Monday, January 31, 2011

What Goes Up...

As the price of specialty coffee rises and hovers around $2.40 per pound, some coffee consumers tighten their belts... or perhaps more fittingly, shrink their morning consumption. Bloomberg's latest report on the subject was enlightening:
Coffee rose to the highest price since 1997 in New York and reached a 28-month high in London on signs that supplies will fail to keep up with demand.
 “The market expects a reduced mid-crop in Colombia due to rain in 2010, and now rainstorms in Brazil that may impact production are being focused on,” said Keith Flury, an analyst with Rabobank in London. “With outlook tight, any potential reduction in the harvest is likely to result in notable price movements, and the increases in the last couple of sessions reflect this.”
This sort of rise and fall of production, and correspondingly, of prices, is perfectly natural and expected. There are those out there who blow their "climate change" whistles too loudly and proclaim that our precious morning brew is in imminent danger, citing rainier seasons in producing countries as proof. Reality check: it rains heavier some years than others. Just like everything else in this fickle world, coffee production changes frequently. 

In times like these, many feel that preparing for the lean seasons during times of bounty would help mitigate high prices in times of shortage- like the epic Biblical tale of Joseph in Egypt storing up grain. I doubt they're suggesting we somehow store up green coffee seeds for 7+ years. They say, would it not make more sense to create a system within the Intercontinental Exchange (ICE) that buffered the price? Set the price of coffee at a reasonable level for stable buying and selling. In bountiful years, the regulated price would be overly kind to the farmers, since high production brings with it increased supply, and normally, lower prices due to lower demand pressure. In lean years, the regulated price would protect buyers from painfully high purchase prices- almost the level we are achieving now. Regulated prices would also keep speculators out of the market, and therefore make coffee only about the growers, roasters, and consumers. Sounds good, right? 

Nope. Won't work. Here's the rub: When a farmer works his butt off and grows a truly fantastic crop, he should be rewarded with a fantastic price for his beans. Organizations like Cup of Excellence exist solely to determine the best coffees from each origin in each season. This reward system, paying more for better coffee, is the only way to motivate a farmer to produce better crops. Think about it, if you were to get paid the exact same amount every year for every pound of coffee you produce, would you not produce more and sacrifice quality to obtain higher production? The whole system is idealist and unrealistic. 

Instead, times of bountiful production that leave farmers underpaid (nobody delights in poverty-level pricing, thus enters Fair Trade pricing) are buffeted by times like the present- those of lean harvests and record-setting prices. As a reference, the TransFairUS base price for coffee is $1.26 per pound. Coffee has been hovering around $2.50 for a while now as is described here by Bloomberg:
Arabica coffee for March delivery advanced 5.35 cents, or 2.2 percent, to $2.5035 a pound at 8:24 a.m. on ICE Futures U.S. in New York after reaching $2.5075, the highest level since June 1997. Robusta coffee for March delivery climbed $58, or 2.7 percent, to $2,187 a metric ton on NYSE Liffe in London after touching $2,204, the highest price since Sept. 25, 2008.
Though there are some unsavory elements to the system, such as speculators that in large part, merely drive prices for purchasers upward, the system is inherently logical and realistic. The plight of farmers is not easy, and I think through organizations like TransFair and through direct trade relationships that some roasters make with farmers (paying higher than market price for higher than average quality beans), the living standard for coffee farmers can increase. 

Recently, Kenya's government bailed out some of its coffee farmers from massive debts. "Co-operatives minister Joseph Nyaga says cabinet has agreed to waive the debt which has continued to bog down coffee farmers in the country in order to give them a fresh lease of life." This news combined with the fact that "The $2.50 area seems to be a level where people are willing to take a little profit" and sell, Kenyan growers should see a pretty profit coming their way to get this new life rolling. 

I think the life lesson here is that when times are good, we should enjoy it, but be saving for the tough times to come- because they will. Prices are high now, but they'll return and probably sooner rather than later. After all, what goes up, must come down.

Lord, thank You for change. A static and unchanging life would be boring. Help us to enjoy the changes, knowing You will be there with us all the while. Keep my head deflated and on straight. 

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