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Starbucks faces higher milk, coffee costs

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[March 20, 2014]  SEATTLE (Reuters)  Starbucks Corp <SBUX.O> is wrestling with higher costs for milk and coffee, the two ingredients in its popular lattes, but that does not mean its customers are going to pay more.

"I want to resist raising prices in this environment," Howard Schultz, Starbucks' chairman and chief executive, said, referring to still cautious spending by many consumers.

"I am concerned about dairy, both domestically and around the world, and we are working feverishly with our suppliers, (and to) identify new suppliers," Schultz told reporters after the company's annual meeting in Seattle on Wednesday.

U.S. dairy prices are at record highs and could move up a bit more in March before easing as a result of increased production, said Jerry Dryer, editor of the Dairy & Food Market Analyst.

He and other experts say the rise is primarily due to increased demand from Asia and other markets.

"The demand for dairy in Asia, specifically China, is something the world's going to have to deal with," Schultz said.


General Mills Inc <GIS.N>, which sells Yoplait yogurt and Haagen-Dazs ice cream, earlier on Wednesday said that its Yoplait business was the main driver behind an 11 percent decline in its U.S. retail segment operating profit in the latest quarter.

Roughly two-thirds of that profit decline was due to dairy inflation and higher merchandising and marketing investments in its domestic yogurt business, Don Mulligan, General Mills' chief financial officer, said.

"We've been assuming that it will top off for the last few months and it hasn't yet," Mulligan said, referring to dairy prices.

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Elsewhere, coffee prices recently hit a two-year high due to crop-damaging drought in Brazil, the top producer.

"I'm not concerned about where coffee is going," Schultz said. "I think the market has significantly overreacted to the issue in Brazil and I don't see coffee prices spiking at very much higher levels than they are today, over the long term."

Schultz said Starbucks has managed through prior commodity cost hikes and "can absolutely do it again."

During the annual meeting, Schultz promised more growth in the years ahead, vowing to turn Starbucks into a "$100 billion company" by an unspecified date in the future. Starbucks' current market value is about $57 billion.

(Reporting by Bill Rigby in Seattle and Lisa Baertlein in Los Angeles; editing by Cynthia Osterman)

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