Will Record Crop Help These Coffee Retailers Reap Record Profits?

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Coffee companies rejoice! Record bean production means costs are down and profits could be looking up, which is good news for retailers like Starbucks (NASDAQ:SBUX) and Dunkin’ Donuts (NASDAQ:DNKN).

After an already all-time high for a peak-year harvest, Brazil came back with an expected 50.8 million bags in the low-crop season, set to break records in the reduced-output season. With coffee bean supplies already high, the increased output should drive bean prices down, which would be a relief after the highest bean prices in 14 years. Brazil now accounts for 38 percent of the world coffee bean supply.

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The two main beans in the harvest are arabica and robusta. Last year, arabica cost almost 3 times the price of robusta, a difference that drove demand for the cheaper bean and encouraged increased production. Switzerland-based Volcafe predicts both arabica and robusta production will exceed consumption demands in 2013 by about 6.3 million and 1.4 million bags, respectively. Hedge funds and large speculators have been bearishly betting on lower prices for the beans.

Starbucks is also expecting lower costs by next September, the end of its fiscal year. Owned by J.M. Smucker Co. (NYSE:SJM), the Folgers brand expects lower costs favorable for earnings. Dunkin’ Brands Group Inc. may not see the same drop in costs, since its restaurants only use arabica, the more expensive bean, but the increased production of both beans should still mean some reduction in Dunkin’s commodity costs.

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