Coffee Prices vs. Gasoline Prices
Corrected for coffee price in $/kg.
In January 2008 coffee prices (per pound) and gas prices (per gallon) were about the same: $3 (see chart above). Coffee prices have more than doubled to $6.60 per pound, making the increases in gas prices to $3.80 in April look relatively minor. Over the last year, coffee prices have increased by 77% compared to the 34% increase in gas prices.
What's next? Congressional investigations to determine if speculators are driving up coffee prices? Allegations of "price gouging" at Starbucks? Investigations of "windfall profits" for "Big Coffee"?
Update: The units for coffee are now correctly stated in $/kilogram (not $/pound as originally labeled, I apologize for the mistake). The main point here is that coffee prices have increased by 77% over the last year, or more than twice the 34% increase in gas prices. The fact that the units are different ($/gallon vs. $/kilogram) doesn't change the fact the coffee price have increased twice as much as gas prices. No adjustment for inflation is necessary here because we are comparing two nominal prices.
55 Comments:
Sorry, I'm going to need the coffee prices in units meaningful to me. What is the per barrel price of coffee? I need at least one of those per day to function.
Oh, and I almost forgot....we should raise margin requirements to 70% on coffee futures and murder speculators in cold blood to prevent them bidding up coffee prices. Given the level of my addiction, my demand is pretty inelastic, which means that coffee is an essential commodity to which I have a right. It is unthinkable to leave this basic human right to be provided at the whim of some mythical free market - which we all know is manipulated by speculators (but only care when the price is high).
Maybe the dumb blonde Stossel had debating Don Boudreaux about oil trading a couple of weeks ago can do an expose on the inebriated coffee pit traders each taking a cut as they trade the same pound of coffee between them before it makes it to your kitchen cupboard. She will explain, with a completely straight face and in a cartoon voice, how a small group of traders at the New York Merc control extremely liquid markets.
We need to free ourselves from our addiction on foreign coffee from hostile nations like Kenya and Colombia! We must have coffee independence, dammit. Plant, baby, plant!
"We need to free ourselves from our addiction on foreign coffee from hostile nations like Kenya and Colombia! We must have coffee independence, dammit. Plant, baby, plant!"
*like*
Yes! Plant here, plant now!
I understand a US district court has ordered the Obambi administration to resume issuing planting permits after a moratorium was lifted, but so far no permits have been issued.
Pretty amusing.
I know an envionmentaloony who think we should grow ctps like coffee here, in environmentally controlled green houses. This is to prevent wasting energy on shipping and create/protect American jobs.
Maybe you should graph how many people have complained to Congress over coffee prices and gasoline prices over the same time period. What do you suppose that would look like?
One of the biggest problems when you represent someone else is realizing you do have a problem if the people you represent think they have a problem even if you do not think it is a problem or there is nothing you can do about it. You only have three choices here: 1) explain to the people you represent there is nothing you can do about the problem, 2) put on a show and attempt to de-escalate the problem, or 3) do nothing.
Two out of the three choices will probably get you beat in the next election. What would you do? We will keep getting what we are getting as long as we keep doing what we are doing. We get the representation that we ask for and that we deserve.
I thought coffee prices were in the dumper for years because too many farmers across the world were growing it. Either we have fewer growers (unlikely) or something is hitting their crops. Or it's an evil, caffeine-depriving conspiracy.
The difference between coffee and gas prices are that coffee at $3-6/lb is the raw green wholesale price, based per origin country. Gas at $3-4/gal is the retail cost.
"What's next?"
The BLS will release new "data" that coffee has only increased 2.1% in price. The new coffee (or its packaging) has improved features and is "better" than the 2008 coffee.
What do you get if the time frame for this graph is 10 years instead of 3?
There's no need to investigate Starbucks for price gouging. Of course they're price gouging. Because it's so, so good.
What do you get if the time frame for this graph is 10 years instead of 3?
If you go back to 1998, you'll see oil prices below $10/bbl. And that's in nominal dollars. In today's dollars it would be less.
OK coffee drinkers, do you want to break the back of the coffee market barons? Yes? Then you need to switch from Arabica to Robusta beans.
Look at the 30 year market for Robusta beans. It looks like these New York Robusta Coffee Market guys are clumsy, if they market manipulate.
BTW, a side benefit of cheap Robusta coffee is higher caffeine content.
This isn't a valid comparison, (all jokes aside) who drinks 20 gallons of coffee a week? Whereas just about everyone consumes 20 gallons of gas a week.
Jason,
A valid comparison would compare the unit price using the weight of the gasoline (about 6 lbs per gallon at 72 degrees Fahrenheit) and the liquid weight 1 pound of drinkable coffee would make.
People are going to bitch about the increasing gasoline prices regardless of how it is measured because people tend to be emotionally instead of rationally driven. Framing the issues that they choose and using the emotional tendencies of the majority of the voters are how politicians win elections.
