Coffee Trends: Bears and Bulls and Coyotes, Oh My!
By Brian Martell
Bears and bulls and coyotes, oh my!
By Brian Martell
The mechanism for trade is as old
as humanity itself. You have something and you want to trade it with
someone else who has something you value more, and they value what you
have more than what they have.
The mechanism for trade is as old as humanity itself. You have something and you want to trade it with someone else who has something you value more, and they value what you have more than what they have.
The essence of free trade (or capitalism) comes down to this simple principle, which can be best defined as “the exchange of value for value between two or more people of their own free volition for mutual benefit.” Within free trade there is no coercion, there is no room for it; there can be no real trade at the point of a gun.
As markets became more sophisticated, transparency led to better information so that the prevailing “price” for which a good was being sold became known to all. This was an essential development for world markets to mature and allow for truly global trading.
Even in the times before the Internet, we had information from various sources that levelled the playing field somewhat, but never perfectly.
Often, economists will talk of the idea of perfect information in the models they build to describe how certain transactional phenomena behave. Of course this is fantasy, but people have been trying for eons to build to that egalitarian ideal just as much as those who know how to exploit imperfect information have been trying to keep part of the market secret.
It is this competing nature that leads to tension between the two sides of any exchange where innovation is born. It leads through evolution to improvements on the system, and by this I mean better efficiencies leading to lower costs either per transaction, or in the production and distribution of the product being traded.
On a transactional level, the cost of trading Arabica coffee changed when the NYBOT (New York Board of Trade) became part of ICE (Intercontinental Exchange) in January 2007. The old method of traders waving pieces of paper and yelling out “puts and calls” in the “pit” gently transformed into a more civilized and less costly method of trading involving agents from around the world working quietly at their computers.
Now all coffee on the exchange is, by definition, “exchange grade;” which means it meets certain minimum standards to be sold without differential, positive or negative (a differential is the added premium paid for a better quality coffee).
Similarly, the mechanisms in place for moving coffee from the country of origin to the roaster have evolved over the years with new methods improving efficiencies.
As the title of this article suggests, in any market there are the “Bears” (those who bet the price for a good will go down) the “Bulls” (those who bet that the price for a good will go up) but who are those “Coyotes?”
In the green coffee business, “Coyote” is the pejorative term used to describe the broker who puts the sellers and buyers together. Most coffee growers view these brokers with the same disdain that some Canadian grain farmers view the Canadian Wheat Board (although it must be said that at least the coffee growers do have the option of selling their coffee to another broker if they don’t like the deal they are being offered, something our grain growers cannot do by law).
The common complaint is that farmers get so little for their produce compared to the price that the brokers will sell it for overseas. The brokers are, however, the ones putting up the financial backing and taking the risk of a descending market and the ones who have developed that all-important relationship which allows for an easier flow of goods based on the trust and goodwill built up over the years.
That being said, the aforementioned tension is what drives some at the producing levels of looking at better ways of getting their products to market. Enter the Kenyan coffee planters who have recently started a co-op to mill and market their coffee directly to roasters leaving the “Coyotes” in a “Bear” trap.
The age-old idea of cutting out the middleman is being tried again, this time in Kenya. Now there may be a point to this exercise if indeed the growers can offer the same value as the brokers did with better costing structure.
It must be stressed; this is a big “if.” Brokers traditionally work on volume and are able to defer some of the costs of doing business by taking on coffees from more than one co-op, let alone one plantation.
Currently, the big coffee issue in Kenya is that millers (those that process coffee cherries into green coffee) and the marketers (brokers) are facing a loss of suppliers (farmers) who are opting to go the co-op way without paying their outstanding debts to the millers and marketers who fronted them the money necessary to take care of their crop. They will, of course, pay or face the legal end of contractual obligations.
In the long run, however, we will see how this experiment in market logistics works and if the coffee market chain of supply will get a little shorter.
Questions or comments? E-mail Brian at Brian@heritage-coffee.com .