Fungible is a Fun Word

Coffee prices are going up

If you haven’t noticed it yet, you will soon.  Folger’s and Maxwell house have increased their prices by 20%-25% in the last year!  This price hike doesn’t just apply to transnational corporate brands.  Shops, small roasters, medium and large sized roasters all across the the US are having to raise prices or risk going under.  The reason is that green bean prices are going through the roof!  In the last 12 months, the price of green coffee has risen by 100%…100%!

Here’s a graph of green coffee prices over the last year:

Why is the cost of coffee going up?  Counter Culture Coffee company made a cartoon that illustrated what most people are pointing to increasing demand and a decreasing supply because of growing world economies, changes in global temperatures, and coffee plant diseases and pests.

While I don’t want to deny something like this is going on, it doesn’t seem to take into account history or anything else going in the world at the moment.

Boom and Bust

I’ll illustrate the history of coffee prices first:

Notice the up and down.  That’s what commodities do.  Coffee, like oil, corn, wheat, and gold, goes up and down.  That’s one of the major reasons why coffee causes so much difficulty for the 25 million families who grow it: the lean years come without fail, and they are very lean indeed.  When prices are high, however, people plant more coffee trees,¹ which in 3-5 years will drastically increase the supply and drop, you’ve got it, the price.  It’s happened time and time again, so often, in fact, it has a name: “The Commodity Boom and Bust Cycle.”  For resources like gold and oil, we can tap them out (peak oil); it is much harder to tap out food crops like wheat, soy, and coffee.  Thus, while the cartoon suggests that coffee prices are reaching highs and won’t come back down, that would buck a very rigid historical trend.  Thus, I think there’s more to the current price hike.

Coffee: the Safe Bet

Let’s look at the graphs for other commodities during the past year:²

Here we’ve got corn, cotton, and gold, but you could look at any commodity (beef, oil, copper, etc), and you’ll see the same trend.  The price of all commodities are going through the roof.  I felt it in August when I bought an engagement ring, and I’m sure you’ve felt it when you’ve driven into the nearest Exxon station.  Increasing demand in emerging economies are certainly driving up prices, but for all commodities and some well over 100% in such a short time?  Another possible cause of the price increase suggest this is a (hopefully) short term spike: Commodities are a hedge against rising inflation.  This point is especially relevant since the Fed’s announcement of Quantitative Easing (printing and putting into circulation billions of dollars) will likely create inflation (or at least cause fear of it).  That means, when you’re $10 in the bank might only be worth $0.10 in a year because of inflation, you could instead buy some cold hard gold (or coffee) to get that $10 to hold it’s value.  It’s a hedge or bet against the dollar losing its value.

Thus, this rapid and ridiculous spike in prices is due in part to increased demand and lower supplies, but it is probably also due to speculative and risk-hedging investments in commodities.  While increasing demand is outpacing the supply of specialty coffee, I suspect current market prices will come back down.

¹ People apparently also steal coffee cherry off others’ trees as well when prices get tempting enough!
² It’s important to point out this applies to the cost of commodity coffee; we sell specialty coffee. Commodity coffee is coffee that allows for a noticeable number of defects and low, but present quality standards and one unit is treated as the same as another (with slight variations from country to country); specialty coffee is coffee that has extremely low levels of defects and where uniqueness and quality is celebrated. Commodity coffee accounts for 90% of the coffee grown, sold, and consumed each year (about 4.5 million tons); specialty coffee, what we sell, accounts for less than 1% of the total market. Specialty prices are typically well above commodity. Nevertheless, commodity coffee directly influences the price of specialty coffee. If a coffee farmer can make a decent amount of money selling commodity coffee, they will often choose commodity because it requires less work and less risk than specialty coffee. This only happens when the cost of commodity coffee gets quite high (as it is right now). Specialty coffee companies that do not have multiyear contract must either pay more for their coffee or risk losing the business of their producing partners.