Coffee Supply Forecasted to Soar; Good News for Starbucks (SBUX)

The premium coffee used by Starbucks Corp. SBUX and Green Mountain Coffee Roasters Inc. GMCR is poised to cheapen. The spread between premium arabica beans and the cheaper robusta beans (used in cheaper instant coffee) is at at a high. Bloomberg reports that coffee crops in Brazil, the world's largest grower, will receive adequate rain in coming days. The forecast goes on to alleviate concerns that hailstorms could harm trees after four months of drought. The premium of arabica over robusta widened 61 percent in the past year to $2,282.61 a metric ton. This comes as investors bet on concern about crop damaging rains in Colombia, the biggest grower of the variety after Brazil. That's almost double the average $1,286.13 a ton since January 2008, when a new contract started trading in London. “The premium on arabica beans should decline in the fourth quarter, as the upcoming harvests in Colombia and Central America should reduce current supply bottlenecks in high-quality arabica beans,” Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt, said. The arabica coffee harvest will surge 14 percent to 85.95 million bags in 2010-2011, from a year ago, according to the U.S. Department of Agriculture. Stockpiles in warehouses monitored by ICE Futures U.S. fell 41 percent in the past year, the lowest level in more than a decade. Colombia's main harvest begins in October. According to the USDA, total coffee production will exceed demand by 8.2 million bags in 2010-2011, compared with a deficit of 3 million bags in the prior season. In the meantime Starbucks has raised prices. On Starbucks Sept. 22 announced the price increases and said "The extreme nature of the cost increases has made it untenable for us to continue to absorb them." Additional commodity costs, primarily from coffee, will be about 4 cents a share in the year ending in September 2011, Starbucks said. I doubt Starbucks will reduce prices when coffee comes back down. This should be good news for investors.