This excerpt taken from the GMCR 10-K filed Dec 14, 2006.
Increases in the cost of high quality Arabica coffee beans could reduce Green Mountain Coffees gross margin and profit.
Cyclical swings in commodity markets, based upon supply and demand, are common and it is expected that coffee prices and differentials will remain volatile in the coming years. In addition, a number of factors, such as pest damage and weather-related crop failure could cause coffee prices to climb. In past years, green coffee prices have been under considerable downward pressures due to oversupply, but have increased significantly since 2005. We believe that the C price of coffee (the price per pound quoted by the Coffee, Sugar and Cocoa Exchange) will remain highly volatile in future fiscal years. In addition to the C price, coffee of the quality sought by Green Mountain Coffee tends to trade on a negotiated basis at a substantial premium or differential above the C price. These differentials also are subject to significant variations and have generally been on the rise.
We generally try to pass on coffee price increases and decreases to our customers. In general, there can be no assurance that we will be successful in passing on green coffee price increases to customers without losses in sales volume or gross margin. Additionally, if higher green coffee costs can be offset on a dollar for dollar basis by price increases, this trend still lowers our gross margin on a percentage of sales basis.
Similarly, rapid, sharp decreases in the cost of green coffee could also force us to lower sales prices before realizing cost reductions in our green coffee inventory and purchase commitments. We roast over 40 different types of green coffee beans to produce more than 100 coffee selections. If one type of green coffee bean were to become unavailable or prohibitively expensive, we believe we could substitute another type of coffee of equal or better quality meeting a similar taste profile. However, a worldwide supply shortage of the high-quality Arabica coffees we purchase could have an adverse impact on our Company.