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Colombia Coffee Yield at Record Low

SBUX GMCR

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Colombia, the world’s second largest coffee producer and exporter, is experiencing consistent bad weather, following which the coffee production dropped 12% to 7.809 million bags in 2011. This is the lowest level witnessed since 1976 from 8.923 million bags a year earlier.

Colombia’s exports experienced a significant decline of 1.2% driven by excess rainfall, diseases and a lack of sunshine, which curbed output.

Recently, the coffee growing regions in Colombia, which is second only to Brazil in growing Arabica coffee, have been witnessing an average temperature, which has risen just one degree over the past 30 years. The region witnessed more than 25% rain, which is above average in the last few years.

Generally, the plant buds cannot withstand higher temperatures and they abort or their fruit ripens too fast for optimum quality. Moreover, heat facilitates the growth of pests like coffee rust, which is a devastating fungus. Therefore, Colombian farmers are producing far fewer beans and “more defective beans” that fails to meet export standards.

Moreover, the frequent heavy rains damage the fragile Arabica blossoms, which are so much high in demand for coffee makers like Starbucks Corporation (SBUX - Analyst Report), who use the high quality Arabica coffee for almost all of their coffee items.

As a result, coffee prices continue to remain high and market experts believe that coffee prices surged 15% last year, partly due to a decline in crop production resulting from unusually heavy rains in Colombia. Further, the experts are of the opinion that the year 2012 will witness a decline of 10% in coffee harvest from the Andean nation.

Coffee giants have been continuously passing on the burden to the consumers. Starbucks raised the prices of its menu items and packaged coffee in July 2011, to combat the record 125% inflation of Arabica coffee prices.

Furthermore, Green Mountain Coffee Roasters Inc. (GMCR - Analyst Report), which has been experiencing significantly higher green coffee costs in fiscal 2008, 2009, 2010 and year-to-date in fiscal 2011, had to sell 96% of Keurig brewers shipped in fiscal 2011 to its distributors approximately at cost, or sometimes at a loss.

The company raised its prices twice for all K-Cup® portion packs in fiscal 2011, once during the first quarter of fiscal 2011 and another late in the third quarter of fiscal 2011. Therefore, despite strong top-line growth, margins are under pressure.

Hoping to increase productivity, Colombia aims to renew its coffee plantations at a rate of 130,000 hectares per year, out of a total 914,000 hectares planted with the crop. So far, the country has replanted around 90,000 hectares.

Agricultural meteorologists announced hot and dry weather conditions in Colombia through next week, which was expected to provide much-needed relief after heavy rains throughout most of December, damaging coffee plants in the northern part of the country.

Market analysts feel that the Arabica coffee supply will not be able to meet the rising demand for coffee in countries like Brazil, Southeast Asia and India. Again, more and more countries are coming forward to develop a new and younger coffee drinking culture.

To conclude, we may rightly fear that we are approaching a day when high quality Arabica coffee will be both expensive as well as rare to find.

Currently, we prefer to be Neutral on Starbucks’ stock. Starbucks holds a Zacks #2 Rank, which translates into a short-term Buy rating. For Green Mountain, we are also maintaining a long-term Neutral rating. Green Mountain also holds a Zacks #2 Rank.

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