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The coffee market has been very strong in recent years,
however, coffee bean prices have been highly volatile.
In 2013, coffee prices fell by 20 percent.
Since 2011, coffee prices have fallen by almost 50 percent,
the steepest drop in over 10 years.
Coffee, in fact, is one of the world's most heavily traded commodities
second only to oil in trading volume.
Why are coffee prices so volatile?
A story on NPR this morning attributed this volatility
to speculators, greedy wholesalers, and even greedy farmers
trying to make a buck by adjusting their planting
to supply and demand, according to the commentator,
exacerbating volatility in the coffee market.
Actually, speculation has the opposite effect.
Speculation tends to decrease volatility.
If coffee farmers anticipate that future coffee prices will be high,
they begin to expand their output now so that that future demand
can be met without a strong increase in prices.
Likewise, coffee buyers, if they anticipate the coffee prices
will be higher in the future will begin to buy coffee now,
increasing the price today and making more coffee available to be released to
the market in the future
when the demands were high. In general, speculation is good for the market;
middlemen, far from being parasites who make profit at the expense of the rest
of us,
help to ensure the smooth flowing of markets.
And that's true whether the market's be commodity markets, financial markets,
or other markets. However, one of the things that the NPR reporter failed to note
is that the reason that coffee prices have fallen so much
in the last couple years is because the large increase in supply,
not a response to natural market conditions,
not an attempt to equilibrate supply and demand in the market,
but rather a response to government incentives.
Coffee, like other agricultural commodities,
is heavily subsidized in most governments. The largest single exporter
of coffee today is Brazil,
which gives very strong subsidies to domestic producers.
Part of the rationale for this is a view that
markets for agricultural commodities are somehow different from other markets
and that, yes, maybe free markets can produce shoes
or automobiles or microcomputers but that food production is different
and that the government needs to intervene to assure a safe supply food,
a secure supply food, and so on. This is the rationale
behind farm policy in almost every developed country
and many developing countries as well. Where agricultural production is heavily
subsidized
and regulated by the state. Now, it's true
that producing coffee or producing any agricultural commodity
is not easy. It's very difficult. There are a lot of uncertainties associated
with the weather,
associated with diseases, associated with fluctuations in global markets
that are often beyond the coffee producers control.
But, if you think about it, this is no different for producing any other
commodity
on a free market. They're always uncertainties;
there many things outside the entrepreneurs control. What's different
about farming?
Indeed the sorts of uncertainties that farmers, like other entrepreneurs,
have to deal with
can be handled by insurance programs. The free market can insure against crop
failure,
the free market can insure against price fluctuations in agriculture
just as insurance markets work for any other good or service.
There's nothing unique about agriculture in this case
just as as we've discussed on previous Mises Views,
there's nothing unique about health care or education
that makes it where the free market cannot supply
the right amount, cannot ensure the right quality,
cannot somehow equilibrate supply and demand.
So what should government planners do to take care of the agriculture sector?
What should government do to make sure we have the right amount of coffee or
any other commodity?
Government should do nothing at all. Government should allow the free market
to determine what is produced, how much is produced,
how it's consumed, how it's traded, who participates in the market
and so on. Let's have a free, vibrant, and robust market for coffee beans
that's the best way to assure that the coffee market works the way it should.