Wednesday, September 8, 2010

The High Price of Coffee

The price of coffee has soared to a 13 year high. This Wall Street Journal article highlights the causes more demand and bad harvests.

So could this increase in coffee prices be good for coffee farmers? Yes in the short term they are likely to earn more money (assuming they aren't having the bad harvest). In fact the harvest might be so good they may pull their kids out of school to work on coffee farmers (Krueger (2007) in Journal of Development Economics)

13 years ago the last time coffee prices peaked was 1997. Just 3 years later coffee prices had fallen 50-70% and many families who earned income through coffee saw their income fall substantially. Why did this happen? With all the profits to be made in coffee, countries like Vietnam increased production to the point where there was a glut in the market.

So I'm guessing this price surge will be temporary. But the linked article suggests

"If coffee prices stay high, it may make sense at some point for die-hard drinkers to start stocking up. If you buy the beans green and roast them yourself, they will stay fresh longer. You're earning no interest on the money you have in the bank anyway, so the "opportunity cost" of the money is minimal. You might as well withdraw some of it and buy your coffee "forward.""

Having had fresh roasted beans this sounds like a great idea!

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