Food inflation is causing consumers to shift their spending and eating habits. But with many of us needing our caffeine hit multiple times per day, are rising coffee prices going to hit consumers in the pocket?

Agricultural commodities have been doing well the past few days. One that has definitely outperformed the others has been coffee. Coffee prices are surging on global supply concerns.

Arabica coffee has popped nearly 15% this week and has triggered a major breakout. A trendline has been taken out and we remain in an uptrend as long as we remain above 225.

Robusta coffee has been on a tear. Robusta is up 22% since the bottom on July 15th. This is more advanced in its uptrend and we remain bullish robusta as long as we remain above the higher low at 2210.

New highs are the targets for both.

What are the fundamental reasons for higher coffee prices? Weather. Coffee prices are rising on concern that excessive dryness in Brazil will reduce coffee yields and curb global coffee supplies. Minas Gerais, which accounts for about 30% of Brazil’s arabica crop received no rain in the past week. Brazilian meteorologists have forecasted no rain for Brazil’s coffee growing regions through the rest of the month. Investors are betting on harvests being poor.

Drought conditions which will stress Brazil’s coffee crop could last through the end of the year as suggested by Maxar Technologies.

The world’s second largest producer of arabica, Colombia, reported a drop too. The National Federation of Coffee Growers reported Aug 3 that Colombia’s July coffee production fell -22% y/y to 944,000 bags.

When it comes to robusta beans, then Vietnam comes in at number 1.  Vietnam’s General Department of Customs reported last Monday that Vietnam’s coffee exports in July fell -17.1% m/m to 113,852 tons.

Robusta is the cheaper variety of beans and is used by instant coffee makers or as a blend in espressos. With prices rising, this is where I see consumers shifting to in order to mitigate the impact of rising inflation. If you still want your caffeine jolt and want to save money, robusta will be your pick.

In summary, the global coffee market is facing one of the biggest deficits in recent times after droughts and weather have slashed Brazilian output, crop damaging rains have affected Colombia, and Vietnam supplies are dropping. Honduras, Guatemala and Nicaragua are running out of supplies from the 2021-22 harvest. Costa Rica’s next-season crop is showing signs of stress, and a drought has cut robusta yields in Uganda.

Since coffee is priced in dollars, a weaker Euro and Yen could hurt consumption in Europe and Japan, both of which are large coffee markets. Perhaps the Japanese make a large shift to bottled green tea? Europe is just getting hit on all fronts. Higher fuel prices, electricity prices, heating prices and now higher coffee prices.

 

How are coffee stocks doing?

Starbucks (SBUX)

This is the company I am more interested in as coffee prices and general living costs rise. Starbucks is so entrenched in North American coffee culture. For many people, their local Starbucks is where they first go before heading out on their work commute. Starbucks will be increasing their prices, and I wonder how the consumer will react.

My thinking is that many people will begin brewing their coffee at home to save some money. Those that really are feeling the pinch might even brew instant coffee for their commute.

The stock made a nice reversal pattern taking out $80. We almost hit $90 but have now fallen back below the moving average. Technically, we remain bullish above $80, but this recent sell off could increase its pace depending on what happens at Jackson Hole. The entire stock market may reverse when they find out that the Fed will continue to hike more than expected.

 

Luckin Coffee (LKNCY)

Luckin Coffee announced pretty strong earnings. More revenues, more customers, more new stores opening. A pretty strong quarter.

“We are proud to announce that Luckin Coffee delivered another quarter of outstanding financial and operational results despite continued pandemic-related headwinds,” said Dr. Jinyi Guo, Chairman and Chief Executive Officer of Luckin Coffee. “We reported net revenues growth of over 70% compared to the same quarter last year, same-store sales growth for self-operated stores of over 40% and our partnership store revenues continued to increase as a percentage of total revenues. Furthermore, we successfully launched 34 new products during the second quarter and sold over 24 million cups of our “Coconut Cloud Latte” from its launch in April 2022 through the end of the second quarter.

The stock is having a very strong performance this week up over 15% in the last two days. The major resistance comes in at $17. Once that is broken, Luckin takes out a major zone, and the momentum on the break could take this stock to $24.50!

 

J.M Smucker (SJM)

Smuckers might be the coffee play for brewing at home. Here are the coffee brands they own:

The company recently put out good earnings which saw the stock jump.

From a technical perspective, this looks very interesting. We are approaching a major resistance zone at $146. If Smuckers breaks this, the breakout sets us up for a test to previous record all time highs at $157.31.

 

Keurig (KDP)

We can’t talk about coffee without talking about Keurig. This is the other ‘brew at home’ coffee play.

The company recently printed new record all time highs on August 18th 2022 hitting $41.31. The move did not come from coffee fundamentals, but instead a rumor that Keurig could be buying Bang Energy drinks. There are a lot of support levels below but I would be watching the zone above $38 to hold for further upside momentum.