Declining coffee prices may aid retailers, roasters

Recent declines in coffee prices may give coffee retailers room to rise.

Coffee, the commodity, is down about 28% since its peak in May, as reflected by the iPath DJ AIG Coffee TR Sub-Index (JO, quote).

Traders can take advantage of the drop in coffee by looking at coffee retailers such as Starbucks (SBUX, quote), Peeteā€™s Coffee (PEET, quote), and Green Mountain Coffee (GMCR, quote).

Coffee retailers have been forced to raise prices during the bull run and now should see relief in their main raw commodity cost while maintaining a healthy margin during the third quarter.

The lower coffee price this past quarter could provide a catalyst for an upside surprises when these coffee retailers report earnings in the upcoming weeks.

While Starbucks has been working off a recession- and expansion-induced declines in earnings, shares of Peete’s and Green Mountain have risen dramatically so far this year.

Green Mountain practically invented a new niche with the success of its Keurig single-serving home brewing machines, and the K-cup specialty coffee that goes in them, while Peet’s is up roughly 50% so far this year, on expectations of an improving economy.

Equity Markets Inc. rates Peete’s “outperform,” although Colin Lokey at the Seeking Alpha blog calls Green Mountain “absurdly overvalued.”

The biggest buyer of “fair trade” coffee could be in trouble if competitors eat into its market share by selling their own coffee in the cups that fit its single-brewer machines, Lokey says. The patent on the K-cups expires in 2012, he says.

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