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Cubans Drinking Peas As Coffee Prices Skyrocket

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"It's much, much more bitter than pure coffee, which is smoother," Havana resident Froilan Valido told the Associated Press. "But many people here are accustomed to it."

The "it" Valido refers to is pea-blend coffee, which is, as the name implies, peas blended into coffee as an extender when prices go beyond sustainable levels.

Cuba was once a net exporter of coffee, but according to the AP, "state-run coffee company Cubacafe director Antonio Aleman said that while the country has spent $9.5 million to modernize production in the past five years, meager harvests are falling short of annual demand of 18,000 tons of beans."

The island nation can also no longer afford the $47 million a year on imports Raul Castro claims the government was spending to keep the population in coffee at the subsidized price of 5 pesos per 4-ounce bag. The pea-blend, which was finally replaced by pure coffee in 2005, will sell for an even 4 pesos per bag -- and the coffee ration for children under the age of six (!) will be eliminated.

The issue boils down to simple economics at the most basic level: the price of coffee rose 69% over the past year from $1,740 to $2,904 per ton, while peas are going for just $390 a ton.

Money manager Shawn Hackett explained his outlook for coffee back in December -- and if his predictions are correct (they're not far off as of today) -- Froilan Valido and other Cubans may not be drinking pure coffee again for quite some time.

Coffee was then at $2.10 a bag, which Hackett pointed out was twice the $1.05 at which it was trading in 2008. Now it's at $3. Factoring in the perpetually rising Colombian peso, which had risen 60% against the dollar since 2003.

Bad weather, he pointed out, kept Colombia from enjoying a decent harvest -- which the global market "desperately needed" to maintain normal levels of supply.

Now, Hackett sees coffee reaching $4 a bag by June.

“$4 is a price that will really be a killer for the roasters,” he says. “A move that far up will really create a tremendous financial strain.”

And it has.

Green Mountain Coffee Roasters already raised prices 10-15% in September, will further boost prices another 10%. Starbucks has been upping its retail prices over the past year, as have the JM Smucker Co., maker of Folgers, and Kraft's Maxwell House.

Hackett said that "none of the big names" -- which, include other players such as Peet’s Coffee & Tea, Caribou Coffee Company, and Farmer Brothers -- "have factored $4 coffee into their models.

“They’ve been buying cheap coffee for 20, 30 years, and never figured on this.”

Of course, Starbucks can't keep prices stable by blending ground peas into a Frappuccino. Though, given enough time, pea-blend coffee could catch on.

"I like it better with peas," Havana street sweeper Juan Hernandez Pedroso told a reporter. "I don't know, maybe it's because it's what I'm used to."


POSITION:  No positions in stocks mentioned.