The Immediate Future of Coffee:

An Empirical Analysis
Peter Klibowitz August 2011

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Table of Contents
Introduction: 3 Overall Commodity Outlook: 4 Retailer Outlook: 9 Producer Outlook: 11 Conclusion: 11

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It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts -Sherlock Holmes

1. Introduction
The goal of this report is to provide your business knowledge of where the coffee industry is headed. I use actual data to forecast coffees commodity outlook, the retailer outlook, and the producer outlook. I use only data to come to any conclusions and forecasts. I have no predisposition. This is a data driven report that uses only data to forecast and help draw any conclusions. This report will be concise and will solely focus on forecasting a few weeks out, forecasting any further out will cause the forecasts to become less and less accurate as uncertainty become greater. Ill overview the general conclusions of the report but will leave out specific actionable advice, as I believe you can use this report to make your own decisions.

Who am I? I'm Peter Klibowitz. I graduated from St. Norbert College in May 2010 with Bachelor Degrees in Economics and Business Administration. I'm currently a graduate student at Marquette University getting my Masters in Applied Economics and I will graduate in December. I made this report is to gain tangible experience as well as provide helpful information to those who can benefit from it. If youd like a more customizable analysis feel free to contact me at: Peter.Klibowitz@Marquette.edu

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2. Overall Commodity Outlook

For the purposes for our report we focus on KC1 commodity futures. KC1 or Coffee "C" contract is the world benchmark for Arabica coffee, according to Bloomberg News. Since we are looking at a futures contract, we are not sure the exact time it takes to be priced into actual coffee prices, as that is a firm specific issue that we cannot analyze with absolute certainty. Our first graph tells us that since January 1st of 2010, coffee has risen significantly. This has been generally true of all commodities. The purple line is the 15-week moving-average; the importance of this line is its direction. We choose the 15-week line as it is smoothed out and when it turns in direction, the move tends to predict coffee price movements for several weeks to months. In this case, it looks as though coffee has had a falling moving average in coffee prices.

KC1: Coffee C Contract

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Trend Forecast
Our second chart is a trend forecast we generated. This is forecast is fairly basic but does an accurate job predicting future movement in prices. According to our trend forecast, we see a brief spike and then a falling price trend. The spike in future prices is a correction our trend forecast makes as it views coffee prices are too low at this time, but once the correction is made, our trend forecast sees a falling price trend. The trend forecast isnt overly accurate in predicting prices but is accurate in current and future trends in coffee prices.

ARIMA Forecast
While our trend forecast is a good first step, we also used a more sophisticated forecasting method, which we call ARIMA. This method gives accurate forecasts for the next few weeks, and much more accurate coffee prices. Our ARIMA forecast gives us the following results:

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Our ARIMA forecast predicts coffee prices will increase in the next few weeks. This is similar to the correction our trend forecast predicted.

Here is a chart to summarize our forecasts:

KC1 Coffee Forecasts

275.00 270.00 265.00 260.00 255.00 250.00 245.00 240.00 235.00 230.00 225.00 220.00 5/27/2011 6/27/2011 7/27/2011
Actual KC1 ($/lb) KC1 Trend Forecast ARIMA Forecast

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We expect to see rising coffee prices in the next few weeks, as we put more confidence in the ARIMA forecasts, but both show rising prices in the immediate future. Our trend forecast does indicate prices will fall after the correction is made. We expect KC1 to be at $245.41 per pound at August 12th, as long there are no major changes in the U.S and World economies. Its worth noting that we are looking at KC1, a futures contract, so the actual time for it be priced into actual coffee prices depends on the specific firm and freight.

