Peak Coffee and other BS

Recently there have been a couple of articles (and here)referencing Peter Bakers claim that we are on the cusp of exceeding our planets capacity for coffee production, or Peak Coffee. The term Peak Coffee itself is a nod to M. King Hubberts 1956 paper which suggested that man had discovered all of the oil reserves which were viable, and that mankind was inevitably destined to run out of fossil fuels before long. Of course, the notion of running out of something depends on the levels of consumption which are never fixed, and don't always rise. But coffee is a very different commodity than fossil fuels because it is a crop, and is replenished every year with some regularity.

Lending credence to the idea of Peak Coffee is distasteful and even this blog post gives it more attention than it deserves. For Peak Coffee to be even remotely possible in context the following must be true:

1. Coffee is grown and harvested at levels of efficiency so high as to be impossible to improve. Of course we know that coffee growing is notoriously inefficient, and massive gains in productivity are possible with even small changes in farming techniques.

2. All available land suitable for coffee growing is presently engaged in coffee production. As advances are made in understanding how to grow coffee in a truly sustainable way thanks to organizations such as Rainforest Alliance, more land for sensible, sustainable and productive coffee farms becomes viable

3. Coffee consumption is inelastic to price movements, and higher prices will not effect the volume required. Coffee prices are relatively inelastic, but consumers look for alternatives at prices rise beyond historical level, most often choosing lower cost options. Coffee has always been considered a loss leader in many retail chains feeding support to the elasticity argument

4. There are no improvements to be made through genetic modification of coffee. (Distasteful but a factor non the less) While this option is likely a nuclear option, if sustained prices and increasing demand were not compensated for by other advances, this would be explored

5. The demand curve volume for coffee will be fed by developing nations who have yet to discover coffee as a beverage, but will eventually overwhelm the marketplace. This is predicated on the assumption that consumers in developing nations consumption habits are particularly inelastic to high prices. Coffee is not tobacco, and overcoming cultural preferences is more difficult than we are being led to believe.

6. Consumption growth in the Specialty Coffee segment has no ceiling, and will surpass commodity coffee in commercial importance. Of course Specialty Coffee can be proud of being the fastest growing segment, as did Fair Trade at one point in recent history. But Fair Trade has never achieved wide acceptance even in markets highly sympathetic to Fair Trade such as The Netherlands and there is no reason to believe that Specialty Coffee will enjoy better results. The idea that Specialty Coffee is somehow impervious to price spikes over the long run is foolish and dismissive of the power and influence of the large commodity operators. Even taking wildly inflated figures of 20% of all coffee sold being Specialty Grade, commodity speculators could quite easily commoditize the Specialty Grade trade by purchasing in quantity should stocks somehow approach Peak. For example: If ALL Specialty Grade coffee in the world were to be commoditized, assuming it represents 20% of production, it would only move the commodity price by: ($2.35x.8)+(4.7x.2)=$2.84 or an increase of $0.47 per pound using todays close.(I am assuming a Specialty Grade Price 2x the "C" which is generous on average)

There is much to be said for the possible negative impact of climate change on harvest yields, but it is all speculation and statistically inconsequential on a macro level to date. Equally, there is much to be said about the impact of the possibility of capital markets freezing in Europe reducing liquidity in the commodity trades and increasing the spreads. I think it fair to say that financial markets and currency factors have moved the coffee market far more often than harvest or weather events in the past 2 years. For now, lets put the words Peak Coffee out of our lexicon, and stick with variables which are within the realm of the reasonable.