NPR’s Uri Berliner is taking $5,000 of his own savings and putting it to work. Though he’s no financial whiz or guru, he’s exploring different types of investments — alternatives that may fare better than staying in a savings account that’s not keeping up with inflation.
My taste of the commodities market started with a headline I read a few weeks ago: Cooling Coffee Prices Hit A Three-And-Half-Year Low.
I like coffee. Most people like coffee. That’s not going to change. So maybe, just maybe, I could buy coffee low and sell high, not by hoarding sacks of actual coffee beans but with a bet on the futures price.
The futures market largely determines the price of the most basic commodities used in everyday life — oil, wheat, soybeans, corn, hogs, cattle, coffee and much more. Despite their significance, futures are a mystery to most people, including many investors and journalists. I caught up with Jack Scoville at the Price Futures Group in Chicago. He’s a futures broker who analyzes the market for agricultural commodities, including coffee. He ticks off reasons why coffee prices have tumbled.
“We’ve had a significant uptick in production,” he says. “When you look at Colombia, their production has increased. And Brazil has had just a whopper year.”
Add in Vietnam, which has quickly become a major grower, and you get the picture: coffee beans flooding the global market. Consumers around the world still like coffee but many have scaled back their spending. All of this helps to explain why the commodity price of green unroasted coffee, also known as the futures price, has fallen to around a $1.20 a pound from a recent high of $3.00 a pound in April 2011.
Coffee growers often participate in the futures market. So do big coffee producers. Farmers don’t like it when the price is low. Coffee producers don’t like when the price is high. A futures contract offers them a chance to lock in protection from price swings. Others are in the market simply as a bet.
It’s all done through contracts on the futures exchange. A price is set for the delivery of coffee or some other product at date in the future. Buyers of futures contracts win if the price then goes up. Sellers win if the price goes down.
“If you really want to watch raw economics in action, come into the futures market. That’s where it is, even more so than the financial markets,” Scoville says. “These are commodities. This is where life starts.”
A Speck Of A Speculator
Before my visit to Chicago, I invest $227 in a fund that’s linked to the futures price of coffee.
When it comes to coffee or other commodities, there are hedgers — like farmers and roasters — and then there are others who never touch a coffee bean. They are called speculators.
Scoville provides a definition of the latter group. “Well, a speculator is most of the public, most anybody that would be interested in trading that is not directly involved in using the underlying product itself.”
So my small investment makes me a speck of a speculator. Before I leave, I ask Scoville what it would take for coffee prices to come back up and make my bet pay off. It could be crop disease, he says, and weather in the Southern Hemisphere.
“Is there a chance we could see a freeze in Brazil? Absolutely,” he says. “Would that affect their production? Absolutely. Would that affect price? Probably.”
Scoville points out that prices often pick up when roasters buy extra coffee in advance of the winter season. People drink more coffee when it’s cold. And over the long term, there’s always the world’s largest market. “You know, we always look to China,” he says. “They’ve become a major consumer. … There’s a lot of people in China, and they have discovered that coffee tastes good.”
The idea that coffee tastes good is one of the reasons I decided to make this bet in the first place. So I went to a place where they have been roasting beans and selling coffee for a long time. Gillies Coffee has been in business in New York since 1840. Donald Schoenholt runs the place. It’s been in his family since the early part of the 20th century. And he really knows the coffee business.
“Everything in my life is coffee beans, relates to coffee beans” Schoenholt says. “My dad used to take me in with him to help out in the business, so to speak. ‘Come, you’ll make coffee today.’ And we would go to the coffee business instead of school.”
With roasting machines roaring in the background, Schoenholt brings me to the green coffee room of his coffee factory. Burlap and jute sacks filled with unroasted coffee from all over the world are stacked around the room.
Schoenholt describes himself as a coffee control freak. He can control the quality of the beans he buys, what country they come from, their country of origin, how they are roasted and packaged. But he can’t control the price. “Coffee is something that is like a roller coaster in terms of values,” he says. “And it has always been that way.”
In some ways, Schoenholt operates outside of the futures market. The specialty beans he buys are different from the commodity coffee traded on the exchange. He doesn’t hedge in the futures market. And yet the futures price still has a big influence on his costs. “It means buying in small quantities of very special things for a very special clientele,” says Schoenholt. “And that is the way that we buy.”
I ask him how he protects himself from big price fluctuations. “I do a lot of prayer,” Schoenholt says. And that’s coming from a man who has worked in the business for half a century.
My $227 wager on the price of coffee could be in for a bumpy ride.