Coffee Makers Were Betting on Lower Prices — They Were Wrong

(Bloomberg) — Coffee roasters that were betting on lower prices opted out of hedging. Now consumers will pay the price.

Companies that typically take positions in the futures market to protect themselves from price fluctuations changed course when prices began rising last year, betting they could secure a better deal later. But supply shortages persisted and prices kept climbing, leaving companies from JDE Peet’s NV to Starbucks Corp. no option but to raise costs for consumers.

Now, one proxy for buyer hedging is near the lowest level in more than 11 years and roasters are expected to pass their much higher costs onto consumers who are already paying the most ever for coffee. Average prices for a pound of ground roast coffee reached a record $7.25 a pound in February, according to the US Bureau of Labor Statistics. 

“The reality is significant price increases are inevitable,” said Rafael Oliveira, chief executive officer of coffee titan JDE Peet’s NV, in a February earnings call. Starbucks Chief Financial Officer Rachel Ruggeri said in January that the company’s  products sold in supermarkets will be affected “in a more meaningful way” than other areas of its business. Both executives said they expect higher prices to pressure retail sales volumes. 

Coffee prices surged to a record earlier this year after a drought hurt crops in top producer Brazil. Shortages means the market flipped into a so-called backwardation, with earlier-dated contracts being more expensive than later ones. As a result, holding beans in inventory has become too costly and roasters are operating “hand to mouth” – purchasing raw beans in very small batches and entering the market at the last possible moment. Cash-strapped traders are also struggling to finance the transport of beans from where they’re produced to where they’re consumed. 

“Roasters are struggling,” said Thiago Cazarini, a broker based in Brazil’s largest coffee-growing region. “Some of them probably at this very moment are working below the cost of the raw materials, of the whole operation.”

Smaller to mid-size roasters, meanwhile, are continuing to stay away from the futures market. 

Gregorys Coffee, a New York-based company with more than 50 locations across the US, used to use futures to lock in prices for almost all of its coffee. But now, given the market structure and high prices, “most folks that are at our size are not seeing a great opportunity to hedge,” said Chief Executive Officer Gregory Zamfotis.

Tomas Araujo, a trading associate at StoneX Group Inc., said roasters are waiting for the market to take a leg lower before putting on new hedges. “The issue is, I’m not really sure if we’re going to get there.”

–With assistance from Daniela Sirtori.

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