new local chains releases, it means fewer beans, and the prospect for a future of higher prices for them,” said Brian Sozzi, Belus Capital CEO. “The best investment an investor could make in 2014 is buying bags of coffee, freezing them, and then selling them on Ebay late in 2015 and 2016 because prices to consumers are going higher, potentially 'eye-poppingly' higher.”
On its last earnings call, Starbucks (SBUX) said it is largely protected from price increases in the near term.
"Our coffee needs are virtually locked for 2014 and more than 40% locked for fiscal 2015 at prices slightly favorable to 2014. So while coffee prices remain volatile, bouncing back up to $2 per pound this week, our strategic coffee buying practices have insulated us from an impact this year, and will allow us to continue to target strong earnings growth next year."
Earlier this month Fundacao Procafe, a non-profit coffee research group, said it expected Brazil's 2014-2015 coffee crop to drop to 40.1-43.3 million bags, even lower than the government’s forecast. Prices are expected to remain volatile as data continue to come in and give analysts and traders more information on just how much of an impact the prolonged drought has had.