Coffee prices have gone up over 100% in the last year and Starbucks chief executive Howard Schultz recently accused hedge funds, index funds and market speculators for manipulating the coffee prices.
“In our view,” Schultz said coffee price rise “is the result of extreme speculation and not a result of normal market forces. We do not believe this is sustainable”.
On the other hand, Schultz did not say that his own CFO, Troy Alstead, was the man who was doing lots of that coffee hedging that caused the price pumping.
From Financial Times:
Ironically enough, one culprit may be Starbucks itself. With the prospect of higher coffee prices on the horizon, the company has sought to hedge as much of its price exposure as possible.“As the coffee prices began to escalate as we moved through December, we took the decision to remove that risk from this year, we think the responsible decision, and lock our pricing,” Troy Alstead, CFO, said in late January discussing the company’s quarterly results.
Then there are indications that coffee producers themselves are playing the speculator and not just the finance suits.
Take India’s coffee growers for example. Producers are playing speculators and withholding their crop in hopes of higher prices.
“While planters are holding on to stock in the hope of an upward trend in the price, buyers’ are deferring its purchase in the hope of downward price correction,” writes India’s Business Standard.
Ugandan paper describes a similar situation: “Coffee farmers, [who] in anticipation of better prices, decided to keep out of the market last month [April].”
On the fundamentals side, bad weather, expensive fertilizer, and growing coffee demand in the emerging markets is used to justify coffee’s price rise.
Global demand for coffee is set to keep climbing and even a doubling in the cost of the commodity over the last 12 months has failed to quench consumers’ thirst for the beverage… There’s no impact (from high prices) in terms of a reduction in demand. Demand is still very dynamic,” ICO [International Coffee Organization] chief economist Denis Seudieu said.
ICO says that coffee demand will rise 2.4% per year.
In another sign that Starbucks should not be blamed for the coffee prices Elliot Wave happened to have made an accurate coffee price prediction last year and, perhaps seeking new subscribers for their Monthly Futures Junctures newsletter, are reminding readers of that accurate call:
If the patterns and analog reviewed in this months issue of Monthly Futures Junctures do indeed repeat, then coffee’s price could easily double from the current levels.
Needless to say, Elliot Wave asks “now that a major historical parallel has occurred, what is coffee’s long-term future?”
The future also looks fueled by media’s love of anecdotal claims that coffee drinking is a custom, that people are dumping tea for coffee, that demand is strong irrespective of price…
So, there we have it, producers speculating, resellers speculating, demand (2.4%) to go sky high irrespective of price, anecdotal claims used to justify price… classic signs of an ongoing bubble.