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Features Coffee Service
Reflections in a cup: May June 2009

Economics And Unintended Consequences


May 1, 2009
By Stuart Daw

Topics

The green coffee market has been acting with much uncertainty, probably due to the unusual variables
at work.

The green coffee market has been acting with much uncertainty, probably due to the unusual variables
at work.

Though the basic ICE coffee “C contract” prices are about unchanged over the past month, the differentials (premiums over the “C contract” that roasters have to pay for high grade arabicas) are setting records. 

It was expected that world coffee stocks would fall as this is Brazil’s off-year in its two-year cycle. But the main thing that caught the industry flat-footed was the sudden shortage of Colombian coffee, caused by excessive cold and rainfall during the main growing season, also affecting the upcoming mid-crop Colombian “mitaca” harvest, which is estimated to be between 20 and 30 per cent lower than usual.

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This has even caused some difficulty in getting exporters to ship, so shortages in importing countries are becoming critical for blend maintenance.

Differentials for Colombians have ballooned by around 50 cents per pound (US$ green) in the past few weeks. The market, usually able to anticipate potential shortages of one or more coffee origins, serves the purpose of gradually smoothing out or avoiding wild swings as prices slowly rise, causing reduced consumption and eventual balancing of supply and demand.

But while the coffee industry was aware of some shortfall in Colombian production, the degree of that shortage came as a surprise. Of course high quality arabicas from other countries rose in price to maintain their traditional relationships to Colombians, so roasters were caught short and have now announced substantial price increases.

A consequence of farmers in coffee growing countries not being able to afford fertilizer has the double effect of lowering production from undernourished trees and, for countries such as Canada, lowering revenue from the sale of fertilizer to those same coffee producing nations.

Another variable we are watching closely is the world economic situation. What effect will reduced incomes and unemployment have on consumption? What market segment will be most affected? Will there be restaurant closings that will cut volume? And will domestic consumption hold while foodservice suffers?

Still another factor affecting coffee is the general trend in all commodities, given the uncertainty in world stock markets. Will banks loosen up and allow speculative funds to play games again in commodities? Will the Obama administration in the U.S., in taking over some car manufacturers, try to make small cars more desirable due to high gas prices? How will they get gas prices to increase?

One can almost imagine how they will arrange it, by banning exploration for offshore oil while making the production of “clean coal” too costly, and scaring the public with dire predictions of disaster from atomic power.

Still another threat to our industry is the concept of cap-and-trade, with its effect of greatly raising the price of energy, the fuel we need for efficient production. It is indeed ironic that governments, in answer to the global warming hysteria, tax the fuel needed for roasting in an attempt to cut gas consumption, while demanding we use more fuel to remove the last vestiges of coffee aroma from the air (roughly 450 degrees Fahrenheit for roasting coffee, over 800 degrees for burning off the smoke, and 1,400 degrees for removing that heavenly aroma coming from the coffee itself).

And without being too pessimistic, the likelihood of serious inflationary consequences of the Obamaniacal printing of money that has no connection to production values bodes ill not just for coffee prices, but for the ancillary costs that surround the production of all goods and services. For governments, to repay borrowed money, either must levy confiscatory taxes, or monetize the debt through inflation.

But we shouldn’t become too upset, as the economically illiterate bureaucrats running the show can always plead the “unintended consequences” of their actions.

For us in the coffee business, as the saying goes, “We live in interesting times.”