Who wants it? The World Wants it! If the World Wants it, it must be good for the World! So, let's get it out there into the world so everyone may benefit from its value. But, wait! What is its value? Its value is what some folks are willing to pay for it at a particular time and place. What makes value? Demand makes value! If demand is higher than supply, then price escalates! If supply is higher than demand, then price subsides and then declines or remains constant while supply is bought up and subsequently exhausted.
If it is your quest to learn all essential ingredients of trading commodity futures, the first item we need to investigate is our food supply and demand. Why? Because food is the most basic of the human life support system. For thousands of years, people went to war over food. Whoever got to the food first, owned the food. Those without food would do anything they could to get food. They would thus risk their life for food. When you are hungry, you do not really get into Maslow's Hierarchy of Needs. In his paper,
"A Theory of Human Motivation" Maslow used the terms Physiological, Safety, Belongingness and Love, Esteem, Self-Actualization and Self-Transcendence needs to describe the pattern that human motivations generally move through.
But, you know all of that already, because your are living in the 21st century and Self-Actualization is your game. You do not have to fight for food. Somebody delivers it to your table and you pull out the plastic and pay. Whether you eat at Chipotle or The Waldorf, it is not of consequence. You eat when you want! If you are reading about trading, you are way beyond the physiological, safety, and esteem needs! You are on to "Self Actualization Needs"!
Understand that the farmers of 150 years ago established cooperatives to avoid the ever present "fighting over food" and eventually the Chicago Board of Trade cam to be the place where civilized people traded commodities in a very organized fashion that most times avoided bloodshed, but not always.
There are many commodities that bring us food from all over the world, for example, did you know that:
Coffee is one of the world's most important cash commodities. Coffee is the common name for any type of tree in the genus madder family. It is actually a tropical evergreen shrub that has the potential to grow 100 feet tall. The coffee tree grows in tropical regions between the Tropics of Cancer and Capricorn in areas with abundant rainfall, year-round warm temperatures averaging about 70 degrees Fahrenheit, and no frost. In the U.S., the only areas that produce any significant amount of coffee are Puerto Rico and Hawaii. The coffee plant will produce its first full crop of beans at about 5 years old and then be productive for about 15 years. The average coffee tree produces enough beans to make about 1 to 1 & 1/2 pounds of roasted coffee per year. It takes approximately 4,000 handpicked green coffee beans to make a pound of coffee. Wine was actually the first drink made from the coffee tree using the coffee cherries, honey, and water. In the 17th century, the first coffee house, also known as a "penny university" because of the price per cup, opened in London. The London Stock Exchange grew from one of these first coffee houses.
Coffee is generally classified into two types of beans: arabica and robusta. The most widely produced coffee is arabica, which makes up about 70 percent of total production. It grows mostly at high altitudes of 600 to 2,000 meters, with Brazil and Colombia being the largest producers. Arabic coffee is traded on the ICE Futures U.S. (ICE) exchange. The stronger of the two types is robusta. It is grown at lower altitudes with the largest producers being Indonesia, West Africa, Brazil, and Vietnam. Robusta coffee is traded on NYSE-LIFFE exchange in London.
Ninety percent of the world coffee trade is in green (unroasted) coffee beans. Seasonal factors have a significant influence on the price of coffee. There is no extreme peak in world production at any one time of the year, although coffee consumption declines by 12 percent or more below the year's average in the warm summer months. Therefore, coffee imports and roasts both tend to decline in spring and summer and pick up again in fall and winter.
The very low prices for coffee in 2000-03 created serious problems for coffee producers. When prices fall below the costs of production, there is little or no economic incentive to produce coffee. The result is that coffee trees are neglected or completely abandoned. When prices are low, producers cannot afford to hire the labor needed to maintain the trees and pick the crop at harvest. The result is that trees yield less due to reduced use of fertilizer and fewer employed coffee workers. One effect is a decline in the quality of the coffee that is produced. Higher quality Arabica coffee is often produced at higher altitudes, which entails higher costs. It is this coffee that is often abandoned. Although the pressure on producers can be severe, the market eventually comes back into balance as supply declines in response to low prices. Coffee prices are subject to upward spikes in June, July and August due to possible freeze scares in Brazil during the winter months in the Southern Hemisphere. The Brazilian coffee crop is harvested starting in May and extending for several weeks into what are the winter months in Brazil. A major freeze in Brazil occurs roughly every five years on average. Coffee futures are traded on the Bolsa de Mercadorias & Futuros (BM&F), the Tokyo Grain Exchange (TGE), the NYSE-LIFFE exchange in London, and the ICE Futures U.S. (ICE) exchange. Options are traded on the BM&F, the LIFFE and the ICE.
Prices - ICE Arabica coffee futures prices in early 2011 extended the rally that began in mid-2010 and posted a 14-year high of 306.25 cents per pound in May 2011. Coffee prices then consolidated modestly below that 14-year high into October and fell to a 1-year low of 210.95 cents per pound in December 2011, finishing the year down -5.7% at 226.85 cents per pound. Bullish factors in 2011 included (1) tight coffee supplies after flooding in Columbia, the second-largest supplier of Arabica beans, decimated its 2011 coffee crop to only 7.81 million bags, a 35-year low, (2) USDA's cut in its 2011 global coffee ending stocks estimate to an 11-year low of 24 million bags, and (3) ICO's cut in its 2011/12 global coffee production estimate to 127.4 million bags from a Jan 2011 estimate of 132.4 million. Negative factors that prompted a slide in coffee prices from their 14-year high included (1) ICO data that showed 2011 global coffee exports climbed 7.4% y/y to a record 104 million bags, and (2) Brazil's forecast for a 2011/12 crop of 43.15 million bags, the largest off-cycle crop in 11 years. Supply - World coffee production in the 2011-12 marketing year (July-June) fell -1.9% yr/yr to 133.801 million bags (1 bag equals 60 kilograms or 132.3 pounds), down from last year's record high of 136.377 million bags. The decrease in production caused the 2011-12 ending stocks to fall -8.3% to 23.979 million bags.
Brazil is the world's largest coffee producer by far with 49.2 million bags of production in 2011-12, which was 36.8% of total world production. Other key producers include Vietnam with 15.4% of the world's production and with Columbia and Indonesia each with 6.2%. Brazil's coffee production in 2011-12 fell -9.7% yr/yr to 49.2 million bags. Vietnam has become a major coffee producer in recent years, boosting its production to 20.600 million bags in 2011-12, up from less than a million bags in 1990. Demand - U.S. coffee consumption in 2011 rose 7.5% to 24.907 million bags, not far below the record high of 25.377 million bags seen in 1968. A bag of coffee is 250 pounds. Trade - World coffee exports in 2011-12 fell -5.7% yr/yr to 103.655 million bags, down from last year's record high of 109.871 million bags. The world's largest exporters of coffee in 2011-12 were Brazil with 28.0% of world exports, Vietnam with 18.7%, and Columbia with 8.2%. U.S. coffee imports in 2011 rose +7.5% yr/yr from the previous year to 24.908 million bags. The all-time high of 24.549 million bags was posted in 1962. The key countries from which the U.S. imported coffee in 2011 were Brazil (which accounted for 28.0% of U.S. imports), Columbia (14.3%), Mexico (6.6%), and Guatemala (6.3%).?
So what? The price of coffee since 1978 multiple extreme oscillations.
See p. 7 of notebook for more discussion.
Source: The source of this story about coffee is brought to us by Eddie Paredes of Commodity Tutors.
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