Over the past couple of years, the exceptional rise and fall of arabica prices have generated their share of inaccuracies and deliberate obfuscation of the facts by individuals and organizations with an agenda other than the efficient operation of the Market.
The unusual ascent of prices 2010-2011 was blamed on increased consumption by BRIC nations whose huge population moved the market by depleting stocks. Every news organization repeated this story, The Specialty Coffee Association of America repeated this story, and it was widely accepted as fact. So what happened in 2012-13 to consumption in the BRIC's if it was true? Did the massive increase disappear? Has consumption in the rest of the world drop significantly to cause the price to drop? No, the BRIC story was just that, a convenient story served to an industry looking for a simple explanation to a complex problem. I've posted a couple of times about the BRIC situation, and so won't rehash old posts, but it is useful in demonstrating our willingness to buy into a story with almost no vetting.
More recently the Leaf Rust Disaster has become the most written about story of coffee in the press. I am not doubtful of the devastating effect Leaf Rust has had, or will have, on individual growers, but on a macro level its impact is highly questioned by coffee traders. Individuals and organizations predicting wildly exaggerated drops in harvest numbers and apocalyptic estimates of job losses and social upheaval are common. As I mentioned in my previous post, the Market doesn't believe the story, and has recently settled the price of arabica below $1.30 for the first time in 4 years. Even more striking is the price for coffee to be delivered one year from now, which sits below $1.42, not reflective of market conditions which expect supply to drop by 20-30%. I can understand how activists and large exporters might feel they would benefit from promoting stories of harvest failures and Supply Shocks, but the mistrust and uncertainty these stories create actually hurt growers rather than benefitting them by reducing market liquidity and increasing uncertainty. Non trade investors who simply purchase contracts as an investment are not likely to participate IF they feel that uncertainty (delta) is too high a factor. Remember, it is those speculators who deserve most of the credit for the price increase of 2010-11.
The reality is that small growers are not generating the misinformation, and must simply react to the information they consume. They have no choice but to be Market participants, their family income depends on it. When they read stories of huge drops in harvest numbers, they are inclined to plant more to benefit from an increased price they naturally expect, which will negatively impact pricing going forward. These small farmers might also be tempted to hold coffee off the Markets in the near term, with the expectation of higher prices in the future...which never arrive. The incremental gaps in Supply which may develop when small farmers withhold coffee, is quickly filled by large green coffee holders looking to dump past crop on the market, hurting small growers.
Today I read a tweet composed by a well known writer within the coffee community which boldly stated "the world is running out of coffee". Why someone hoping to attain or retain any credibility would tweet such a thing is debatable, but I prefer to think it is misguided good intentions hoping to push prices higher for the farmers they are obviously emotionally attached to. Statements like these, if left unchallenged are not likely to result in higher prices, but markedly lower prices when plantings increase in an already oversupplied market causing larger surpluses. The fact the market is oversupplied is unquestionable...prices don't EVER drop in a market with supply shortages...EVER. As I stated previously, these statements also discourage all but the most risk seeking speculators from participating, reducing the bid numbers on all offers.
The solution to chronic low prices is not fantasy stories of pan-global crop devastation and destruction, but honest, transparent, trust building relationships between Supply and Demand participants. As an industry, let's recognize that the Supply side benefits from the halo's we've placed above their heads, and disabuse the notion the Demand side all have tridents and horns ready. Maybe once we've accepted that premise, we can begin to talk about balancing Supply and Demand to achieve a fair price growers deserve and consumers want.
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