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But it doesn't really make sense for the Starbucks management team to be speculating on coffee prices. To run Starbucks successfully you need a lot of managemen

But it doesn't really make sense for the Starbucks management team to be speculating on coffee prices. To run Starbucks successfully you need a lot of management skills related to operating and marketing a large chain of coffee houses. I dunno I'd assume that an organization the size of Starbucks can probably afford to have a few folks dedicated to their supply chain economics separate from the coffee house operations and marketing folks.

yummyfajitas 15y ago
I'm sure they can afford it. But do you really expect Starbuck's coffee speculators to beat the speculators at Renaissance and GS?
- svmegatron 15y ago
  In some ways I would expect exactly that. Starbucks' coffee speculators would probably know more about coffee than generalist speculators. The best solution might be for Starbucks to bring in a speculation consultant to work with them - and they probably did something like that. I have to confess I'm a little baffled at the story here, though. My understanding is that it's often more important for a large business to have knowledge of future raw materials prices than strictly the lowest possible prices. So it should be expected that buying coffee futures will do more to smooth out the ongoing price of coffee than to minimize it. Sure, it would be nice to minimize the cost of coffee beans and I'm sure Starbucks works hard to do so, but to if they (or anyone) could constantly be perfect coffee price predictors, they wouldn't need to produce coffee to make money.
- fennecfoxen 15y ago
  Speculation at places like Goldman Sachs isn't just about having better future-predicting power, though. It's also about sitting on buckets of money such that you have a lot of risk tolerance. Then people pay you to take their risk, and you win on the average (in terms of profit) and they also win on the average (in terms of reduced risk). Starbucks, being as big as they are, may simply have felt that they were big and well-informed enough that the risk of self-insurance made more sense for them... a decision which is easy enough to snipe at ex post facto, but may still have made more sense.
  - byrneseyeview 15y ago
    In value-at-risk terms, Starbucks' hedging requires a negative amount of capital: they need more cash on hand if they refuse to hedge. With a given capital structure and no coffee hedging, there's a possible coffee price X that would wipe them out. With hedging, they can place an offestting bet that coffee will rise; then they're indifferent to that price fluctuation. That's one less way for them to unexpectedly lose money, so their results in the aggregate would be less aggregate. Plus, the buckets of money thing is a canard; Goldman has to earn a percentage on their capital, just like anyone else. If they have 10X as much equity as Starbucks, they need to earn 10X as much net profit to get the same return. And ceteris paribus, that means taking 10X as much risk.

yummyfajitas 15y ago

I'm sure they can afford it. But do you really expect Starbuck's coffee speculators to beat the speculators at Renaissance and GS?

svmegatron 15y ago
In some ways I would expect exactly that. Starbucks' coffee speculators would probably know more about coffee than generalist speculators. The best solution might be for Starbucks to bring in a speculation consultant to work with them - and they probably did something like that. I have to confess I'm a little baffled at the story here, though. My understanding is that it's often more important for a large business to have knowledge of future raw materials prices than strictly the lowest possible prices. So it should be expected that buying coffee futures will do more to smooth out the ongoing price of coffee than to minimize it. Sure, it would be nice to minimize the cost of coffee beans and I'm sure Starbucks works hard to do so, but to if they (or anyone) could constantly be perfect coffee price predictors, they wouldn't need to produce coffee to make money.
fennecfoxen 15y ago
Speculation at places like Goldman Sachs isn't just about having better future-predicting power, though. It's also about sitting on buckets of money such that you have a lot of risk tolerance. Then people pay you to take their risk, and you win on the average (in terms of profit) and they also win on the average (in terms of reduced risk). Starbucks, being as big as they are, may simply have felt that they were big and well-informed enough that the risk of self-insurance made more sense for them... a decision which is easy enough to snipe at ex post facto, but may still have made more sense.
- byrneseyeview 15y ago
  In value-at-risk terms, Starbucks' hedging requires a negative amount of capital: they need more cash on hand if they refuse to hedge. With a given capital structure and no coffee hedging, there's a possible coffee price X that would wipe them out. With hedging, they can place an offestting bet that coffee will rise; then they're indifferent to that price fluctuation. That's one less way for them to unexpectedly lose money, so their results in the aggregate would be less aggregate. Plus, the buckets of money thing is a canard; Goldman has to earn a percentage on their capital, just like anyone else. If they have 10X as much equity as Starbucks, they need to earn 10X as much net profit to get the same return. And ceteris paribus, that means taking 10X as much risk.