Table 1 provides a table of the actual and predicted coffee prices of both forecasts:

Table 1
Date 5/27/2011 6/3/2011 6/10/2011 6/17/2011 6/24/2011 7/1/2011 7/8/2011 7/15/2011 7/22/2011 7/29/2011 8/2/2011 8/12/2011 8/19/2011 8/26/2011 Actual KC1 KC1 Trend ($/lb) Forecast $263.70 $270.95 $264.95 $249.55 $249.00 $263.45 $263.15 $252.55 $241.50 $239.55 $242.57 $252.95 $249.98 $246.73 ARIMA Forecast

$245.41 $247.14 $248.20

*Please note: We can do an even more sophisticated forecasting approach but it would take more detailed information as well as specific information regarding price determinants of coffee. However given the goal of this report is to give a snapshot and not predicting an exact price of coffee next month, we felt it was not necessary. However, if that is necessary please contact me.

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Coffee Volatility
We also forecasted volatility of coffee in the coming weeks and month. Volatility is important as it can explain the magnitudes of coffee price movements as well as help predict the turbulence of the coming weeks in coffee prices.

Volatility has been falling in the past few months, but has seen a slight uptick in the past two week. Our model also predicts a slight increase in volatility in the week of August 12th. Overall, the low recent volatility is a sign of less risk in coffee price changes and makes our models predictions more accurate.

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3. Retailer Outlook
We do not put much significance in the retailer outlook compared the commodities section of this report. Our reasoning is that we do not have much data at our disposal in this area and do not feel that it would be beneficial in predicting future earnings and stock movements for Starbucks as it has little to do with your business in the immediate future. The goal again is to provide a snapshot, and we use Starbucks Corp as a proxy for the coffee retailer market.

Starbucks Corp Historical Net Income

The net income for Starbucks Q2 2005 to now has been fairly stable. Outside of the most recent recession, Starbucks has managed to keep stable growth. If we were to fit a line from our first data point to our last, we would see a stable and modest growth. Again, the drop in 2008-2009 is not alarming as many businesses were unable to forsee the recession or its severity. The importance is the recovery. For the coffee industry as a whole, we see that there is still significant demand for coffee and it tends to be increasing.

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Starbucks Corp: Stock Performance

When we look at Starbucks daily stock performance over the past seven months we see a strong increase in its value. This signals that investors and the market are becoming more confident in Starbucks which we take to translate that the market is ever more confident in coffee retailers in the past seven months. Again we dont overly read into Starbucks performance but use it as a proxy for the overall conditions of coffee retailers.

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4. Producer Outlook
From the producer standpoint we look at Green Mountain Coffee Roasters as a proxy for the performance of coffee producers or specifically coffee roasters.

Green Mountain Coffee Roasters

There net income since Q2 2005 has shown again modest and steady growth. When looking at a producer standpoint and trend, we prefer to ignore 2011s performance. This is these net income movements are fairly severe and are outliers from the general trend. From 2008 on, we do see increased demand and performance but we prefer to assume the general producer performance to be in line with an upward trend that follows 2008-2010s trend.

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Green Mountain Coffee Roasters Stock Performance

Again, the past seven months has seen increased confidence in the coffee industry as seen by Green Mountain Coffees stock performance. We just take this to mean the market as well as society believes in the strength and robustness of the coffee industry. We do not take to mean anything more than that coffee is fairly secure from economic conditions and should increased demand and growth in general.

5. Conclusion
Our report does draw a few important conclusions. The main emphasis of our report is in forecasted coffee prices. Our report believes that coffee will rise in the next few weeks as long as the U.S and world economies do not have any major shocks or changes. This is important for any immediate planning as well as help better prepared for the near future. We expect volatility to remain damped, which signals that price movements should not change dramatically in the coming weeks; this means there should be less risk in coffee prices in the immediate future.

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Our retailer and producer sections did take a snapshot view of Starbucks and Green Mountain Coffee Roasters. The general conclusion is that the market believes that coffee will continue in its demand and that the market is confident in the coffee industry. The coffee industry is not likely to face any significant negative changes in the near term and should expect conditions to remain the same or slightly improve. If you or your business would like to receive more in-depth or specific reports in the coffee industry please e-mail me at: Peter.Klibowitz@Marquette.edu

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