Mar

21

 A couple of months ago I was trying to put together a container of coffee from Indonesia, and my experience is somewhat different from SBUX. I find that the "speculators" responsible for the very tight current supplies are the coffee producers themselves. Many farmers have seen prices going up and up, and they therefore hold on to their current supplies in the hope that they can get even more for them. If you do manage to buy some coffee you must be very careful that what you receive is what you tested because there is strong incentive for the farmer to mix in lower-quality beans. Thus it is very hard to put together a large order of high-quality beans. This situation will only rectify itself when prices start to decrease. In this part of the world, that may be around June or July when the new crop comes in. Buyers are now having to consider buying for their anticipated yearly needs at once and storing the beans. Of course, due to their heavy volumes, SBUX has been using forward contracts for a long time, so they have been partially insulated from price hikes.

Though I do not yet have much experience in this field, I do think that higher coffee prices are here to stay. The gross margins on coffee are pretty high, leading to an inelastic demand curve. There is more and more demand for "specialty" coffee, which sells for higher prices and is not price-sensitive. It is also interesting that pricing for Indonesian beans tracks very closely to the New York price.

Ken Drees writes:

If you do manage to buy some coffee you must be very careful that what you receive is what you tested because there is strong incentive for the farmer to mix in lower-quality beans.

An unscrupulous cantonese tea farmer in the late 1700s had the idea too: a very detailed account of tea and its trading, of how it was evaluated, graded and which trading houses bought which varieties was described. The usual cheating methods were illuminated for the reader-stale tea added to fresh tea, chopped willow leaves added for increasing bulk, additives of Prussian blue added for brilliant appeal.you needed a good Chinese point man at the cantonese port to ensure that what you bought was what was loaded onto your ship for the return trip.

From Otter Skins, Boston Ships and Chinese Goods by Gibson.

Craig Mee writes:

When looking at traditional gold mining in local areas of Indonesia, I noticed I could buy good physical 10% below spot, however this was unrefined, and no doubt paying the bro, and slippage would negate the edge in this case. Then with the added query of dealing size, and you really need another 15% off for "local" risk.

I spoke to local geo about one such query, about a new mining venture. He mentioned a company who had claimed the title got approval for mining (no easy task), shipped in all the machinery, and at the 12 hour, a man's brother appeared out of the forest waving a "title paper", and they had no choice but to pay him off.

It seems there is no better place for knowing your market and its participants.


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