Arabica Coffee Prices High Sugar Fall Starbuck Takeover Package Coffee Distribution

Arabica coffee surged to a 13-year high on signs that shrinking supplies in Brazil and Colombia, the world?s two biggest producers, will fail to keep up with demand. Sugar fell.

Arabica prices have surged 84 percent in the past year. Starbucks Corp. this week forecast second-quarter profit that fell short of analysts? estimates as it projected paying more for coffee. A growers group in Colombia said it expects output to fall and a researcher said that Brazil?s crop will decline.

?There is a production deficit, and we hear that several coffee traders and brokers are demanding higher prices from companies,? said George Kopp, a senior market analyst at International Futures Group in Chicago. ?Also, there is technical buying.?

Arabica coffee for March delivery advanced 8.05 cents, or 3.4 percent, to settle at $2.45 a pound at 2 p.m. on ICE Futures U.S. in New York. Earlier, the price reached $2.4635, the highest since June 1997.

The commodity added 1.9 percent this week, a third weekly gain. Futures may rise to $2.50, Kopp said.

Colombia?s National Federation of Coffee Growers said the harvest in Antioquia, the largest producing region, may drop below last year?s levels after excessive rainfall. Brazil?s output may fall as much as 21 percent in 2011 as trees produce less after record yields in 2010, Safras & Mercado, a research company, said on Jan. 21.

Robusta-coffee futures for March delivery climbed $39, or 1.9 percent, to $2,129 a metric ton on NYSE Liffe. The price has gained 64 percent in the past year.

Arabica is grown mainly in Latin America and brewed by specialty companies including Starbucks. Robusta beans, used in instant coffee, are harvested mostly in Asia and parts of Africa.

Raw-sugar futures for March delivery fell 0.24 cent, or 0.7 percent, to 33.94 cents a pound in New York. Prices dropped amid concern that Egypt will delay purchases because of the political turmoil.

?The timing of the imports may be pushed back,? said Michael McDougall, a senior vice president at Newedge USA in New York.

Kingsman SA, a Lausanne, Switzerland-based sugar broker, estimates Egypt will import 1.135 million tons of raw sugar this year.

In London, refined-sugar futures for March delivery fell $10.10, or 1.2 percent, to $814.40 a ton on NYSE Liffe.

A U.S. District Court denied Kraft Foods Inc.'s (KFT) request to block Starbucks Corp. (SBUX) from taking over the distribution of Starbucks's branded packaged coffee March 1.

In U.S. District Court for the Southern District of New York, Judge Cathy Seibel ruled that Kraft "has not established that it has suffered irreparable harm," indicating the packaged-food giant failed to meet a key hurdle that would have allowed the court to rule for the injunction.

The legal victory for Starbucks sets in motion an upheaval in the premium-coffee category.

Starbucks now has a definitive date to bring the distribution of its packaged-coffee products in house, which should help boost margins, and it can meet with retailers to decide on marketing plans and the future of sales of its coffee outside of its stores.

After the ruling was issued Kraft issued a statement saying the company "intends to appeal the decision to the U.S. Court of Appeals for the Second Circuit on an expedited basis."

The ruling leaves Kraft scrambling to fill, within just a little more than a month, the premium side of its coffee business by either elevating one of its own brands, such as Gevalia, or finding another supplier.

Seibel said that Kraft, rather than making plans to prepare for life after Starbucks, engaged in a legal delaying game that included the request for a preliminary injunction.

"You didn't look for an apartment; that's your problem," Seibel told Kraft during the hearing, suggesting Starbucks had given Kraft ample warning of the change. Kraft was going to loose Starbucks either way, she said, and should have been preparing for the loss of that business.

The two consumer-product giants still face the question as to whether Starbucks will have to pay a fee to Kraft to terminate the distribution agreement. That matter is before an arbitration panel in Chicago.

Kraft argued that Starbucks must abide by the break-up process laid out in the contract, which puts the decision before the arbitration panel, rather than simply let Starbucks's claims of violations by Kraft end the deal.

Starbucks countered that it had given Kraft ample time for the transition, and that the global food company was too big to be really hurt by a March transition.

As to the question of irreparable harm, the judge ruled that Kraft claims of potential damage to the business are too speculative and that any resulting losses could be recovered in monetary compensation. The judge said Starbucks could end up owing Kraft "a boatload of money."

Kraft argued that going forward with the transition date puts them at a tremendous disadvantage to Starbucks, their partner for the last 12 years, but a fierce competitor starting March 1.

"Kraft has the important legal right to be able to compete on Day 1," attorney William Quinn, representing Kraft, said. Not having enough time to prepare "puts Kraft at significant long-term, possibly permanent, competitive disadvantage."

Kraft could also lose its position as the "category captain" in the coffee aisle in supermarkets as it will lack a strong premium product in its portfolio, Quinn said. This is a business that Kraft has built up over the last 12 years and has about 1,000 employees, he said. "All that will be gone."

Attorney Aaron Panner, representing Starbucks, said Starbucks had tried to work with Kraft to ensure an orderly transition March 1, but "Kraft has snubbed us."

Alan Hilowitz, a Starbucks spokesman, said: "We are pleased with the court's ruling, which makes clear that Kraft failed to demonstrate the need for a preliminary injunction. We are hopeful this will bring an end to Kraft's efforts to further confuse our mutual customers and look forward to the transition of the business to Starbucks on March 1 and to the pending arbitration process."

The break-up between the two companies has been unfolding publicly since November, when Starbucks announced it planned to end the distribution deal.

Privately, the relationship began fraying sooner, as Starbucks in early 2010 began complaining that the partnership wasn't living up to expectations, and by April began negotiating an end to the deal.

Kraft said it rejected a $750 million buyout in August as inadequate, and is hoping for a higher payout.