Investing.com -- Coffee prices soared nearly 60% over the last six months, with the price of Arabica beans reaching a 50-year peak, stirring concerns about the potential impact on the margins of coffee chains like Starbucks (NASDAQ:SBUX) and Tim Hortons (NYSE:QSR), as well as the resilience of consumer demand.
While short-term pressures are expected to ease, Berenstein analysts forecast that coffee prices may stay above historical averages in the long run.
The global coffee industry, with an annual production and consumption of approximately 10 million tons, is expanding at about 2% per year.
Brazil, responsible for around 40% of the world's coffee, has seen its production affected by severe weather conditions, including droughts and high temperatures.
Similarly, Vietnam and Indonesia have faced climate issues leading to a 20% production drop in Vietnam in 2024 and a 16% decline in Indonesia. These factors, combined with growing coffee consumption and a 20% decrease in warehouse inventories, have led to the price hikes.
Bernstein analysts believe that the current high prices may encourage producers to increase production in the upcoming harvest seasons and that the rising macroeconomic pressures could reduce demand as consumers seek alternatives.
Moreover, clarity on new deforestation regulations may reduce the risk premium currently factored into coffee prices by commodity traders.
However, the long-term outlook suggests that prices will remain high due to the effects of climate change, stricter deforestation laws, and rising production costs, including labor.
“More regulations on deforestation and use of land will also lead to more limited areas suitable for growing coffee, and increasing protectionism and rising production costs (especially labor) will both contribute to pressuring price,” analysts led by Danilo Gargiulo explained.
For Starbucks, coffee comprises 10-15% of its cost of goods sold (COGS), and the company's significant inventory holdings of $900 million could help it manage through the commodity fluctuations until the new harvest.
Analysts suggest that Starbucks' current spot market exposure might even lead to margin expansion if coffee prices decrease.
On the other hand, Tim Hortons may pass on the increased costs to franchisees, thereby minimizing the direct impact on its supply chain margins.
Historically, Starbucks stock used to show a strong negative correlation with coffee prices, but this relationship has weakened since COVID-19 due to shifting supply and demand dynamics, operational hurdles, and a declining reliance on coffee sales.
For Tim Hortons, sharp rises in coffee prices have historically squeezed margins, sometimes leading to price adjustments.
However, with a “better-optimized supply chain system and an improved pricing and cost structure, we believe that Tim Hortons will be better insulated from short-term price swings,” analysts said.
