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What Goes Up Might Come Down?
We all saw the headlines in the Spring of '97: "Coffee Prices Skyrocketing!" "Java Goes to the Moon!" A simple cup a joe was in danger of becoming an endangered species, at least to those of us unwilling to pay nearly $2 for the privilege (although they happily pay $4 in some European countries). Was it bad weather in Brazil? rampant speculation on the Cocoa, Coffee and Sugar Exchange? too much demand and not enough supply? Eager for the real skinny, I call up Robert Nelson, president of the National Coffee Association in New York City, to get the lowdown on the run-up in coffee prices.
The affable Mr. Nelson takes a professorial approach with me while explaining the dynamics of coffee pricing. "I can't speak to what's happening on the retail level," he cautions me. "My area of expertise is green beans." And an expert he is. I proceed to learn that green coffee is traded in a free market, which means that the price will fluctuate according to supply and demand. Regarding that supply, both the planting and harvesting schedules chosen by coffee farmers will affect the availability of green beans in the marketplace. A tree planted by a farmer today will not yield a crop for another three to five years, so coffee growers have to be both agronomist and seer. It stands to reason that coffee growers want to plant only to the extent that their harvest will be a profitable one, so tracking the trends in coffee consumption as well as the global coffee yields become key considerations when deciding how much to plant.
Unfortunately for coffee farmers, most of whom run relatively small operations, the planting schedule alone doesn't dictate profitability. Weather often plays a significant role in the harvest, whether it's heavy rains, frost or some other act of God. Man-made disruptions also figure into the equation, be it a labor strike in the fields or a trucker's strike at the loading docks. The slightest concern in any of these quarters can send coffee prices into a tizzy.
In recent years, coffee growers, by and large, have been getting it right. There has been a close balance between the number of beans produced and the amount of coffee consumed worldwide. Although public perception may be different in the age of Starbucks, coffee consumption had actually been in a decline in the 60s, 70s and 80s. It wasn't until the 90s that consumption leveled off. "Coffee has been shown to be a safe beverage," notes Nelson. "It's also benefiting from increased visibility and the growth of coffeehouses." This greater acceptance of coffee has led to a gradual reduction in coffee stocks and a resulting tight supply of coffee. The net effect is higher coffee prices. Coffee producers have yet another ally in the Association of Coffee Producing Countries (ACPC), another set of eyes and ears making sure that those crops are profitable ones.
So what exactly happened in the spring of '97 when coffee prices were making headlines and most neighborhood coffee shops took a price of java over the heretofore-sacred one dollar level? For starters, heavy rains in Central America put a serious crimp in that region's harvest. Second, labor problems in Columbia affected the delivery of many beans. Lastly, the anticipated crop harvest in Brazil, one of the world's largest producers, was lower than expected. Add it all up and the tightness in supply led to higher prices. Trickle-down theory being what it is, the higher prices soon made their way to most coffeehouses.
But can we blame it all on the vagaries of production, delivery and consumption? Not really. Remember, Nelson of the National Coffee Association asserted that coffee trades in a free market, as do most commodities. Those commodities markets notoriously draw speculators, for good or bad. "I can't say how many people at the coffee exchange are speculators and how many are in the coffee business," says Nelson, "but I'm sure there are some of both." So you can blame some of the increase in coffee prices to those Wall Street wonders, who may be crying into their cup of coffee if they gambled the wrong way.
As of late summer, 1997, coffee prices had stabilized at about $1.87 for a pound of green coffee. Most of the spring price run-up has been made back. But did your local cafe give back those price increases of early summer? Mine certainly didn't. And just how much coffee are we drinking? Tons. U.S. imports of coffee for the calendar year 1996 looked something like this:
Bags of coffee imported into U.S., 1996 (each bag weighs 60 kilos, or 132 lbs.)
Columbia: 3.8 million bags
Mexico: 3.7 million bags
Brazil: 1.8 million bags
Guatemala: 1.7 million bags
Indonesia: 1.2 million bags
Vietnam: 1.0 million bags
These are the leading coffee importers; there are many more. At the low end of the scale, we imported 14 bags of coffee from Australia, 11 bags from Turkey and four from China.
So what's a coffee lover to do? Pray for good weather along the world's coffee belt and hope that Wall Streeters find a new game. Bottoms up!