The world’s largest café chain, Starbucks, has dramatically reduced its hedging against coffee price fluctuations amid soaring bean prices, potentially exposing itself to significant market volatility. The company’s fixed-price contracts for unroasted coffee plummeted to less than $200 million by September’s fiscal year-end, a stark decline from $1 billion in 2019.
This reduction coincides with severe supply deficits following poor harvests in major exporting nations, particularly Brazil. Benchmark coffee futures recently surged above $3 per pound in New York, marking a 13-year peak and reflecting a more than 70 per cent increase over the past year.
Wall Street analysts have expressed concern over this strategic shift. Gregory Francfort from Guggenheim Securities notes, “They are substantially less hedged than they used to be. It makes the next 12 terms of coffee prices more important than they’ve ever been.”
The company’s new chief executive, Brian Niccol, who is implementing plans to revitalise declining café sales, maintains that “coffee comes first” at Starbucks. The organisation, which purchases 3 per cent of global coffee production for its 40,000 cafés, manages its bean acquisition through the Starbucks Coffee Trading Company in Lausanne, Switzerland.
Industry experts observe that Starbucks isn’t alone in reducing price coverage during this market rally. The company now primarily utilises “price-to-be-fixed” contracts, establishing quantity and delivery terms while leaving final pricing flexible. This approach, while common during rapid market increases, potentially leaves the company more exposed to price volatility.
Starbucks maintains its current stocks of physical coffee provide protection against market volatility, with inventories valued at $920 million as of September. However, with global production challenged by adverse weather conditions and the US Department of Agriculture recently reducing Brazil’s production forecast, market analysts suggest maintaining strong hedging positions would be prudent in the current climate of rising spot prices.
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