Starbucks Reduces Hedging Against Coffee Price Fluctuations Amid Surging Costs – CoffeeTalk

Starbucks has reduced its use of hedges against coffee price shocks, despite the soaring price of beans. The world’s largest café chain held less than $200mn worth of fixed-price contracts for so-called green, or unroasted, coffee at the end of its fiscal year in September, down from $1bn as recently as 2019. This decline has occurred at a time when roasters confront supply deficits after persistently poor crops in major exporters such as Brazil. Benchmark coffee futures rose above $3 a pound in New York on Friday to a 13-year high, following a more than 70% gain in the past 12 months.

Starbucks buys 3% of the world’s coffee to supply its 40,000 cafés and retail businesses. A team based in Lausanne, Switzerland manages purchasing high-quality arabica beans under a subsidiary named the Starbucks Coffee Trading Company. The decline in the value of its fixed-price contracts has attracted attention on Wall Street. Gregory Francfort, a restaurant analyst at Guggenheim Securities, said that they are substantially less hedged than they used to be. Starbucks is in the early stages of a plan to revive flagging sales at cafés and restore its appeal as a community coffee house.

The company is not alone among roasters in letting price-cover slip during an explosive market rally. Data from the US commodity futures regulator shows commercial traders have sharply reduced their contracts to buy arabica. Starbucks’ 56 “tier one” suppliers range from global commodities trading houses such as Louis Dreyfus and Olam to farmer co-operatives. In 2021, the company said it bought 800mn lbs of coffee annually, an amount that would cost $2.4bn at current benchmark prices.

Starbucks had $1.1bn in green coffee purchase obligations on its books as of September, according to its annual report. The company buys green coffee using two types of contracts: fixed-price and price-to-be-fixed, according to its annual report. For the latter, the company also uses derivatives contracts to insure against market gyrations.

Starbucks executives rarely discuss coffee hedging with Wall Street, but in 2021, another period of furious price rises, then-CEO Kevin Johnson told analysts the company purchased 12 to 18 months in advance and locked in prices for the next 14 months. The value of Starbucks’ price-to-be-fixed contracts has fluctuated, ending the fiscal year in September at $929mn, according to the annual report. Coffee derivatives contracts held by Starbucks were worth $154mn, the lowest September value since 2020.

Starbucks said its approach to purchasing coffee hasn’t changed. The company pointed out that its current stocks of physical coffee are a cushion against volatility in the spot market. Inventories of unroasted and roasted beans combined were worth about $920mn as of September, the lowest fiscal year-end figure since 2021.

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