The start of 2011 has seen green coffee prices continue to steadily increase, breaking through new price barriers and surging towards levels not seen on the market since 1997. This is occurring before a backdrop of numerous interweaving factors. Adverse weather conditions, such as unseasonably long rains disrupting the fruiting cycle of trees in all the major producing countries, leading to a significant downwards trend in volumes of harvested coffee and thus a decrease in the certified stocks of warehoused coffee, are combining with an increased global demand for coffee, especially from emerging economies such as China and Brazil. With the latter projected to out consume the U.S. (the world largest coffee market) this year, making it not only the largest producer of Arabica but also the largest consumer, the outlook is for high prices to be sustained for the medium to long term.
While I think that a price increase is overdue for coffee farmers who have long been underpaid for the amount of work that it takes to produce the raw material for your morning cup, there is more at play here than the classic 3rd form economics lesson of supply and demand, something far more powerful- money, and more significantly, profits. Whose profits you ask? The sultans of sub prime. The forebears of foreclosure. Yes, the kings of cavalier themselves. You may recognize them from such world events as the global recession or the financial crisis. Yes, the banks and hedge funds who so happily toyed with people’s livelihoods, homes, and sanity, are now toying with food prices.
As the finance market contracted there was a scramble into more stable investment markets by the hedge funds trying to hold onto profits, and for many the obvious choice was soft commodities. Thanks to some intensive lobbying by banks, hedge funds, and free-market politicians in the US and Britain in the early 90’s, commodity markets were dramatically freed and regulations rescinded allowing a marked increase in speculation in soft commodities. This has ushered in an unheralded period of speculation in softs with the likes of Goldman Sachs reportedly making US$1bn in profit from speculation in these markets last year, while commodity assets under management rose to a record $376 billion last year, boosted by demand from institutional investors. This speculation is responsible for artificially inflating the prices paid for coffee contracts and with big profits to be made the banks are here to stay. This situation has many commentators signaling a new bubble in commodity markets – the very place where it is needed least, and a collapse in the most important market of all, food, could have dire consequences not only for the price you pay for your latte but prices for everything that we consume. Prices will be going up and more people will be going hungry.
What can we do about this situation? Not much apart from maybe trying to understand a little more about the factors involved in the price of a cup of coffee. Diminishing supplies, increased demand, and speculation are all combining to push prices for green coffee ever higher. Price increases in other commodities such as sugar, cocoa, and milk will add directly to the cost of a cup, while other commodities such as oil and minerals will have trickle on effects through increases to transportation and energy costs. Either way, price increases are unavoidable. What I can suggest if you can’t stomach the thought of a $5 latte is maybe consider drinking more coffee at home or preparing it yourself, as on a cost per cup basis this the most economical way to enjoy coffee. Or if you prefer to head out to your favourite spot for your caffeine fix, take a little longer next time and have your coffee in as opposed to takeaway as one of the biggest costs in a takeaway is the cup itself. Perhaps even try a coffee without milk as black coffees are usually cheaper than their milk counterparts and, who knows, you may even like it.
For some more in-depth views may I suggest you check out these links:
http://www.royalcoffee.com/mblog.asp
http://www.guardian.co.uk/global-development/2011/jan/23/food-speculation-banks-hunger-poverty
