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."