Coffee prices have been on a wild run recently, which has had repercussions for the packaged-food industry. J.M. Smucker (NYSE:SJM), owner of the iconic Folgers brand coffee, has announced it will be raising its prices for coffee, a move that has now been followed by competitors as the company is widely regarded as a market leader. Meanwhile, the company reported a slowdown in sales as well as in its profit for its most recent earnings report. Is J.M. Smucker still in good shape?

Surge in coffee prices
Coffee prices have witnessed a meteoric rise recently, with arabica costs already up more than 50% year to date. Mostly, this is due to a severe drought in Brazil, the world's top producer of arabica beans. Estimates for yearly production have been slashed, now expected to be about 16% lower than last year's crop. While the cherries are maturing as usual, there are often no beans inside due to the dry conditions in the area.

Because Brazil is such a huge player in the global coffee market, supplying around a third of the world's coffee and half of arabica production, any disturbances in the area's crops are sure to be felt elsewhere. As a result, J.M. Smucker, which owns America's No. 1 coffee brand, has announced it will be raising prices by an average of 9%. This also goes for the Dunkin' Donuts brand of grocery store coffee, which is manufactured and distributed by J.M. Smucker. The price hike is the first in three years, with the company citing "sustained increases in green coffee costs."

J.M. Smucker is far from the only major company affected by the rise in green coffee prices. Kraft Foods, owner of the Maxwell House coffee brand, roughly half the size of Folgers and good for 6% of the company's sales over the last year, joined J.M. Smucker in hiking prices during the last major increase in 2011. The pricing turmoil comes at a time when coffee volumes are falling for the companies, with Smucker's volume down by 9% and Kraft's down by 20% between 2010 and 2013. Nevertheless, Kraft has decided to join J.M. Smucker in raising its coffee prices, with Maxwell House and Yuban brands going up by around 10%. 

Trouble brewing?
J.M. Smucker's results may be suffering from the coffee price woes: Its top and bottom lines declined year over year in the fourth quarter. Diluted earnings per share excluding certain items slipped 6%, beating expectations, while overall revenue was down 8%. However, for the full year, EPS was up by about 5%. The U.S. retail coffee segment seems to have played a big role in these results.

Apparently, much of the slide in revenue was due to pricing action in U.S. retail coffee. The company decided to pass through lower costs realized earlier in the year, resulting in an 8% reduction in net price realization. The reduction in price led to an increase in volume, with Folgers and Dunkin' Donuts brand coffee both up 1%, but this was not enough to compensate for the lower prices.

Presumably, the company will now be trying to offset this with the average 9% price hike for coffee going forward. On the face of it, then, the report doesn't look too bad. Additionally, the company's outlook came in ahead of analyst expectations.

The bottom line
The meteoric rise of green coffee prices over the last year or so has left J.M. Smucker with no choice but to pass these higher prices on to consumers. This is especially necessary after having passed on lower prices to consumers earlier this year. As such, the price increase should lead to stabilized results, after the company reported lower profit and revenue for the fourth quarter. Generally, the company still seems to be doing well enough.