

Dunkin' Donuts Chief of Procurement Urges
Position Limits in Coffee Market
Justin Rohrlich December
23, 2010 10:20AM|
Bloomberg reports:
"The
chief of procurement for Dunkin’ Donuts outlets urged
the top US commodity regulator to limit speculation
in raw materials like sugar, wheat and coffee as Arabica
beans rose to a 13-year high."
“Something
as simple as a good cup of coffee at a fair price is
under threat today because of intense pressure by hedge
funds and other speculators,” said Ed O’Rourke, chief
procurement officer for Dunkin’ Donuts National DCP
LLC, a franchise-owned cooperative that handles purchasing
and distribution to more than 6,000 Dunkin’ Donuts and
Baskin Robbins outlets, in a letter to the Commodity
Futures Trading Commission.
But money
manager Shawn Hackett, founder, president, and CEO of
Hackett Financial Advisors, a Boynton Beach, Florida,
firm with a specific focus on agricultural commodities
which serves farmers, end-users, and investors, says
roasters are "in denial of the realities of lack
of supply."
Colombia
normally produces approximately 12 million bags of coffee
a year. However, as the weather has severely affected
494,200 acres of farmland, Hackett told us last week
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 said. “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
8 million bags, the smallest crop since 1976. Because
of this, as well as a lackluster crop of 9 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
7 to 9 million range,” he said.
This will
stimulate a “huge rush into the futures market, as everyone
tries to buy whatever coffee is remaining,” Hackett
said. “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 pointed 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 said. “A move that far up will really create a tremendous
financial strain. None of them have factored $4 coffee
into their models. They’ve been buying cheap coffee
for 20, 30 years, and never figured on this.”
Will more
stringent position limits ease the situation? While
there's no way to predict the future (no pun intended),
according to Hackett, "price controls never work
and only make the problem worse."
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