Last week I wrote about how ethanol was increasing milk costs and how this will impact the bottom line at Starbucks (SBUX). Today we need to look at biodiesel. Currently Brazil is famous for two things, coffee and ethanol. Their national ethanol program has allowed them to become independent of imported oil and now they are turning their sights on biodiesel. Researchers have found an economically viable way to turn coffee beans into biodiesel. The oil-extraction from coffee bean rate, now at 92% to 94% means the project will begin next year and this years harvest will be affected as coffee bean supplies are built in anticipation. The project will enable coffee producers to produce enough biodiesel to power all their farm and agricultural equipment. Why does this matter to Starbucks? Brazil is the worlds largest coffee producer and exporter and this study contends up to a fifth of that production will be used to produce biodiesel.
If we go back to Econ 101, when you constrict the supply of an item and have constant or increasing demand, price must increase. Starbucks, who already gets $5 for a cup of coffee will feel the pinch. How much are people going to be willing to pay for a cup of coffee? Like all products, there is a point of inflection where price depresses demand. In the case of Starbucks, this price is lower than commonly thought as quality coffee can now be had by the like of McDonald’s for a fraction of Starbucks prices. All coffee producers and sellers will be impacted by the price increase, but when you are at the top of the price ladder, have painfully slow growth that is already a result of those lower McDonald’s prices, that pain may be more immediate and severe.
When you add the Brazil situation to the recently announce Ethiopia settlement that now has Starbucks paying additional royalties for that coffee, Starbucks is now facing an onslaught on input price increase with not much wiggle room on the revenue side. When consumers are looking at $4 a gallon for gas, will they cut back on the $5 latte and go for the $3 one at McDonalds?
I bet they will….
I hold no position in Starbucks
Todd Sullivan
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