Starbucks, the world’s largest coffee chain and buyer of 3% of global coffee, has significantly scaled back its hedging programme despite a surge in coffee prices. Fixed-price contracts for green coffee have dropped to under $200 million, down from $1 billion in 2019. This decision raises concerns about increased exposure to market volatility as coffee prices reach 13-year highs, fuelled by poor harvests in Brazil and Vietnam.

1. Starbucks’ Declining Hedging Strategy

Starbucks has cut its reliance on fixed-price contracts, with less than $200 million of such contracts in place as of September 2024. This marks a dramatic reduction compared to $1 billion just five years ago. Instead, Starbucks increasingly uses "price-to-be-fixed" contracts, which establish purchase quantities and delivery terms but leave final prices to be agreed later.

• Why It Matters: With coffee prices up by over 70% in the past year, this strategy leaves Starbucks more exposed to fluctuations in the market.
• Market Context: Benchmark coffee futures recently surpassed $3 per pound, reflecting global supply deficits.

2. Rising Coffee Prices and Global Supply Challenges

The global coffee market is grappling with supply issues caused by poor weather in key exporting nations like Brazil and Vietnam. The US Department of Agriculture recently downgraded its production forecast for Brazil, citing irregular rainfall and high temperatures.

• Expert Insight: “The global coffee market just can’t seem to catch a break,” said Kona Haque, a commodities analyst. Adverse weather continues to keep supplies tight, driving prices higher.

3. Starbucks’ Response to Market Volatility

Despite concerns, Starbucks maintains that its current approach provides flexibility. The company’s inventories of green and roasted coffee, worth approximately $920 million, act as a cushion against spot market volatility.

• Company Stance: Starbucks claims its strategy hasn’t changed, citing ample stocks as a safeguard. However, coffee derivatives held by the company were valued at just $154 million in September, the lowest in three years.

4. Challenges for Starbucks’ New CEO

Brian Niccol, Starbucks’ newly appointed CEO, faces the dual challenge of navigating volatile coffee markets while reviving café sales. Niccol aims to reposition Starbucks as a community coffee house while balancing supply chain costs.

• Analyst Concerns: Gregory Francfort of Guggenheim Securities noted that reduced hedging makes Starbucks more reliant on favourable coffee prices over the next 12 months.

5. Looking Ahead: A Tight Coffee Market

As global coffee production struggles to meet demand, analysts warn of continued upward pressure on prices. Roasters, including Starbucks, may face difficult decisions about increasing price coverage to mitigate risks.

Conclusion: A Risky Brew for Starbucks

Starbucks’ reduced hedging programme reflects a shift towards agility in a dynamic market, but it also exposes the company to greater risk. With coffee prices at multi-year highs and global supply under strain, the company’s approach will be closely watched by investors and industry analysts alike. Balancing cost pressures and maintaining customer loyalty will be critical for Starbucks’ success in the volatile months ahead.

Source: (FT.com)