Even After Brazilian Drought, Trouble Ahead For Starbucks Supplier Ipanema

Ipanema Coffees, supplier to Starbucks Corp. (NYSE:SBUX), said it expects a 40 percent drop in crop yields after an historic drought in Brazil.

Brazil is the world’s largest coffee producer, responsible for about a third of the global supply. But a three-month drought has left farmers scrambling to recover supplies, and bean prices rising. Brazilian officials say that the weather problems are over, but not everyone is as optimistic.

On Monday, Brazil’s Agriculture Minister Neri Geller said that farmers should expect a better harvest next year, following the worst dry spell in 50 years.

“It’s a mistake to suppose that coming rains will solve the problems we’ve had,” Washington Rodrigues, CEO of Brazil-based Ipanema, said last week, according to Bloomberg. “Once vegetative growth is lose, you don’t recover it."

Typically, farmers are able to harvest about 110 pounds of green beans from 220 pounds of cherries picked from a tree. But the recent lack of water means farmers were only getting about 66 pounds from the same amount of cherries, according to the BBC.

Coffee prices have surged 54 percent this year, and analysts expect that demand will be 11.3 million bags above actual output this year.

But the price of a Starbucks latte isn’t at risk. The company typically plans coffee purchases months out, and has already locked in prices for the rest of the year and a large portion for 2015, according to its most recent quarterly report.

But other companies are feeling the pinch. J.M. Smucker Co. (NYSE:SJM,) which makes Folgers and Dunkin’ Donuts coffee, said earlier this week its bean prices increased by an average of nine percent. In April, Nestle SA (VTX:NESN) predicted a 1 percent increase in costs as well.

“There is a lot of risk being bearish about Brazil at the moment,” one leading trader told the Financial Times.