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Coffee Futures Plunge Nearly 4%, Lowest Since June 2010 (SBUX) (GMCR)

December 31, 2012 11:55 AM EST Send to a Friend
Coffee futures fell to their lowest level since June 2010 in New York today, which has investors eying Starbucks (NASDAQ: SBUX) and Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR). On the InterContinental Exchange, coffee (KC) last traded down 3.7 percent to $1.414/lb. Coffee reached a multi-year high during fiscal 2011.

Starbucks hedges arabica coffee through price-to-be-fixed green coffee contracts. As of September 30, 2012, Starbucks had committed to purchasing green coffee totaling $557 million under fixed-price contracts and an estimated $297 million under price-to-be-fixed contracts. As of September 30, 2012, approximately $125 million of its price-to-be-fixed contracts were effectively fixed through the use of futures contracts.

For Green Mountain, the company tries to pass significant coffee price increases and decreases to customers. They warn that rapid and sharp decreases in the cost of green coffee could also force them to lower prices to customers resulting in lower gross margins due to the need to sell products comprised of higher green coffee costs until they would be able to reduce green coffee inventory and purchase commitments.

At September 29, 2012, Green Mountain held outstanding futures contracts covering 3.2 million pounds of coffee with a fair market value of (0.3) million, gross of tax. At September 24, 2011, they held outstanding futures contracts covering 3.1 million pounds of coffee with a fair market value of (0.4) million, gross of tax. Purchase commitments hedged with financial instruments are classified as fixed in the table above. At September 29, 2012, Green Mountain are exposed to approximately $31.6 million in un-hedged green coffee purchase commitments that do not have a fixed price as compared to $119.9 million in un-hedged green coffee purchase commitments that did not have a fixed price at September 24, 2011.

Shares of Starbucks last traded at $52.67, up 0.06%. Green Mountain is up 1.2 percent to $40.85.




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