Reading Time: 5 minutes

Coffee Stocks (retail chains) and Coffee Futures are not always examined together.

Examining the major coffee chain retailers that primarily earn revenue based on coffee sales and contrasting it against the Coffee Futures prices may tell an interesting story about both management of the coffee retailers and who is thriving during particular market environments.  The Coffee Futures price itself tells an interesting story in how it relates to the overall marketplace and the demand for Coffee Beans.

KC1 is the Generic First Coffee Future, which is the Future that is closest to expiration.  After all, Futures Contracts do expire as there are actual deliveries of product.  This is a contract for a blend of Arabica Coffee Beans.

Coffee Futures (KC1) CFD 4 Hour Chart with Supply and Demand Zones

There was a pinbar retouch on June 14 on a 4 Hour Chart, which would seem to indicate a bearish direction and Coffee Futures (KC1) did fall in price.  It was not necessarily an ideal price per volatility tests conducted on currency pairs, but the results could be different for commodities.  Ideal volatility with Supply and Demand Zones is a moderate volatility per the testing conditions.

Right now, Coffee Green Bean Futures are slightly coming off a 4 Year Low.  They reached their peak in mid-2011 going above 300 before crashing 66% from peak-to-trough over the course of a 3 year period.  Cheaper coffee has resulted in greater popularity and ubiquity.  Robusta Coffee and Instant Coffee have been largely replaced by Arabica Coffee and various exotic coffee blends in Western markets.  Colombians are starting to be able to try their famously delicious export that their country produces as they are experiencing one of the by-products of economic growth and prosperity.

Let’s examine two of the major market retailers that are very dependent upon coffee, Starbucks and Dunkin’ Brands.

Coffee Futures (KC1) vs. Coffee Retailers

Starbucks vs. Coffee Futures (KC1)

Starbucks’ stock price appeared to be going in the opposite direction as the Coffee Futures Price, but this changed in 2018 as managerial changes, racial discrimination issues, and the transformation of Starbucks into gentrified homeless shelters in the United States.

Over the past three years, the relationship between the Green Coffee Bean Futures prices and the Starbucks stock price has been of a negative correlation.  However, with Coffee Futures falling and the Starbucks stock price falling it speaks to managerial issues and oversaturation.  Oversaturation through uber-aggressive franchising by Subway resulted in their on-going demise, while Starbucks owns and operates all of their locations with the exception of the EMEA region.  Starbucks may not necessarily own the real estate per se, but they directly are impacted by rents and real estate prices than other companies in the Quick Service Restaurant space.

It is telling that the Starbucks stock price hit a wall of resistance on the Starbucks Share Price to Coffee Futures Price ratio.  Starbucks has not split their stock since April 9, 2015.

The ratio would tease that it would test the highs, but would ultimately peter off.

Dunkin’ Brands vs. Coffee Futures (KC1)

Dunkin’ has been on a secular run and the Futures Price of Coffee has not negatively impacted the stock price one bit.  Expansion in the United States and internationally has provided a jolt for shareholders.  Coffee Futures falling from the middle of Q3 2017 through present has certainly not hurt the company’s bottom line as royalties from franchisees continue to flow into the company.  Coffee and Dairy prices are considered a threat to the company’s bottom line, but if Coffee Beans fall in value, the risk is lowered considerably and it means higher profits.  A leaner, back-to-basics change for their menu in the short-run was viewed with some skepticism, but in the long-run may pay off considerably.  After all, Dunkin’ is not where anyone wants to order a tuna sandwich.

Dunkin has thrived regardless of the price of Coffee Beans, but compared to the commodity boom that took place during the run-up to the Financial Crisis and after the Financial Crisis, it is still a rather low commodity price.  What needs to be considered a threat for Dunkin is that the cost of labor is rising in their base states (New York, Massachusetts, New Jersey), which they have turned into a bit of an opportunity to pad profit margins for existing locations.  Rising rents and taxes, real estate prices, weather, labor costs, and population shifts could hurt Dunkin in their base states, but Dunkin is growing in the Sun Belt and internationally.  Dunkin’s geographic growth is what will keep the New England Elixir from suffering the negative effects of a shuffling population.

Unlike Starbucks, Dunkin’ enjoys a higher share price to Coffee Futures price.  However, also unlike Starbucks, Dunkin’ has a Market Cap that is 11 times lower, which makes a bit of a difference.  Starbucks has expanded far more aggressively than Dunkin’.  Dunkin’ has 12,000 stores in 36 countries while Starbucks has over 28,000 stores in 76 countries.  Dunkin’ is not considered a premium brand like Starbucks and is considered more sensitive to price than Starbucks as the clientele are different.  It’s not necessarily a discrepancy in product quality and taste, but rather a difference in customer experience.  The Starbucks consumer is considered more erudite than the Dunkin’ consumer and the allegiance to each of the coffee chains is even considered an expression of the political divide that exists in the United States.

Brazilian Arabica Coffee Futures/Coffee Futures Spread

Both may have different amounts in terms of what each contract comprises, the Brazilian Arabica Coffee has a contract of 6 metric tons of raw product.  The Intercontinental Exchange (ICE) Futures Contract Size for Green Coffee Bean Futures is 37,500 pounds, which is nearly three times the amount of the Brazilian Arabica Coffee contract size.  The price of Brazilian Arabica Coffee has fallen at a faster rate than the blend offered in the ICE Coffee Futures contract.

It is more helpful to see all of this on a per 37,500 pounds basis.

 

The spread spiked in 2011, but the spread is at lows experienced in March 2016.  It is currently at a Support Level that has not been penetrated since 2009.

Coffee Futures Prices are at low levels, but they are dealing with historical price support levels as well.  The last time KC1 was below 100, it was 2006.