Tata Coffee Ltd’s share price has risen by 35% since Monday to about Rs760. Some of this seems to be because of rising coffee prices worldwide.
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Coffee prices have been rising due to what the International Coffee Organization (ICO) calls “the precarious balance between demand and supply”.
But is that the only reason driving Tata Coffee’s shares? It must first be noted that this stock has relatively low trading volumes and a sudden spurt in buying may itself cause a spike in the share price.
This was evident when the alliance with Starbucks Corp. was announced in January. Tata Coffee shares had then jumped to Rs712 before falling back to around Rs520 subsequently.
Also, it’s not that coffee prices started rising this week. They have been rising since December. The ICO composite price in March is up by 6% over February and higher by 24% over January.
In a recent report, ICO states that the global production in crop year 2010-11 is expected to be up by 9%, led by a 27% rise in Brazil’s production. But output in some other countries such as Indonesia, Vietnam and India has either declined or risen at a slower rate.
Now a 9% growth in output is good compared with a consumption growth of about 3%. But a few factors are responsible for higher prices, according to ICO.
Brazil’s large domestic market leaves a relatively small proportion for exports. So, its bumper output does not affect the demand-supply balance. Since output in 2009-10 was low, opening stocks for 2010-11 are down by about 33%.
And, coffee exporting countries are running down stocks to take advantage of higher prices. India’s own exports between January and now are up by about 70%. Adding to this is stocking up by importing countries, fearing that coffee prices may rise further.
Financial speculation, too, could be behind the rising coffee prices. The market appears volatile and prices may well come down as sharply as they have risen.
Coming back to Tata Coffee, rising prices mean better profitability for its stand-alone operations. But it also means higher raw material costs for its much larger US coffee retailing business under the Eight O’Clock Coffee brand. In fiscal 2010, this business was triple the size of Tata Coffee’s stand-alone revenue and a higher input cost is unlikely to be healthy for margins.
Keeping these factors in mind, it would be imprudent for investors to try and ride this price wave.
Graphic by Naveen kumar Sani/Mint
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