Key takeaways

• Coffee prices surge on Brazil threat
• Starbucks’ share price comes under pressure
• Sugar and cocoa also at risk
• Inflation concerns remain, even as energy prices retreat

If you thought that your coffee fix each day was already costing you more than ever, brace yourselves for further price rises. Brazil has delayed its coffee harvest, after only 50% of the coffee crop was ready by July 1st, that is below the 60% recorded last year and below the 5-year average.

The cost of Arabica coffee, a well-loved mild blend used by Starbucks and other coffee chains, surged more than 15% at the start of the week, the 4th largest daily gain on record. Prices pulled back slightly on Tuesday, however, they remain at a near 6-month high. Prices for coffee and cocoa are getting hit by el Nino risks, the weather phenomenon which is responsible for the heatwaves in Europe this summer. El Nino is also causing excessive rain in other parts of the world. Rain is hitting Brazil’s coffee harvest, which produces the milder Arabica coffee, while dry and hot weather in Asia is set to hit production levels of Robusta coffee. As coffee prices soar, Starbucks, the largest coffee house chain in the world, saw its share price sink 2% and under perform the broader market on Monday.

This makes Starbucks earnings season even more interesting. If its input costs are rising, investors want to know if these prices will get passed on to consumers? In the UK, gains in the coffee price included in the CPI index have been moderating in recent months, although absolute prices remain elevated. The weather pattern could also add upward pressure to sugar and cocoa prices, which are also under threat from persistent rain caused by this weather event. As energy prices have been declining, the price of these much-loved commodities have been surging, which may add upward pressure to food prices, just as hopes were rising that CPI rates could moderate in the coming months.

For now, inflation risks are contained, but if the price of coffee and other commodities continue to rise, this could trigger a fear about food price inflation later this year. If the price of coffee continues to surge, then stocks worth watching include Starbucks, Pepsi and Nestle. They all sell affordable treats or minor luxuries and could be hit by lower demand if prices for coffees, chocolate or fizzy drinks rise even further. After rising more than 21% YTD due to a well-received turnaround plan, Starbucks’ uptrend is now at risk. The stock price could get further jitters if the price of coffee continues to surge.

Chart 1: Starbucks gets the jitters, 3-month chart

Source: XTB

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