World Coffee Market – the Impact of Speculation

July 16, 2008
Understanding the intricacies of the world coffee market is no easy task. Throughout history, coffee farming families have been at the mercy of the world market prices, largely dictated by climatic issues, supply and demand and the ever-hungry profiteers who have long negotiated for prices that fatten their wallets. To understand how the conventional world market work, check out this piece from coffeeresearch.org.
      This year, the world coffee market saw more volatility than in years past due to increased speculation by  a new wave of traders. According to a recent article by Sam Kornell called ‘Commodity Speculation: Gambling with the futures of farming families’ in CoffeeTalk magazine,”Commodity speculation (including coffee) in the United States changed fundamentally . . due to a rather obscure piece of legislation written by Republican Senator Phil Gramm that substantially relaxed, and in many cases eliminated completey, federal regulation of futures trading in American commodity markets. Gramm essentially managed to turn American commodities markets into a kind of  financial Wild West”.
     From 1936 to 2000, the year when Gramm slipped the controversial legislation through by attaching it to a 11,000 page omnibus Senate appropriation bill, speculation in the commodities (sugar, cocoa, coffee) markets was limited to experienced investment firms whose trading practices were regulated by Congress. After 2000 world commodity markets were opened to the whims of day-traders and less experienced and unregulated investors.
     Couple this with last year’s purchase of the New York Board of Trade (NYBOT which housed the arabica coffee trading system in addition to cotton, sugar and other commodities) by the Intercontinental Commodities Exchange (ICE), a British electronic energy marketplace. Sam Kornell writes, “The sale of NYBOT to the ICE made it even easier for non-commercial investors to get in – in a big way – on the commodities futures action. For one thing, the ICE and other electronic markets are harder to regulate, and they make investment in commodities contracts relatively easy”.
     Add to this falling stock market prices and the devaluation of the US dollar and the result is a very tenuous situation for coffee farmers and buyers. While market prices have escalated tremendously – a good thing for farmers – the uncertainty of the future weighs heavily on the mind of our partners in the field. They’ve watched the cycles come and go and they worry that, while their cost of goods continue to sky-rocket, the market will once again bottom out as it does time and time again.
To read the full article Commodity Speculation: Gambling with the Futures of Farming Families by Sam Kornell in Coffee Talk click here: http://www.coffeetalk.com/images/CTJun08web.pdf

 
The next installment of this newsletter will include a piece about how Higher Grounds Trading (in conjunction with our importing co-op, Cooperative Coffees, is bucking the conventional trading system). We trade directly with our partner farmers, negotiating prices far above fair trade minimums via transparent and friendly conversations with our producer partners.  Suspenseful, I know . . .

 

 

 

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