It doesn’t happen often, but investors long on arabica coffee beans are about to wrap their best month in five while shareholders of iconic coffee chain Starbucks (NASDAQ:SBUX) might be due for a good quarter too.
Starbucks didn’t deliver the caffeinated sales that Wall Street wanted in the first quarter but the coffeehouse chain gets another chance to deliver a jolt when it reports Q2 results after the bell today, Barron’s noted in a pre-earnings report.
As connoisseurs of the beverage would attest, coffee is more than the sum of its parts, which consist of region, variety and species.
Whatever the case, arabica beans are regarded as top of the game and Starbucks uses only this variety, which is grown mostly in Brazil, versus robusta, the other major bean type largely harvested in Vietnam.
In Monday’s session, the front month contract in New York-traded arabica settled at $1.4235 per lb, up 15.3% from the close of March.
If it stays the course, it would be arabica’s best monthly gain since November, when it rose nearly 16%.
Brazilian Weather Key To Arabica Rally
Jack Scoville, crop analyst at Chicago’s Price Futures Group, said the rally was underpinned by drought in Brazil that had restrained the growth of arabica by as much as a third.
Said Scoville:
“The main feature to the market is the weather in Brazil and the production prospects in the country.”
“Some cooperatives and the export association are calling for a significant reduction in production with a 30% loss in production potential mentioned.”
Scoville said the current arabica output from Brazil was an off-year crop in a two-year production cycle.
Conditions had been drier than usual at the time of flowering and the drought was back now, he said.
The reprieve though was better weather and production among Brazil’s neighbors—Costa Rica, Mexico and Guatemala—which also turned out high-quality arabica beans.
“Production conditions elsewhere in Latin America are mixed with good conditions reported in the north of South America and improved conditions reported in Central America after devastating floods early in the growing cycle.”
Investing.com Rates Arabica 'Strong Buy'
Price-wise, arabica futures might also be in good technical territory.
Investing.com’s Daily Technical Outlook rates arabica a “Strong Buy” with resistance seen at between $1.45 and $1.48 per lb, versus the Monday’s close of $1.4235.
As for Starbucks, analysts are upbeat about the coffee-chain’s earnings, and the mood has carried over to its stock, Barron's notes.
Economic reopenings from COVID lockdowns will help companies across the board. But analysts argue that Starbucks is especially well-positioned for this as people get breakfast on the go as they return to offices and schools.
Starbucks Has Big Plans For The Future
Starbucks has big plans to grow its footprint—200,000 additional stores that would put one on every important US street corner.
The company opened 278 net new stores in the first quarter, including in China, yielding 4% year-over-year unit growth, ending the period with 32,938 stores globally, of which 51% and 49% were company-operated and licensed,
For the second quarter, Starbucks is expected to earn 53 cents a share, on revenue of $6.78 billion. That’s up from an earnings per share of 32 cents and revenue of $6 billion in the year-ago period. Of the 33 Starbucks analysts tracked by FactSet, 58% rate the stock at Buy and 42% at Hold. There are no bearish ratings on the Street. The average analyst price target is $118.57.
Starbucks will hold a conference call at 5:00 PM ET.
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.