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A big reason for the volatility: Since much of the supply comes from
developing nations, there's no clear picture of how crops are faring.
Overreaction to news is common. And then there are those commodity hedge
funds that can distort the price with their stampedes. One of the reasons
Ganes-Chase is telling you to buy now is that she thinks prices have
fallen artificially as big commodity funds have liquidated their positions
in recent months.
Alarming initial reports of weather trouble during the 2004-05 growing
season in Brazil (inclement rain) and Vietnam (drought) sent prices
soaring last spring. Later on the market decided that production in
these two countries would fall short by only a little. That sent prices
down. Folgers, Procter & Gamble's coffee unit, announced in early August
that it was lowering retail prices by 5%. Kraft Foods' Maxwell House
followed suit.
Nevertheless, for those willing to put a little mad money at risk,
the long-term outlook for coffee seems propitious. While the Brazilian
and Vietnamese producers aren't in dire straits, their yields will be
down to some degree. Estimates for Vietnamese harvests over the 12 months
beginning in November range from 1.4 billion to 1.8 billion pounds,
off from the previous year's 1.9 billion pounds.
The story in the U.S. and other developed nations is the retail coffee
explosion, which shows little sign of abating. So why not just buy some
coffee-chain stocks? Because they have been, to put it mildly, discovered
on Wall Street. Starbucks shares have climbed 16% over the past year
and will now cost you 45 times trailing earnings. Rival chains Peet's
Coffee & Tea and Green Mountain Coffee Roasters are similarly rich.
Excitement is already building on Wall Street for the initial offering
of Caribou Coffee, which plans to add up to 73 more stores this year
to its existing 322.
Big food companies sell coffee, too, but not enough to really move
their bottom lines. At P&G, coffee accounts for 2% of revenues; at Kraft,
13%. You would get a taste of coffee in a well-diversified commodities
fund but only a taste. Pimco Commodity Real Return, a $9.8 billion pool
whose expenses run to 0.74% of assets annually, has 3% of those assets
in coffee.
The risky alternative: Be your own commodities adviser. Each futures
contract controls 37,500 pounds, enough to make 1.1 million grande Americanos
at Starbucks. If the price climbs 6 cents, you make $2,250. Of course,
it could just as easily drop by 6 cents.
Contracts for arabica beans, considered higher quality since they
go to coffee chains like Starbucks, are listed on the New York Board
of Trade. The robusta bean, well represented in instant coffee and in
cans on the supermarket shelf, trades on the London International Financial
Futures & Options Exchange. These days arabica trades at a 50-cent premium.
You can open a commodities position with as little as $2,800 margin
per contract, but skimping is not a good idea because you might be out
of town when you get a margin call. Put up the whole contract amount,
$41,000, and place as much as you can in Treasury bills. (The broker
will hold a percentage, typically 10%, as cash margin, on which he gets
to pocket the interest.) Ganes-Chase recommends buying futures that
come due in December (now at $1.09 per pound) or March ($1.14) and holding
until the per-pound price hits this year's high of $1.45.
F O R B E S • September 5, 2005
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