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Want to Trade a Tulip For That Coffee?

August 24, 2011

I thought prices of coffee were rising because of a shortage of beans due to increased demand in new markets but that might not be the case. The real reason seems to be speculator greed - the same kind of greed that created Enron a while ago and more recently caused the housing bubble and crash that is still negatively affecting our economy.

The higher prices for coffee today are partly the fault of our Federal Reserve according to a article I read on the News Observer titled "Got 10 bucks for a cup of joe?"  Here is a quote from the article:

"The Federal Reserve's actions this year to encourage investment in anything other than Treasury bonds drove some of the money into commodities investment.

"Commodities have become one of the 'interesting' homes for that money to operate in," said Ric Rhinehart, the executive director of the Specialty Coffee Association of America.

Futures markets were designed as risk-management tools, in which producers or users of oil, wheat, coffee or other commodities could hedge against shifts in price. Today, financial investors appear to be crowding out end-users of commodities, in many markets outnumbering them two or threefold.

Critics argue that this influx of money — a lot of it involving algorithmic high-frequency trades triggered by small price shifts — at best distorts the market's legitimate price discovery process and at worst renders it meaningless."

Read more: http://www.newsobserver.com/2011/08/25/1436290/got-10-bucks-for-a-cup-of...

So thanks to speculators looking for any place to park their money the commodity market is over inflated in general and -  of concern here at least - over pricing the real value of coffee crops.  Sure, the farmer might see a bit more money - that would be great.  But what if, like many enterprises, the farmer plows his earnings into raising production capacity?

There is nothing wrong with that either as long as the price remains strong.  But what happens when the money runs back into stocks, real estate, or tulips (been a while since tulips had a good run) - what then?  The price drops like a rock.  The only buyers left will be the ones needing the farmer's crop to roast and sell in their coffee business.  These buyers will have a glut of newly created excess beans available on the cheap since the farmers, eager for profits overplant and overproduce to satisfy the perceived demand created by the speculator's run up of coffee prices.

Long after the money is gone chasing after itself like a dog after it's tail, small farmers and artisan roasters will struggle to put the pieces back in the puzzle so it makes sense to continue growing specialty coffee instead of tulips or any other crop that likely will be more profitable than coffee once the dust settles.   






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