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Coffee Prices Surge From Tall to Venti

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Poor harvests and short supply are creating opportunities for investors. But what do they mean for Starbucks customers?

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The price of coffee has received a caffeine-like jolt in the last few sessions.

Coffee futures have now surged 18.3% from June 9 to $1.6095 a pound, according to Bloomberg data; traders we spoke with this morning say it's due to various factors including tight supply, a weaker buck, and hot money chasing prices higher.

Let's start with supply: The market's now reacting to poor harvests in important coffee-growing regions of the world such as Vietnam and Central America, says Kevin Kerr of Kerr Trading International.

"This market should have moved up sooner," says Kerr. "We're seeing shortage of supply in key growing areas across the board. There are all kinds of harvest and weather problems."

The international coffee organization reports that world exports between October and April fell about 8% versus the year-ago period, from just under 58 million bags to 53 million bags.

Other variables to consider: A weaker dollar over the past few days has played a role here, says Hector Galvan, senior trading adviser at RJO Futures. Also, traders remind us, it isn't all about fundamentals: Investor demand is supporting prices.

So says Mike Seery, senior market analyst at Olympus Futures, who commented on the role speculators are playing.

"The funds buy at 4- and 10-week highs," he says. "So, once it hit a 4-week high, which was several days ago, they all got in. Then it did a 10-week high and they added to the position. So a lot of the funds are all long. They pushed it up and exaggerated the significance of the move."

Seery adds, "50% of this is speculators buying on the breakout."

The analyst argues that coffee is going higher as does Kerr, who forecasts the price rising potentially another 20% from these levels.

What does the rising price mean for Starbucks (SBUX), Peet's (PEET), Green Mountain Coffee Roasters (GMCR), and Caribou Coffee (CBOU)?

Probably not much right now, say traders. "It doesn't mean a whole lot," Seery points out, "They're hedged," meaning the companies already locked in the price they're going to pay for those sought-after beans.

However, ultimately, if prices do keep rocking and rolling, you and your neighbors will feel the pinch when buying that next cup of joe.

"It all rolls down hill," says Kerr. "Eventually, we will all pay more for our lattes. The consumer will end up, at the end of day, paying for this."

In a recent research note, Shawn Hackett of Hackett Financial Advisors, a Florida-based money manager specializing in agricultural commodities, told clients that, for those who own coffee, the best bet may be to take partial profits at this time.

However, Hackett argues, the current Brazilian coffee crop harvest -- low quality in nature -- isn't going to be able to alleviate the extreme scarcity of more high-quality Arabica beans.

As such, any sizable corrections are opportunities to buy coffee, he says, which should be in a general uptrend heading into the summer of 2011 that will make the current scarcity issues "look like child's play."
No positions in stocks mentioned.
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