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The report from the National Federation of Coffee Growers of Columbia cites an anticipated cyclical decrease in Brazilian production as Brazilian coffee fields enter the less productive second year of their two year grow cycle and an expected 2% increase in global consumption that they predict will cause a shortfall of as much as 10 million bags (down from an estimated 7 million bag surplus for this year). Put simply, Columbian growers are betting that the recent explosion in premium grade coffee consumption in markets like China will continue as the availability to consumers increases despite a weaker economic situation. These sounds like a decent assumption to us based on historical precedents –in periods of economic and political turmoil, coffee drinkers in western nations have proven to be resilient and resourceful, but we still view bullish reports from producer associations with a degree of suspicion.

Longer term, South American academics warn of potential production declines as rising fertilizer costs have seen independent farmers skimping in recent cycle. Agricultural experts say that the full consequences could be felt in crop yields in 2010 and 2011. In Brazil a report from the Cooperaiso coffee cooperative suggests that fertilizer sales are likely to fall by 20% over this crop year because of price levels, while the Columbian Government has earmarked subsidy funds to try and prevent declines in use by farmers there.

Andrew Barber

HBI: Numbers looking too high…

I like the HBI story, but I think expectations are too high headed into 3Q. Let’s not forget that the average EPS surprise for HBI is +40% over the past 6 quarters. This qtr won’t be different.

My model is shaking out about 20% below the Street for the back half. I think that the top line is fine. Volume trends have been decent enough in mass channels, and I think that price increases from Wal*Mart are coming through at a magnitude needed to offset higher cotton costs through mid-2009. It’s the non-commodity costs that are a true moving target for this company. A simple tweak in labor or ad spending accounts for wild swings in EPS. That’s why my Jr Analyst Zach Brown cranked out the file below, which is a complete sales and margin walk of all the puts and takes over each of the past six quarters. It highlights some interesting points for the upcoming quarter.

1) On the top line, 3Qand 4Q07 were the two biggest top line quarters of the year.

2) In 3Q HBI was nearing the end of a 1-year period where Champion ramped up in Sporting Goods channels.

3) 3Q07 started a 4-quarter period where International sales accelerated from no growth to double digit. Now FX is going the wrong way and growth comps get tough.

4) HBI is comping against 375bp in combined labor and manufacturing cost savings margin enhancement. Remember that the company let go 150 employees at corporate in late summer ’07. Now it needs to find a new bag of tricks.

5) 250bp of this went to fund the write-off of obsolete inventory. But net/net, that still leaves HBI 125bp in the hole this quarter.

Check out Zach’s table below for more details (click on each one for an enlarged picture with better detail).
If the company does, in fact, miss and/or guide down, I’m likely a buyer. I like the longer term margin progression. This is one of the few companies left in this industry that can offshore its production and free up what I think is 8 points of margin to be used as an offensive weapon to grow the business, pay down debt, and improve returns.

Sports Apparel Data: 'Less Strong'

The growth rate eased over the past week for sports apparel sales, though not to a point that leaves me concerned. Sales are running at about +1.4%, which slowed by half vs. prior 3-week run-rate due to incremental weakness in the mass channel. On the flip side, the Sport Retail channel is hanging in at about 10% -- not bad for FL, FINL, DKS and HIBB. Tough to find these growth numbers elsewhere in retail. I still think that we’re entering a better part of the cycle for this group.

Source: SportscanINFO

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Traders love coffee. Lloyd’s coffee house was a gathering place for speculators in shipping insurance and commodities in 18th century London that turned into Lloyd’s of London (the saloon across the street, Jonathan’s, became the London Stock Exchange –traders also love alcohol).

A data point on coffee this morning had traders taking note: the National Federation of Coffee Growers of Columbia is predicting a cyclical decline in Brazilian Coffee production will cause a global deficit as supply falls below demand that has grown dramatically in recent years.

To put in context, the grade of coffee produced in South America is the premium Arabica grade. Starbucks and other retailers have re-introduced premium South American blends to new audiences from the less urban parts of the US to developing Asian and Eastern European markets in recent years and Columbian Growers are betting that despite slowing growth one of the last sacrifices that people in those markets will make is their premium coffee in the morning.

Coffee Futures felt the same pressure as other soft commodities in recent months as the great deleveraging process saw a tremendous amount of capital flow away from static log index investments which were based on rolling front month positions. Unlike Oil or Gold, Coffee does not enjoy the same following among institutional investors as a standalone investment and so the absence of index investors will significantly impact open interest and volume. JO is an Ipath ETN based on the Dow Jones AIG Coffee sub index, which consists solely of front month NYMEX Coffee Futures on premium South American Arabica.

Andrew Barber


The Canadian Dollar has been hammered by declining energy commodity prices, but we are buyers here. Remember that this is a nation that printed a 5.8 Billion dollar trade SURPLUS for the last reported month and that the benchmark rate there is 2.6% while we expect the fed to cut US rates in the near term. From both a technical standpoint and a relative value standpoint, this trade looks solid.

Andrew Barber


Our breakaway level on the S&P 500 is 949. If the market closes above that line we have an upside target of 1024. If it closes below that line our downside target is a lower low of 875.

In general, the data this morning held more bullish indicators than bearish:

· The VIX declined yesterday with a closing level of 53.11
· Yesterday’s volume was comparatively light yesterday –less than half the level we had seen during the capitulation sessions in previous weeks
· Sentiment indicators continue to come in at historic lows
· Credit spreads continue to show signs of contraction
At the time of this update, our marginally bullish stance is being tested, but we rely on a disciplined process and will adjust our market levels accordingly.

Andrew Barber

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