So now, let’s bring on the villains in the piece. Coffee is traded on global futures markets. That means that expectations of future shortages, or even rumours of poor weather, can drive up prices long before beans are harvested. In theory, this trading provides stability by letting producers hedge their risks. In practice, it often amplifies volatility as traders pile in and out of the market. As is always the case, the volumes of coffee traded are much higher than the actual volumes produced: speculative gains and the extraction of resulting rents are a major factor in the increase in the world coffee price.
Such speculation moves prices through time – as Adam Smith pointed out 249 years ago. Which is good, you know?
Also, that “provides stability” to producers means the price risk is transferred to hte peculators. And as we know speculation is a zero sum game among the speculators. There are, therefore, no rents extracted nor rents to extract.
Sigh.
The producers can sell futures and thus get insurance, for which they (in aggregate and on average) pay a small amount.
The ‘speculators’ (i.e. all the other participants in the market) provide the insurance, and in aggregate and on average earn a small amount from doing so.
None of this means that Murphy isn’t an idiot, of course.
So we can deduce that commodity markets are yet another thing he doesn’t understand?
There is no end to his ignorance and no beginning to his knowledge, Quantum or not
There’s a great natural experiment in the USA futures market. By law onions cannot be traded on a futures market and the last time I read something on the subject it was also the most volatile market.
In my experience of the grain market, speculation makes the market price the producer receives far more volatile. The actual production and consumption of grain world wide is pretty stable. Yet the price gyrates all over the place. And you can’t even say that this price is a market signal to produce more or less because crops take months to produce, and once they have been planted that production is set in stone so it doesn’t matter if the price goes up, you can’t plant any more. And I suspect the same applies to coffee, probably even more so. You can’t just up coffee bean production overnight, the trees the beans grow on take years to get to production size. So if the price of coffee doubles (say) and a producer thinks ‘Hey lets plant some more trees!’, by the time his new trees have reached the time they can produce anything the price may have crashed, and he’s out of pocket. So chances are they don’t respond to higher prices with extra production, and if prices crash they still have to sell their output because its their only source of income. The grain off my farm gets sold whatever the market price is, because there’s no income otherwise.
What food producers need are prices that don’t wildly gyrate, that they can rely on year in year out, so that they can make plans over many years. Having bunch of speculators making fortunes from futures trading doesn’t help them at all.
Pendantry requires to point out that Coffea species aren’t trees. They’re bushes or shrubs.
They simply haven’t got it in them to grow a proper trunk.
The “trees” you see them sometimes as are the result of careful pruning of one or two early branches until they get to the desired height.
Same with whales. Some people think they are fish. When in fact they are insects.
Pendantry forces me to point point out that Tim wrote “peculators”, those who steal from their employers.
Sure it’s zero sum among the speculators.
The brokers get a shaving in commission on every trade. I’m not sure why he isn’t complaining about them.
Maybe there’s too many, and they might provide him money somehow.
Or maybe that’s tomorrow’s jeremiad.