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Issue Date: Vol. 51, No. 9, September 2011, Posted On: 9/20/2011


The End Of Calm Markets? Renewed Price Volatility Requires Greater Operator Vigilance


by Kevin Daw
green coffee prices, coffee market, coffee price, coffee futures, coffee trading, OCS, office coffee service, vending, vending machine business, Heritage Coffee, Kevin Daw, vending machine coffee, office refreshment


The economic, social and natural disasters befalling mankind at present 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 benefit can be found in natural disasters, it would be the increased sense of community that follows them, a tacit agreement to dig in and fix the mess while assigning little blame to local businesses where service is disrupted. Who can blame the electric company's workers who are putting in double shifts to restore power, or the local office coffee company that gets backed up on its deliveries for a few days? There is greater understanding on the part of people who have just faced far worse.


But in economics, this forgiveness is decidedly lacking, and the noise from the "talking heads" can become so loud that one is left stunned, like a deer in the headlights, confused as to which direction to take. Decisiveness is the key to our (or, for that matter, to any) business, and decisions made on the basis of good information are more likely to be correct. Unfortunately there is little consensus at present, or even information that can be quantified, that might give us a clue about what comes next.

So it is with the coffee market now. 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 [Stuart Daw] used to say that if there is a person alive who can truly predict which way the market is headed, that person must be a very, very rich individual. In other words, no one can.

In recent weeks, the green coffee price has spiked upward again, after a period of stability during which a number of major roasters were able to lower their prices. This renewed volatility is not related to any dramatic change in supply or demand; it seems to be driven primarily by speculative buying on the part of people who know little about coffee except that it is a commodity.

These days, there are supercomputers looking for variations in markets by applying algorithms to analyze high-frequency trades and extract minute but accretive sums that, over time, churn 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 broken." Others point to the more conventional belief that money is headed for safer ground until the worst is over, and commodities are a sound investment when the threat of runaway inflation is at the door.

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 minuscule increase to the inflation numbers, I wonder if they ever look at their grocery bills. Not only has coffee gone up 59% at this writing, but sugar (55.61%), cocoa (7.74%), wheat (8.55%), and gasoline (51.3%), have all had big run­ups this past year.

The inflation of our stock in trade cannot be addressed by the simple solution of moving production overseas, as with manufactured goods. The products we sell every day are, for the most part, already produced in low-cost economies around the globe. Crops -- especially coffee -- cannot be disassembled and reassembled elsewhere.

So we are slaves to the constraints of the ingredients necessary to our livelihoods. For your own mental health and well­being, be sure to stay abreast of the markets and communicate with your suppliers about impending changes to pricing well in advance of your own price scheduling.

As high as the market has been, it is not for me to suggest that you go out long on your inventory or price contracts. I'm sure that, 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 yet informed your clients about.

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 their sleeves and dig back into our pockets. Those automated high-frequency trading programs I alluded to earlier may take some of the fall effect away, since no human needs to be there to put the trades through once the software is up and running.

It will be interesting to see whether 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 supercomputer.

If we are going to need supercomputers to detect whether super computers are to blame, then aren't we headed down an eerily similar path to the 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.

I'll be back.


KEVIN DAW is president of Heritage Coffee Co. (London, ON, Canada), a leading private-label roaster serving the breaktime management industries in North America. He is in charge of coffee buying for Heritage. A 30-year veteran of the workplace service business, Daw has served as a commission coffee service salesman, a principal of a vending operation and president of a bottled water company. Since 1990, he has concentrated on coffee roasting. Active in industry affairs, Daw is a Specialty Coffee Association of America Certified Brewing Technician, a member of the National Beverage and Products Association Hall of Fame, a recipient of the National Automatic Merchandising Association Supplier of the Year Award and a NAMA Coffee Ser­vice Committee member.


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