Infrastructure

Beating the Rise of Coffee Prices (JO, SBUX, GMCR, JVA, CBOU)

If you have been a frequenter of coffee shops in recent months, chances are that you have noticed that coffee prices have gone from high to higher.  Ditto for coffee at the grocery stores.  We wanted to track what has been happening in the coffee stocks of late.  Of course this also impacts shares of the iPath DJ-UBS Coffee TR Sub-Index ETN (NYSE: JO), Starbucks Corp. (NASDAQ: SBUX), Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR), Caribou Coffee Company, Inc. (NASDAQ: CBOU), and Coffee Holding Co.Inc. (NASDAQ: JVA).

Jose Sette, Head of Operations of the International Coffee Organization, noted in a brief this morning on ABC TV that consumers are about to stomach much higher coffee prices.  Sette noted that part of the problem is 3 different disappointing harvests in a row from South America.  If you adjust for inflation it is not as bad as it feels but Jose Sette noted that the current prices on a relative basis were as high as they have been since 1997.  Of course, that was before Starbucks brought inflated and self-imposed ‘coffeeflation’ to the public.

Some blame climate change, some blame crop trends, and some blame overall coffee demand.  Whatever you choose to use as a catalyst, it is obvious that if coffee prices remain higher then we are all going to be paying more for a cup of joe in the near future.

Coffee futures effectively doubled over the last year.  Prices approached $2.50 in mid-February and that was the highest since mid-1997 when coffee was trading around $3.20 per pound.

iPath DJ-UBS Coffee TR Sub-Index ETN (NYSE: JO) closed at $71.60 on Tuesday and the 52-week range is $35.96 to $73.56.  To put things in perspective, the ETN closed out 2010 at $64.03.  In short, coffee prices are up almost 12% so far in just the first 60 days of 2011.  If investors want to hedge their coffee prices, this is perhaps the vehicle of choice without having to open a futures account.

Coffee Holding Co.Inc. (NASDAQ: JVA) is often forgotten about or overlooked due to its size of only a $22 million market cap. At $4.02, the 52-week trading range is $3.67 to $5.60.

Caribou Coffee Company, Inc. (NASDAQ: CBOU) is more of a retail-only play and at $9.62 its 52-week trading range is $6.61 to $11.84.

Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR) has become a coffee roasting giant with both a wholesale and a retail presence, but shares have run into some headwinds.  At $40.35, its 52-week trading range is $21.83 to $47.81.

Starbucks Corp. (NASDAQ: SBUX) is trading around $32.39 and the 52-week trading range is $22.50 to $34.03.

It was mid-February that coffee prices hit a 14-year or 15-year high.  Consumers can expect a lag on the rise in prices as retailers generally absorb price hikes in the first waves of inflation and are forced to ultimately pass these prices on to retailers.  It used to be milk prices that drove up coffee due to the relative effect.  This time it is coffee driving coffee prices higher.

You don’t have to worry too much about this if you trust your financial policy-makers.  Ben Bernanke says there is not really any inflation.

JON C. OGG

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