Colombia, the world's second largest coffee producer and
exporter, is experiencing consistent bad weather, following which
the coffee production dropped 12% to 7.809 million bags in 2011.
This is the lowest level witnessed since 1976 from 8.923 million
bags a year earlier.
Colombia's exports experienced a significant decline of 1.2%
driven by excess rainfall, diseases and a lack of sunshine, which
Recently, the coffee growing regions in Colombia, which is
second only to Brazil in growing Arabica coffee, have been
witnessing an average temperature, which has risen just one degree
over the past 30 years. The region witnessed more than 25% rain,
which is above average in the last few years.
Generally, the plant buds cannot withstand higher temperatures
and they abort or their fruit ripens too fast for optimum quality.
Moreover, heat facilitates the growth of pests like coffee rust,
which is a devastating fungus. Therefore, Colombian farmers are
producing far fewer beans and "more defective beans" that fails to
meet export standards.
Moreover, the frequent heavy rains damage the fragile Arabica
blossoms, which are so much high in demand for coffee makers like
), who use the high quality Arabica coffee for almost all of their
As a result, coffee prices continue to remain high and market
experts believe that coffee prices surged 15% last year, partly due
to a decline in crop production resulting from unusually heavy
rains in Colombia. Further, the experts are of the opinion that the
year 2012 will witness a decline of 10% in coffee harvest from the
Coffee giants have been continuously passing on the burden to
the consumers. Starbucks raised the prices of its menu items and
packaged coffee in July 2011, to combat the record 125% inflation
of Arabica coffee prices.
Green Mountain Coffee Roasters Inc
), which has been experiencing significantly higher green coffee
costs in fiscal 2008, 2009, 2010 and year-to-date in fiscal 2011,
had to sell 96% of Keurig brewers shipped in fiscal 2011 to its
distributors approximately at cost, or sometimes at a loss.
The company raised its prices twice for all K-Cup® portion packs
in fiscal 2011, once during the first quarter of fiscal 2011 and
another late in the third quarter of fiscal 2011. Therefore,
despite strong top-line growth, margins are under pressure.
Hoping to increase productivity, Colombia aims to renew its
coffee plantations at a rate of 130,000 hectares per year, out of a
total 914,000 hectares planted with the crop. So far, the country
has replanted around 90,000 hectares.
Agricultural meteorologists announced hot and dry weather
conditions in Colombia through next week, which was expected to
provide much-needed relief after heavy rains throughout most of
December, damaging coffee plants in the northern part of the
Market analysts feel that the Arabica coffee supply will not be
able to meet the rising demand for coffee in countries like Brazil,
Southeast Asia and India. Again, more and more countries are coming
forward to develop a new and younger coffee drinking culture.
To conclude, we may rightly fear that we are approaching a day
when high quality Arabica coffee will be both expensive as well as
rare to find.
Currently, we prefer to be Neutral on Starbucks' stock.
Starbucks holds a Zacks #2 Rank, which translates into a
short-term Buy rating. For Green Mountain, we are also maintaining
a long-term Neutral rating. Green Mountain also holds a Zacks
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