Starbucks, the world’s coffeehouse kingpin, has a problem: as coffee prices tumble, the providers of its high-quality beans are suffering an outsize hit to their competitiveness. The reason that this is a problem is simple: if the farmers that supply Starbucks’ can’t keep themselves in business, then the company’s supply chain takes a massive hit. What’s the problem? Coffee prices are falling below the cost of production in a number of countries around the world. And the farmers producing Starbucks’ arabica beans are suffering. Starbucks’ solution? To keep them afloat with an extra $20 million in payments.

Starbucks’ share price has appreciated by 36% over the course of 2019 to date

Source: Yahoo Finance

Starbucks, the largest coffee chain in the world, paid more-than 8,000 farmers in Mexico, El Salvador, Nicaragua, and Guatemala, a premium that amounted to $20 million. That’s on-top of its regular payments, according to Michelle Burns, senior vice president of global coffee and tea at the company. She said:

“When we looked at what the cost of production was across the range of countries, it was clear that the Latin American countries had a serious situation in hand. When a premium specialty arabica coffee of the highest quality — the arena that we play in — has been impacted, with historically low coffee prices at around $1, there are many countries where that’s not sustainable living.”

“The desire would be that the market has some correction. That would be the ideal state. If the coffee crisis on pricing continues, we will look at both what we do on the financial side as well as our continued work with what we do with trees. We’ve built this company around a diversity of flavour profiles from many growing regions around the world. We know for certain we want farmers to stay, we want the diversity of the origins we have the privilege to buy from.”

Dominion holds Starbucks in its Global Trends Managed Fund.

Author: Theo Leworthy

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