Coffee Prices Hit Record Highs: What It Means for Investors

Arabica coffee futures surged above $3.35 per pound in January 2025, maintaining levels close to multi-decade highs after reaching $3.48 in December, the peak not seen since April 1977.

This price increase is raising concerns about the broader coffee market. In a note shared on Wednesday, Bank of America analyst Sara Senatore highlighted that “Coffee remains inflationary,” with an anticipated average coffee price inflation of 75.5% for Q1 2025.

She emphasized that coffee prices have jumped 120% from their lows in 2023, contributing to investor worries regarding Starbucks Corp. SBUX’ margins and dampening the company’s valuation multiple.

Coffee Futures Reach Near 50-Year Highs

Supply Challenges Behind Rising Coffee Prices

The surge in coffee prices can be traced back to supply challenges stemming from Brazil, the world’s largest coffee producer.

Recently, Brazil’s coffee production forecast has been downgraded due to weather-related disruptions affecting the country. On Monday, Conab, Brazil’s national supply agency, projected the 2024 coffee harvest at 54.2 million 60kg bags, reflecting a 1.6% decrease compared to the previous year.

This adjustment is a consequence of adverse weather conditions in Minas Gerais, a crucial region for Arabica coffee. Additionally, robust demand for Robusta beans, which are commonly used in instant coffee, continues to add pressure on prices.

Wes Lambert, chief executive of the Restaurant and Cafe Association in Australia, noted that if bean prices remain high, the cost of coffee could approach double digits in major cities.

Starbucks’ Strategy: Are They Prepared?

Even with coffee prices climbing, Starbucks appears to have a buffer against immediate cost hikes. According to Bank of America, the Seattle-based company employs long-term purchasing strategies.

As the leading coffeehouse globally, Starbucks secures supply agreements over a year in advance. The company utilizes a combination of fixed-price and price-to-be-fixed contracts.

With fixed-price contracts, costs are established upfront, while price-to-be-fixed agreements allow for price flexibility until delivery. Additionally, Starbucks uses futures contracts and collars, financial tools designed to mitigate the impact of price swings.

While these hedging strategies help mitigate risks, part of Starbucks’ inventory is still subject to the unpredictable nature of commodity prices. It raises a crucial question: could sustained high prices eventually affect its cost structure?

Despite this uncertainty, Bank of America holds a positive outlook for Starbucks. “We believe SBUX’s brand remains fundamentally strong and there are significant opportunities to reallocate resources,” Senatore remarked in her note, keeping a Buy rating with a $117 price target.

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