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Spices: White and Black Pepper have continued their somewhat divergent paths, so a discussion of a classic commodity trading strategy is in order for this quarter's Market Report. This is called a "spread" or, sometimes, a "straddle" and involves taking opposite positions on two related commodities with price relations that seem illogical. A little background on these particular items is necessary: White and Black Pepper are both the same berry (Piper nigrum) but in order to produce White Pepper the berry is left to ripen a little longer on the vine and is thenz decorticated (i.e., the cortex, or black shell, of the berry is removed). Therefore, theoretically, at least, the price differential between White and Black should be the difference in cost for additional ripening and decortication expense. This should be something on the order of 10-20 cents/lb. At this writing the price difference is about 80-90 cents/lb. and the theory of the spread is that sometime in the future this price differential (or spread) should narrow to something like "normal" levels.

Therefore, the particular strategy in this case involves selling future deliveries of White Pepper and buying equivalent quantities and delivery periods of Black and playing for the price difference to narrow. An example with today's numbers follows (September 24, 1993):

- Buy: (Some quantity) Black Pepper for future delivery @ $0.85/lb.

- Sell: (Same quantity) White Pepper same delivery @ $1.70/lb.

Later (and in tandem) if market falls:

- Sell: Black Pepper @ $0.65/lb.

- Buy: White Pepper @ $1.00/lb. for net profit (less commissions) of $0.50/lb.

Or, later (and in tandem) if market rises:

- Sell: Black Pepper @ $1.30/lb.

- Buy: White Pepper @ $1.80/lb. for net profit (less commissions) of $0.35/lb.

As can be seen from these admittedly hypothetical examples, there is money to be made if the market for Pepper either rises or falls, as long as the price differential between White and Black narrows. This would be the logical course of events. The only caveat, of course, is the usual one: commodity markets are always logical, but only eventually. Timing in commodities, as in life, is paramount.

Other spices remain somewhat dull. Our previously recommended position in Nutmeg is showing a small, sluggish profit and seems inclined to languish in the doldrums. Basil and Marjoram, too cheap for too long, are showing signs of life. The situation in Cardamom may be relieved with the arrival of the new crop next month, but preliminary prices are still high. Cloves, which have been incredibly cheap this year due to lack of Indonesian buying, seem to be recovering some luster now, with prices advancing slightly (about $100-150/metric ton) this week.

Botanicals: Very dull markets. New crops coming very soon and then we'll see what effect the disruptions in Eastern Europe have had on crop sizes and export capabilities. Albania is chaotic, the former Yugoslavia either is embroiled in war or is under international embargo and yet botanicals seem to find a way to make it to our shores. Stay tuned. Inventories here are very low.

Potpourri Ingredients: A strange market. Some staple items, like Red Roses from Pakistan, are tight due to reduced crops and slight price increases on Indian ingredients have led to some higher prices. The real problem is that inventories here are very low and any sizable order sometimes reduces these inventories to zero. The season is upon us and shortages could arise at any moment. Transit times are still counted in months and manufacturers who have been buying strictly hand-to-mouth may be left with little to pack if this year's selling season is good.

Article copyright American Botanical Council.


By Peter Landes