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What Can Starbucks Expect for 2016 Coffee Prices?

Adam Jones

Starbucks's 1Q16 Results Are Almost Here: What Can We Expect?

(Continued from Prior Part)

Coffee prices

Coffee is, of course, one of the most important commodities for Starbucks (SBUX). Coffee prices have been trending downward in 2015. The company’s cost of sales as a percentage of revenue fell 0.5% in 2015, primarily as a result of lower coffee costs. A year before, coffee costs were 5.7% lower as a percentage of the company’s sales.

Coffee prices expectations

Coffee prices in 2016 are expected to average $1.19 per pound compared to $1.40 per pound. Starbucks uses two types of contracts to purchase commodities: fixed-price and price-to-be-fixed. In the latter arrangement, the company fixes the price based on market conditions, which is beneficial if prices fall further.

The average cost for coffee in 2016 is anticipated to drop below prices in fiscal 2015 and fiscal 2014. Keep in mind that Starbucks’s coffee costs may be higher because of its inventory purchased at a higher cost.

Lower coffee costs should also benefit Dunkin’ Brands (DNKN), Yum! Brands (YUM), and McDonald’s (MCD), which sells coffee through its McCafé brand. You can also access some of these companies through ETFs such as the Consumer Discretionary Select Sector SPDR ETF (XLY). This fund invests about 3% of its holdings in Starbucks, 4% in McDonald’s, and 1.5% in Yum! Brands.

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