Accepting the obvious consumer demand weakness that is expected to correspond to a poor economy for "luxuries" like coffee, do you have any guidance that you can impart me on how to learn more about the expected path commodities like this will fare over the next several years in response to what is happening now?
I work at a roastery, and know that prices are higher now, at least partially due to supply issues...but I suspect there are/will be more influences from the broader economic situation-- I'd like some insight on the deeper variables that an Austrian outlook might reveal...
My boss knows nothing about this aside from waiting for a dip and ordering. I want to give him more knowledge about the broader picture, but I'm unsure about how...
I hope my qustion is not overly broad-- and thank you for any comments you share---
Do I understand you correctly, You'd like to know, why the prices were going up and how coffee prices are going to develop over the following years?
You deal with coffee here as a commodity.
Yes sir--
I work at a mid-sized coffee company (~30 stores) and my department head is in charge of our green bean purchasing.
He has mentioned the average price per-pound has gone up quite a bit, and has no idea what to expect. It's all wait-and-see. He is educated about supply issues, but knows nothing about economics, and the broader influences on price.
I'm no expert, but I am a continuing student of Austrian theory and watch monetary manipulation with concern. I know that all of the countries we deal with (South American, Indonesian, African) through brokers have a lot of things affecting their prices other than crop size, quality, and weather. I want to find a way to explai this to him so he can see it as a valuable tool to save us money when making moves on purchases of quantity.
How can I explain to this man what to look for or specific places to go to give some better predictive knowledge about this kind of product? He's a great guy-- but he's just a coffee roaster-- I want to make him see why this specific industry is directly affected by the ongoing financial crisis and the broken system we operate under, to break him out of the simple wait-and-see approach he uses now.
A lot of people think (wish) economics can predict the future., it cannot – it can help us understand what MAY happen if different events or courses of action are taken. But there are too many variables to predict future events.
austrian economists predicted the bust part of the business cycle, because it is what happens after a boom – they knew that the business cycle had not been vanquished like has been stated so many times in the past. Even within “Austrian” circles there are those that see price deflation and those that see price inflation, both can make a good case.
So, sorry – no magic
If you like reading on this – check out The Black Swan: The Impact of the Highly Improbable.. or black swan theory on wiki
Good luck
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We must get them to understand that government solutions are the problem!
Matt: Well, you'll need to develop a detailed understanding of the supply of and demand for coffee. There is no shortcut. This means understanding where coffee is grown (in detail, not "South America, Africa and elsewhere", what can wipe out crops or give bumper crops, who buys coffee, who is buying less coffee, who is buying more, and so on.
Perhaps - as the Chinese economy begins to boom - their demand for coffee will go up as they work harder and longer. Perhaps, as the American economy collapses, demand for coffee will go down as it becomes a luxury good.
You also need to understand economic substitution. As the economic squeeze increases, some coffee drinkers will buy less coffee from a roastery but more in a can, rather than giving up coffee altogether. The commodity price of coffee might be less sensitive to such shifts in consumer demand for the final product (you still need the same amount of beans).
Note that commodity trading is a specialist occupation in its own right. While you have an advantage over the man on the street - being in the business - realize that a lot of what commodity traders have to know in order to make money has nothing to do with the business itself. What commodity traders are, in fact, doing that contributes value to the market is "smoothing out" the commodity price for people like your boss (and the coffee bean producers, as well). Thomas Sowell, in his book Basic Economics, mentions a friend of his who makes a living buying and selling soy beans. The man has never seen a soy bean in his life but he doesn't need to in order to be a successful soy bean speculator. So, being in the business is an advantage over the man on the street but it's only a marginal advantage.
Don't mean to be a wet blanket, just trying to say that there's more to it than meets the eye.
Clayton -
Thank you so much for the enlightening posts-- I value your perspective, and what you say makes perfect sense.
I find myself wanting to help my boss become aware of the "big" picture, but don't do a god job of explaining how it affects this particular business.
You're dead-on of course-- analysis of that market and it's unique habits is ultimately the best way to "predict" the future. I didn't mean to come across as looking for a magic shortcut :)
Thanks again, and continuing praise to all of you here helping educate novice supporters like like me--
Matt: Read Chapter 2 of Murray Rothbard's The Mystery of Banking, found here: http://mises.org/books/mysteryofbanking.pdf
The chapter is titled "What Determines Prices?: Supply and Demand. The example Murray uses is.......drumroll........COFFEE!
Hope that helps!
"La cuestión es siempre la misma: que el gobierno o el mercado. No hay tercera solución." -Ludwig von Mises