The price of Coffee has been on a tremendous run. Due to concerns over dry weather in Brazil, coffee futures contracts went from $1.10 per pound at 2013 year-end to $1.63 today. That's an increase exceeding $0.50 per pound in less than 2 months.
This is huge for coffee-buying companies such as Green Mountain Coffee Roasters (NASDAQ:GMCR). While these companies typically have some fixed price contracts along with variable pricing, the move is so large as to make a visible difference in the bottom line. The following is from GMCR's latest 10-K:
Green Coffee Cost and Supply
We purchased approximately 216 million pounds of coffee in fiscal 2013. We utilize a combination of outside brokers and direct relationships with farms, estates, cooperatives and cooperative groups for our supply of green coffee. Outside brokers provide the largest supply of our green coffee.
216 million pounds. At an increase in cost of $0.50 per pound, this can lead to an impact of as much as $108 million to GMCR's bottom line. Since GMCR had pre-tax profits of $740.8 million in FY2013, this means that as much as 14.5% of these profits are at risk at this point.
While there's been a small drop in earnings estimates for GMCR recently, this drop was due to the recent earnings release, and I believe it doesn't yet include the coffee price impact (Source: Yahoo Finance)
At the same time GMCR has been incredibly speculated upwards due to the agreement to develop cold beverages with Coca-Cola. This makes it even more vulnerable to the bad news brewing with this coffee price spike.
In short, GMCR is vulnerable to margin pressures derived from a large spike in coffee prices. The spike itself is due to dry weather in Brazil.
The overall impact looks to be around 15% of GMCR's EPS. Thus, until estimates are revised lower by around 15% the stock is at risk.
Regarding the presence of price hedges, the point is that up to 15% or earnings might be at risk, even if there are hedges for a single year. Price hedges run off at some point and then the prevailing coffee price makes itself felt. Any company dealing with hedges can only insulate itself from price movements for a short while, whereas the stocks trade on tens of years going forward.