Hackett Advisors in the News

Starbucks, Others About to Be Hit by Skyrocketing Coffee Prices

Justin Rohrlich December 13, 2010 1:30PM|

       A massive supply shortage has money manager Shawn Hackett predicting coffee prices doubling by June.

Coffee was first introduced to Colombia by European Jesuit priests in the mid-16th century, and the country’s first exports of what are known today as the finest Arabica beans in the world began in 1835, with a shipment of 2,500 bags to the United States.

While Colombia will export considerably more than 2,500 bags of coffee this year, the devastating rainfall that killed 176 people, injured 225, left 1.5 million homeless, and caused the government to declare a “public disaster”, the country’s coffee crop will likely be a relative disaster, as well. The fact that the rain is forecast to last into the first quarter of 2011 only adds to the existing problems.

According to money manager Shawn Hackett, founder and president of Hackett Financial Advisors, a firm with a specific focus on agricultural commodities, Colombia normally produces approximately 12 million bags of coffee a year. However, as the weather has severely affected 494,200 acres of farmland, Hackett tells Minyanville that it’s “very, very clear we are going to see another failed Colombian coffee crop.”

“Colombia and the surrounding region has had the worst rainfall in more than three decades -- they even had to shut down the Panama Canal, which was only the third time that’s happened in history,” Hackett says. “Generally, rains are good for coffee -- at the right time of year. They’re terrible, though, when they occur close to harvest time -- which is right around now. You can’t pick wet beans, all that water creates fungus problems, and, as a lot of growers dry their beans outdoors, well, that’s obviously not possible during torrential downpours.”

Colombia’s coffee crop was off by 32% last year, to just under eight million bags, the smallest crop since 1976. Because of this, as well as a lackluster crop of nine million bags in 2008, Hackett says the “market desperately needs this coffee.”

“Everyone was expecting a recovery back to the 10-12 million area, but it now looks like it will come in somewhere in the seven to nine million range,” he says.

This will stimulate a “huge rush into the futures market, as everyone tries to buy whatever coffee is remaining,” Hackett says. “Problem is, there are only about 1.5 million bags left. As we get into January, we’ll start to see the cash differential start to take off, as the cash price begins to rise against the New York futures price. And this will be the straw that breaks the camel’s back.”

Coffee is now at $2.10 a bag, which Hackett points out is twice the $1.05 at which it was trading in 2008. And he sees it reaching $4 a bag by June.

“$4 is a price that will really be a killer for the roasters,” he says. “A move that far up will really create a tremendous financial strain.”

This will affect not only names such as Starbucks (SBUX), Green Mountain Coffee Roasters (GMCR), Peet’s Coffee & Tea (PEET), Caribou Coffee Company (CBOU), and Farmer Brothers (FARM), but importers, exporters, shippers, and commodities trading houses.

“None of them have factored $4 coffee into their models,” Hackett says. “They’ve been buying cheap coffee for 20, 30 years, and never figured on this.”

He likens it to the recent rise in cotton prices, which also caught everyone by surprise “because no one’s ever seen $1.50 cotton before.”

“No one thought it could happen,” he says. “No one planned for it. The same thing is happening with coffee. The market is going to do to the coffee companies what cotton prices are currently doing to clothing manufacturers. There’s only so much lower-quality Robusta the coffee companies can mix into their blends, and they’ve already maxed that out. Any more, it won’t have the right flavor. A company like Hanes (HBI) can turn to synthetic fibers if they need to. Green Mountain can’t.”

Hackett recommends staying out of names like Green Mountain and Starbucks, or getting short.

“You don’t want to be on the long side of this,” he says. “We haven’t figured out how to make synthetic coffee yet. If you find some, let me know -- I’ll be buying it.”

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