Economics: What We Could Learn From the Price Of Coffee

(Drivebycuriosity) - Happy times for coffee drinkers. The price of coffee is on a 13.5 years low. The chart below (cents per pound) shows the price history since 1990. Huge price rallies were followed by sharp drops. What caused these huge swings? Coffee is traded on financial markets. The commodity is represented by coffee futures (delivery contracts) which are financial assets like stocks. So they behave like stocks and other tradable assets which prices are influenced by investors & speculators.

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I remember a massive speculation wave in the first decade of this century, when I worked for a German online service.  In these years futures - and other financial instruments -  on soft commodities like coffee, cocoa, cotton and wheat became a fashionable investment idea. Hedge funds and other speculators followed the ideas of the English cleric Robert Malthus ( 1766-1834) who claimed that the world would soon run out of food because the harvests weren`t enough for the rising world population. Malthus`pessimism found many followers including the Club of Rome in the 1970s who claimed the same and the peak oil callers in 2007/08.

Many speculators set high bets on rising agriculture prices (long positions) because they expected that a climbing demand will meet a tight supply (super cycle). In the case of coffee the rising popularity of chains like Starbucks signaled a climbing demand for the delicious beans. Therefore financial investors & speculators like hedge funds, huge pension funds and ETF providers pumped billions of dollars into coffee futures and drove the price far north.

But then happened what usually happens when agriculture prices rise: Farmers worldwide responded by planting more coffee plants because they expected more profit. Soon came more coffee on the market as the speculators expected. Today seems to be a oversupply, more coffee available than consumed. 

The coffee prices tell us again that Malthus & Club of Rome - and their followers - are still wrong. We are not running out of things we need & love. If the demand for something rises producers will find ways to produce more. Markets, profit thinking and the price mechanics will ensure this.