Starbucks‘ (NASDAQ:SBUX) core input — coffee beans, of course — might get notably more expensive soon.
A group of nine commodities analysts and traders recently polled by Reuters believe that the price of arabica beans will rise by nearly 25% above current levels by the end of this year. That’s a scary prospect for Starbucks’ profitability, eh? Well, actually…
The anticipated price rise isn’t due to some scary one-off factor. Rather, it’s related to the fact that the coffee market is coming off a bulge in supply last year from Brazil, a major arabica producer, which drove down prices. Reports that this year’s crop would be less bountiful have contributed to a recent price increase.
Over the years, the price for arabica has swung around considerably. This is why Starbucks hedges its coffee purchases. These arrangements totaled nearly $1.2 billion as of the end of fiscal 2018, and Starbucks said that they were “expected to provide an adequate supply of green [i.e., unroasted] coffee through fiscal 2019.” So basically, we can take these as the current annual coffee purchase expenditures for the company.
This makes for a revealing detail about Starbucks’ relationship with its core commodity: The cost of beans forms only a small percentage of its overall costs. Poured into the big cup of fiscal 2018’s total operating expenses (over $21 billion), that $1.2 billion is barely the foam in your cappuccino.