Coffee prices have risen steadily from their historic lows early in this
decade, and the continued increase is causing a good deal of discussion. Some
say that the world has changed, and the market factors that worked to correct
green coffee price spikes in the past are no longer effective. Is this time
really different? I've been told that during the recent National Automatic
Merchandising Association CoffeeShow in Las Vegas one of the speakers warned
operators that the green coffee market could hit $3, so they should buy for a
year out right now, if they can. If he's right, people will see him as a guru.
Should he be wrong, no one will remember anyway, so he had nothing to lose by
throwing that figure out there. But it was the first I had heard of such a dire
prediction, and it got me to thinking more about my own stance on where the
market is headed.
There is no magic
crystal ball involved when it comes to predicting the future path of the coffee
market -- or any other market, for that matter. People keep asking me where the
market is going next, and I keep telling them that if I knew, I'd have a much
larger boat. In order to estimate where it will most likely migrate -- and at
what speed and strength, and to what peak -- one can only reference two sources
of information: the players in the game who are cognizant of the supply/demand
equilibrium, and the lessons of history. By those in the game, I mean the
exporters, producers, selling agents and technical analysts of green coffee.
Among these folks, there are varied opinions, usually formed on the basis of
their own perspectives and positions. A grower in Mexico, where production has
been habitually lower in recent years, may be far more bullish than an exporter
in (say) Brazil, where abundant crops are forecast. So relying on what one hears
from this group is sketchy at best, and may leave listeners frozen in fear when
the time comes to decide which direction to take in planning to meet their
coffee needs, going forward.
Incidentally, the
consensus I get from this crowd is that the market has not finished heading
upward -- more votes for the $2.60-to-$3 range. The NAMA speaker has cast the
only $3 vote I've heard about, but only time will tell. If we cannot find any
agreement among the people with the best information on the contemporary market,
we must turn to history. So I went back and studied all the bullish events that
have affected the industry over the past 40 years. For purposes of comparison, I
only noted events that pushed the price over the $2 threshold, as has recently
happened again. When I added all the $2 crossings, I came up with five prior
events.
In 1976-'77, the "black frost" hit
Brazil; this was the biggest event of the bunch.
The market went over $2 in December
of '76, hit a high of $3.30 in April 1977, and by October of the same year was
back down below $1.50.
In 1979, the green price crossed $2
in July, hitting $2.23 before getting back to $1.80 by September, and $1.70 by
January 1980.
1986 saw the market cross $2 in
January to a quick high of $2.87, then settle back to $1.60 by August.
In 1994 it went from $1.44 to
$2.44, all within the month of July, and was back to $1.60 by December.
Finally, in 1997, it crept from
$1.40 in April to a June high of $2.28, and dropped back to $1.50 by October.
So what can the
OCS operator take away from these details? First, that none of these events
lasted an entire year, and even the worst event took nine months to shake out
the speculators that drove the market to record highs in 1976-'77. Second, that
only one event ever drove the price over $3. I suppose it could be argued that,
adjusted for inflation, the numbers would appear different; but markets do not
act upon the rules of inflation, only on the guesses and actions of those
involved. Just as the housing bubble went too far, and before that, the stock
bubble, market events arrive, get overblown, and retreat as the sharks move on
to warmer waters. One interesting aspect of our current market is that for the
past few years, "differentials" -- the price paid above or below the market, to
reflect a truer sense of a particular coffee's quality -- have risen
substantially. This really should be considered as part of the overall increase
that prices have already experienced. As an example, when the market hit
the $1.60 range back in June, the differentials on Colombian coffees were being
quoted in the vicinity of 70¢ to 80¢ over the "C" market price.
This put the
effective price of green Colombians in the neighborhood of $2.40. In past
bullish events, this was not the case; Colombians traded at no more than 30¢
over, so it could be argued that we effectively crossed the $2 line as far back
as June. Ironically, most farmers, when asked how they are enjoying this
newfound money, will frown, annoyed that they did not hold out longer. No one is
ever happy with events such as these. I am by no means suggesting anything from
all of this information, but I have found it gives at least some sense of
comfort to know that when the inmates take over the asylum, and the market
shoots to the stars, history strongly suggests that rational minds eventually
prevail. Stay tuned.
