Investing in Starbucks (SBUX) shares is much more profitable than buying exchange traded products that simply track coffee prices.
Starbucks shares are trading close to an all-time high, while iPath Dow Jones-UBS Coffee Subindex Total Return ETN (JO) is languishing near its lifetime low. The exchange traded note, which is designed to replicate the performance of coffee futures, was launched in June 2008.
It’s important to note that JO, the coffee ETN, won’t exactly track coffee prices due to the effect of contango in futures markets and other factors. iPath Pure Beta Coffee ETN (CAFE) is another product following the commodity’s price. [How Coffee ETNs Work]
Coffee futures have fallen to their lowest price in over four years due to global oversupply, The Wall Street Journal reported.
U.S. stocks of unroasted coffee in domestic warehouses is at the highest level since July 2009, the last time prices traded at current levels, according to the WSJ story.
Of course, falling coffee prices mean lower costs for Starbucks, and better profits. The stock is up 50% the past year and the company continues to expand in emerging markets. Meanwhile, JO is down more than 40% the last 12 months
Starbucks in June raised prices on some of its coffee drinks. “The price hike comes despite falling coffee costs that have boosted the company’s profits,” the Associated Press reported at the time. Lower coffee costs have helped boost the company’s profit margins.
“And those lower coffee costs are expected to continue padding its bottom line,” according to the AP report in June.
Although coffee prices have dropped to four-year lows in commodity markets, it isn’t reflected in cafes, writes Kyle Stock for Bloomberg Businessweek.
“Odds are good the discounts won’t trickle down to the retail level,” according to the article. Stock pointed to factors such as hedging by Starbucks and competitors, government intervention to boost coffee prices, and retail spending habits.
iPath Dow Jones-UBS Coffee Subindex Total Return ETN
The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.