Starbucks Doesn't Pull Up Despite Falling Coffee Prices

Jun. 5.12 | About: Starbucks Corporation (SBUX)

Coffee prices have declined in recent weeks to their lowest levels since July 2010. Despite the recent sharp turn in coffee rates, the stock price of Starbucks Corporation (NASDAQ:SBUX) didn't seem to be affected by this fall in prices as the stock fell during most of the month. What could explain the decline in SBUX and how will the recent decline in Coffee rates affect Starbucks stock?

I have already analyzed in the May/June coffee market, and pointed out that in my humble opinion the coffee market will continue to cool down in the near future. This means coffee prices might continue to decline in the weeks to follow as the coffee market further loosening up. The relation between coffee prices and Starbucks Corporation is straight forward: as coffee prices decline we should expect Starbucks Corporation stock to rise. I.e. a decline in the cost of one of the major inputs of the company is helping it to expand its profit margin (when was the last time you went into a Starbucks and was surprised to see a price cut of a caffé latte?).

The chart below shows the development of the price of coffee 'c' future (short term delivery) between the years 2010 and 2012 (monthly figures) and the stock price of Starbucks Corporation . The lagged by one period correlation between these two indexes is -0.27. This means, as coffee price decline, Starbucks Corporation stock tends to rise the following month.

(click to enlarge)Click to enlarge

On the other hand things weren't that straight forward in recent weeks. During May the two indexes tumbled down: Starbucks Corporation fell by 8.81% and Coffee (KC01) Front Contract by 9.72%; furthermore, the linear correlation of the daily percent changes was positive and reached 0.33; the lag relation by one day was 0.14. This means there was a third variable (one or several) that may have adversely affected Starbucks such as the descent of S&P 500 (^GSPC): during May S&P 500 fell by 6.27% - the worst performing month since September 2011. The reasons for the decline in the stock market have been well explained and analyzed by many including the disappointing U.S labor report. The linear correlation between S&P 500 and Starbucks (daily percent changes) was 0.5 during May; this means the developments in S&P 500 could explain (under certain conditions) at best 25% of SBUX stock volatility. Therefore, if the stock market will further decline it could keep dragging down SBUX.

Obviously there are other considerations including the financial statements of the company its recent managerial decisions and business development. But the point of this article to highlight two things:

The recent decline in S&P 500 has a lot to do with the recent decline in Starbucks' stock price;

I suspect as long as coffee prices continue to decline, we should see it reflect in a rise in the stock price of Starbucks (even if it will be by a small margin).

For further reading: Coffee-Outlook and Analysis for June

This is by no means an investment advice only general market analysis.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.