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Coffee Trends: Coffea Populi

Coffea Populi


April 29, 2008
By Brian Martell

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The National Broadcaster has just reported an acute shortage of coffee after the federal government had imposed price controls on certain food staples, coffee being one of them.

The National Broadcaster has just reported an acute shortage of coffee after the federal government had imposed price controls on certain food staples, coffee being one of them.

All throughout the country, people are glued to their radios and televisions as news breaks that the country’s roasters, who have been told to pay green producers twice the market price with no option to pass along the increase to retailers, have revolted and refuse to roast their green inventories and sell at a loss.

Military units throughout the country have been given special judicial powers devolved from the country’s leader to seize all coffee that is now in the hands of roasters and “re-distribute” it at government-imposed prices. Furthermore, a special session of Parliament to push through a proposed bill to nationalize, without compensation, the coffee roasting industry has been held. Television reports show machine gun-toting soldiers raiding warehouses in search of the “hoarded coffee” with employees being dragged away.

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Thank God this is not happening in Canada, but pity the people of Venezuela who are living through this nightmare imposed by their Marxist/Stalinist president, Hugo Chávez. Voted in democratically in 1999, Chávez promised sweeping reform from the corruption of governments past (he even led an unsuccessful military coup which landed him in jail in 1992), but felt it would only be possible through a soviet style dictatorship. Not surprisingly, this has not sat well with his South American neighbours or the leaders of the G8. So what is he trying to do and why is he picking on coffee, among other things?

Essentially, Chávez’s charismatic approach to staying in power has always dealt with image and what he feels will keep the majority of the population on his side. He is not beyond grandstanding stunts, like his recent offer of subsidized heating oil to residents of southeastern United States who were affected by Hurricane Katrina when the majority of his own people are having a tough time feeding themselves. As such, his solutions have been simplistic in approach and rash in execution. As an ex-colonel in the Venezuelan military, he might have been accustomed to knee jerk responses to battle scenarios, which could have served him well by being decisive; but his decisions in macro-economics have usually yielded incredible hardship on the common person when government interference was imposed.

In the latest coffee debacle this past December, Chávez responded to Venezuelan coffee farmers, who were protesting in Caracas over the low prices they were getting, by raising green prices by 100 per cent. The farmers, not surprisingly, were elated by this news but the roasters, who would bare the burden of the added cost, were not amused. Requests for increasing the price of roasted coffee to the retailers was denied as Chávez had already imposed strict price controls on staple goods, such as sugar, flour and coffee.

Faced with selling at a loss, roasters did what any rational businessperson would have done; they mitigated their losses by not even firing up their roasters. This drew the ire of Chávez who accused the roasters of collusion and worse, defiance, and promptly set the army on them to seize their coffee throughout the country.

While the response was typical demagoguery, it had the effect of aggravating the long-term situation by destroying the coffee roasting industry’s infrastructure that all Venezuelans relied upon. Realizing that, like Caesar crossing the Rubicon, the die had been cast – he now needed to go all the way in his attempt to save face by further threatening the nationalization of the roasting industry. What he failed to realize is that if the private sector could not make a profit selling coffee at double cost with stagnant pricing, the government surely could not either. Essentially, the populist the sleight of hand would see the Venezuelan public paying for the increase circuitously while crippling the efficiency of the market that, until now, had served the common coffee drinker well.

While the extremity of this unfortunate fiasco would be unlikely in North America, calls for price controls have made their way north. The U.S. toyed with price controls in the coffee industry in the not too distant past when green was trading at record levels (above $3.00/lb USD green). Congressional hearings were held to determine if this was indeed the way to go and pundits were called on to explain why there should or should not be price controls.

In the end, reason won out and we were spared the indignity of having to line up for rationed coffee bought with government issued coupons. By trying to control the market, governments have invariably always made the situation worse and extended the misery longer than it otherwise would have played out. The coffee market, like most mature commodity markets, is complex with a host of players who do not always seem to be beneficial to the interests of all stakeholders, but serve their purpose all the same.

If Chávez had bothered to ask what would have been the best policy regarding the coffee industry, he could have looked no farther than François Quesnay. When asked by Louis XVI’s exchequer what would be the most appropriate action by the government in relation to trade, Quesnay answered “laissez-faire!” o
Questions or comments?  Reach Brian at Brian@heritage-coffee.com


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