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Have we seen an end to calm markets?

The present economic, social and natural disasters befalling mankind have the makings of a Hollywood blockbuster. From earthquakes to Hurricanes to the flailing of global markets we are witnessing quite a smorgasbord of craziness this summer. If any credit can be found in natural disasters, it would be the increased sense of community that follows them, a digging in to fix the mess while assigning little blame to local businesses where service is disrupted. Who can blame the electric workers putting in double shifts to restore power, or the local office coffee company that gets a few days backed up on deliveries? There is some sense of understanding when people have just faced far worse fare.

As economics go, the forgiveness is decidedly lacking and the noise can become so loud from talking heads that one is left like a deer in the headlights, confused as to which direction to go. Decisiveness is key to ours or any business for that matter and informed decisions lead to increased odds of correct decisions. Unfortunately there is little consensus or even information that can be quantified into knowing what comes next.

So it is with the coffee market of late. As with all commodities (have you seen gold lately?), the coffee market is gyrating around like a dashboard hula dancer in its attempt to find equilibrium between supply and demand. My dad used to say if there’s a person alive who can truly predict which way the market is headed, they must be a very, very rich individual. In other words, no one can. These days there are supercomputers looking for variations in market algorithms that utilize high frequency trades to extract minute but accretive amounts from the public markets churning out handsome returns for their masters. I have spoken to more than one person who feels that this is what has caused the markets, including the coffee market, to behave in such an unprecedented fashion. As someone said to me just yesterday, “there are some smart people who feel that the market system is broke.” Others point to the more conventional belief that money is headed for safer shores until the worst is over, commodities being a sound investment when the threat of runaway inflation is at the doorstep.

Regardless of the cause, our industry finds itself in one of the only high inflation areas of the economy, jewelry manufacturers notwithstanding. When I hear the pundits report a miniscule increase to the inflation numbers I wonder if they ever look at their grocery bill. Not only has coffee gone up 59% as of this writing, but sugar(55.61%), cocoa(7.74%), wheat(8.55%), and gasoline(51.30%), have all had big run ups this past year.

The inflation of our stock in trade does not enjoy the simple solution of moving production overseas, as with manufactured goods. The products we sell daily are, for the most part already produced in low cost economies around the globe. Crops cannot be disassembled and reassembled elsewhere.

So we are slaves to the confines of the ingredients necessary to our livelihoods.

For your own mental health and well being, be sure to stay abreast of the markets and communicate with suppliers on impending changes to pricing well enough in advance of your own price scheduling.

As high as the market has been it is not for me to suggest you go out long on your inventory or price contracts. I’m sure with inflated inventory values, buying a carload of coffee and sitting on it does not sound too attractive. By the same token, the market has shot back up to near its highest levels of the year and you do not want to be caught with an inbound load of product bearing a huge price hike per case that you have not informed your clients of.

Traditionally the coffee market has been bullish from September through December as consumption is about to “heat up”, and traders return from their summer homes and vacations, roll up the sleeves and dig back into our pockets. Those automated high frequency trade programs I alluded to earlier may take some of the fall effect away as once programmed in, no human needs to be there to put the trades through.

It will be interesting to see if regulators dig further into this subject. I have heard talk of investigations into how these programs are affecting world markets and whether they should even be allowed. Regrettably, the only way to disallow such trading would require demonstrable proof that they are indeed the root cause of the current volatility. That would be difficult to achieve without the use of, well, another super computer.

If we are going to need super computers to detect whether super computers are to blame then aren’t we headed down an eerily similar path to the old Hollywood Blockbuster series, The Terminator?

At what point do the computers get wise enough to begin to take all aspects of forecasting, production and global command out of our hands? I can only hope someone decides they run best on coffee.

Kevin Daw 8/30/11