El Nino Threat to Starbucks

Key Takeaways

• Coffee prices surge due to threats from Brazil's coffee harvest.
• Starbucks’ share price faces downward pressure.
• Other commodities like sugar and cocoa are also at risk.
• Inflation concerns persist despite a decline in energy prices.

Overview

Recent developments indicate that coffee prices are set to rise further, primarily due to delays in Brazil's coffee harvest. As of July 1st, only 50% of the coffee crop was ready, which is below both last year's 60% and the 5-year average. This situation has led to a significant surge in the cost of Arabica coffee, a popular blend used by Starbucks and other coffee chains, which saw an increase of over 15% at the beginning of the week, marking one of the largest daily gains on record.

Impact on Starbucks

As coffee prices continue to climb, Starbucks, the world's largest coffee house chain, experienced a 2% decline in its share price, underperforming the broader market. This development raises questions for investors regarding the company's upcoming earnings report, particularly whether rising input costs will be passed on to consumers.

Broader Commodity Concerns

The El Nino weather phenomenon is not only affecting coffee prices but is also impacting sugar and cocoa prices due to excessive rainfall in Brazil and dry conditions in Asia. While energy prices have been declining, the surge in commodity prices could lead to increased food prices, raising inflation concerns as hopes for moderating Consumer Price Index (CPI) rates begin to fade.

Stocks to Watch

If coffee prices continue to rise, companies such as Starbucks, Pepsi, and Nestle may be affected, as they offer products that could see reduced demand if prices for coffee, chocolate, and soft drinks increase significantly. After a year-to-date rise of over 21% due to a successful turnaround plan, Starbucks' stock is now at risk of volatility if coffee prices keep surging.

Conclusion

The current situation presents a complex challenge for Starbucks and other companies reliant on coffee and related commodities. Investors will need to monitor these developments closely as they could have significant implications for pricing strategies and overall market performance.