Coffee is a commodity

At Starbucks they obviously need coffee. To insure that they get the coffee at a good price, Starbucks has chosen to buy the coffee fields, rather than pay an advanced contract price for the coffee beans. Just think it's Starbucks was buying coffee from Cuba, and that hurricane that came through Cuba two months ago destroyed all the coffee beans, in this case Starbucks cannot sell you your Latte. That would really piss you off. Starbucks knows that if they piss you off; you may never come back again. Also if Starbucks kept raising and lowering the price of coffee they sell in the store you might get upset. But since the coffee is a commodity, the price would fluctuate. And Starbucks knows since they buy so much coffee, that they would have to guarantee they have the coffee, and then they would have to pay a premium price for the contract for coffee.

Mr. Schultz the founder of Starbucks, a former Chicago boy and commodity trader knows that with the volume of coffee it's Starbucks sell, if they entered into contracts to buy the coffee in advance then they would also be raising the price of the commodity itself. Now Starbucks the seller to the end user owns 23 percent of all the coffee plantations in the world. Are they manipulating the commodity, sure they are. But if they fail to manipulate the commodity of coffee and sell retail the large volume of coffee they do, then they would have decreased margins of profits. That would hurt shareholder value, quarterly profits and there is no way Starbucks would have reported a 37 percent gain in profits in the fourth quarter of 2001. Not to mention the exponential growth in stores and profits since their original IPO. You should not be surprised, that Starbucks has been able to do this.

You should not be surprised that Folders coffee and other name brand coffees have increased their prices in the stores. Its Starbucks owns 23 percent of all plantations of coffee in the world then that leaves 77 percent. Now those other companies are vying for that 77 percent since the total production of coffee available to the commodities exchange is 23 percent less. Therefore simple supply and demand in the irregularities of weather, which limits output of a plantation, will tend to drive the price and upward direction. It's Starbucks does not need all the coffee for its own stores, it can now sell its coffee beans on the open market to other companies at wholesale level. That is of course before the coffee beans actually get branded Starbucks. At that point they are just the commodities of coffee beans.

By Lance Winslow