Starbucks 2011 Annual Report Download - page 43

COMMODITY PRICES, AVAILABILITY AND GENERAL RISK CONDITIONS
Commodity price risk represents Starbucks primary market risk, generated by our purchases of green coffee and
dairy products, among other things. We purchase, roast and sell high-quality whole bean arabica coffee and related
products and risk arises from the price volatility of green coffee. In addition to coffee, we also purchase significant
amounts of dairy products to support the needs of our company-operated stores. The price and availability of these
commodities directly impacts our results of operations and can be expected to impact our future results of
operations. For additional details see Product Supply in Item 1, as well as Risk Factors in Item 1A of this 10-K.
FINANCIAL RISK MANAGEMENT
Market risk is defined as the risk of losses due to changes in commodity prices, foreign currency exchange rates,
equity security prices, and interest rates. We manage our exposure to various market-based risks according to an
umbrella risk management policy. Under this policy, market-based risks are quantified and evaluated for potential
mitigation strategies, such as entering into hedging transactions. The umbrella risk management policy governs the
hedging instruments the business may use and limits the risk to net earnings. We also monitor and limit the amount
of associated counterparty credit risk. Additionally, this policy restricts, among other things, the amount of market-
based risk we will tolerate before implementing approved hedging strategies and prohibits speculative trading
activity. In general, hedging instruments do not have maturities in excess of five years.
The sensitivity analyses disclosed below provide only a limited, point-in-time view of the market risk of the
financial instruments discussed. The actual impact of the respective underlying rates and price changes on the
financial instruments may differ significantly from those shown in the sensitivity analyses.
Commodity Price Risk
We purchase commodity inputs, including coffee, dairy products and diesel that are used in our operations and are
subject to price fluctuations that impact our financial results. In addition to fixed-price and price-to-be-fixed
contracts for coffee purchases, we have entered into commodity hedges to manage commodity price risk using
financial derivative instruments. We performed a sensitivity analysis based on a 10% change in the underlying
commodity prices of our commodity hedges, as of October 2, 2011, and determined that such a change would not
have a significant impact on the fair value of these instruments.
Foreign Currency Exchange Risk
The majority of our revenue, expense and capital purchasing activities are transacted in US dollars. However,
because a portion of our operations consists of activities outside of the US, we have transactions in other currencies,
primarily the Canadian dollar, British pound, euro, and Japanese yen. As a result, we may engage in transactions
involving various derivative instruments to hedge revenues, inventory purchases, assets, and liabilities denominated
in foreign currencies.
As of October 2, 2011, we had forward foreign exchange contracts that hedge portions of anticipated international
revenue streams and inventory purchases. In addition, we had forward foreign exchange contracts that qualify as
accounting hedges of our net investment in Starbucks Japan to minimize foreign currency exposure.
Starbucks also had forward foreign exchange contracts that are not designated as hedging instruments for accounting
purposes (free standing derivatives), but which largely offset the financial impact of translating certain foreign
currency denominated payables and receivables. Increases or decreases in the fair value of these derivatives are
generally offset by corresponding decreases or increases in the US dollar value of our foreign currency denominated
payables and receivables (i.e. “hedged items”) that would occur within the period.
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