Coffee Prices Set to Fall (SBUX, MCD, GMCR, DNKN, KFT, SJM, KKD)

Coffee prices rose steadily from July 2010 to March 2011, before dipping a little, and then climbing back to a price of more than $3/pound. The price today is about $2.80/pound and there’s some evidence that the price  could fall even more. This ought to be good news for the many US coffee purveyors.

Starbucks Corp. (NASDAQ: SBUX), McDonald’s Corp. (NYSE: MCD), Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR), Dunkin’ Brands Group (NASDAQ: DNKN), Kraft Foods Inc. (NYSE: KFT), J.M. Smucker Co. (NYSE: SJM), and Krispy Kreme Doughnuts, Inc. (NYSE: KKD) could all see a boost on their bottom lines as a record harvest in Brazil and an increase in exports from Colombia work their way into the market. Coffee stockpiles in South America dwindled sharply in 2010, leading to a doubling of the price.

The 2012 coffee crop year, which begins October 1st, looks to be one in which the market may be over supplied, pushing coffee prices down. Bloomberg reports that ABN Ambro Bank and VM Group are predicting that supply will outstrip demand by 690,000 132-pound bags in 2012. [http://www.bloomberg.com/news/2011-09-05/coffee-peaking-as-cargoes-carrying-brazilian-beans-surge-freight-markets.html] That’s for the higher grade arabica beans. For robusta beans, the surplus is estimated to come in at 3.87 million bags.

Kraft lowered its coffee prices by about 6% just two weeks ago. The price drop included Maxwell House and Yuban brands, but not the premium Gevalia, Tassimo,and Maxwell House International brands. Smucker’s also lowered its prices by the same amount on Folgers, Dunkin’ Donuts, and Folgers brands.

McDonald’s, recently rated the best coffee in Australia, has not announced any price cuts. Nor has Starbucks or Dunkin’ Donuts or Krispy Kreme. It’s possible that bagged coffee prices will come down a little, but individual drink prices are less likely to fall. After all, once customers have shown a willingness to pay more, there’s no good reason to charge less.

It’s interesting that Krispy Kreme chose this particular time to push harder in the coffee drinking business. Coffee accounts for just 4% of the company’s revenue, but after shooting itself in the foot following its IPO the company has rebounded well and is looking to grow its revenue. Getting more customers to buy a cup of coffee to go with those doughnuts is a natural move.

But the good news on the coffee front hasn’t done anything to help share prices today as worries about the European and US economies have moved the market down nearly -2% in the early afternoon. Starbucks, which announced this morning a plan to triple its number of stores in China, is off about -0.9%, at $37.15, in a 52-week range of $24.53-$41.11. Shares in Dunkin’ Brands are down about -3%, at $26.17, after Goldman Sachs initiated coverage on the company with a ‘sell’ rating. Dunkin’s 52-week range is $24.97-$31.94.

Paul Ausick