In fact, there is a cartel devoted to keeping oil prices up--OPEC.
Unfortunately, this cartel is beyond the reach of US law.
Sadly, OPEC is aligned with thug states, such as Russia, Venezuela, Mexico, Nigeria et al, who manage to repress oil production through corruption and boobery. No free markets here.
The Oil Gods love monkey-thug nations.
The answer: Tax oil imports, untax domestic natural gas.
"The BLS will release new "data" that coffee has only increased 2.1% in price. The new coffee (or its packaging) has improved features and is "better" than the 2008 coffee."
absolutely.
then benji will post a link to the ludicrously flawed boskin report and claim that we are still overstating coffee inflation.
walt-
i don't think that is the right way to do a comparison in terms of assessing advocacy.
the relevant factor is how much of your consumption basket it is.
if you spend $100/wk on gas and buy a $10 pound of coffee one a week, a 10% hike in gas costs you as much as a doubling of coffee.
"Unfortunately, this cartel is beyond the reach of US law."
As is our military, which makes sure that cartel keeps exporting their oil for only one fiat currency - the U.S. dollar.
Ask Sadaam Hussein what happens if you try to accept Euros instead.
We need the monkey-thugs to export our debt.
Buddy
Your first link doesn't work.
"There's no need to investigate Starbucks for price gouging. Of course they're price gouging. Because it's so, so good."
If someone "gouges" all the time whether there's a shortage or not, is it really gouging? :)
Ron H, I just tried the link and it works -- but just in case, here is link to copy -> paste into your browser:
http://kaffee.netfirms.com/Coffee/robustavsarabica.html
morganovich,
I think my method is better to strictly determine aggregate inflation over time between the two products.
Your method would be superior at the individual level to measure consumption and product mix.
As always, the question is what do you want to measure, and are you using the correct metric to measure it.
"This isn't a valid comparison, (all jokes aside) who drinks 20 gallons of coffee a week? Whereas just about everyone consumes 20 gallons of gas a week"...
Well you know Jason I know I don't burn up 20 gallons of gasoline per week since I'm only 3 miles from work but I'm guessing that I come a lot closer to 15 gallons of coffee per week (in my case all weeks are seven days long and I could be working all seven days) consumed...
My brother who lives in Laredo has a standing order for me of 4 kilos (usually runs from $36 to $44 per order) of cafe de oro or bola de oro per month...
The price of coffee is getting steep...
This is one of the most meaningless graphs I've ever seen. Why measure pounds of coffee versus gallons of gas at the pump? How about a venti at SBUX v a gallon of gas, or a 100lbs of green coffee v a barrel of crude?
And what do the coffee units refer to? The C market (wholesale) price for high quality arabica is under $3/lb. I doubt you can find it in a store for $7, and you certainly couldn't find a pound of roasted arabica coffee on the shelf for $3 ten years ago.
Are the dollar figures even inflation adjusted?
Typical economist to put up a bunch of made up numbers and claim to find some deeper meaning in them.
BTW, a side benefit of cheap Robusta coffee is higher caffeine content.
Yes, but it tastes like you're sucking on your cat's ass. Some things are just not worth the savings.
I believe the big difference is that there actually is a shortage of supply in coffee, with world stockpiles being at their lowest level in around 60 years. This has been caused by the environmental impacts of global warming in coffee growing regions. Also, coffee prices are impacted by oil prices as well. Coffee needs to be transported, and oil prices have increased freight costs. The US dollar has also been in decline, meaning it takes more dollars to equal the same value when buying coffee. Last, drug dealers are buying coffee at extremely high prices as a way to lander money, driving up the cost of coffee as well. In contrast, there is no shortage of oil in the world economies at the moment, meaning oil prices are being driven up more through fear, of unrest in the middle east, and speculation, by investors that see oil as a way to make quick money. So, while both coffee and oil are going up in price a lot, the driving reasons behind the price increases are quit different.
Grace,
Couple things...
Both oil and coffee are expressed in US$'s in the graph.
Both oil and coffee need to be transported.
Is there some reason that coffee futures are more prone to money laundering than oil futures? I don't know of any.
You are right about one thing though - there is no shortage of oil.....at this price.
1. I've updated the post. Coffee prices are now correctly stated as $/kilogram, and not $/pound, and I apologize for the mistake.
2. No adjustment for inflation is necessary to compare nominal prices of two commodities (coffee and gas).
3. Even though the units are different, the main point was to show that coffee prices have increased by more than gas prices in PERCENTAGE terms. Because gas prices (per gal.) and coffee prices (per kg.) were both about $3 in 2008, it was easy to display both prices on the same scale.
Alternatively I could have converted both prices to a unit-free index scale, but the graph would have looked exactly the same.
Worried Dad: This was not intended to be a completely serious post, but follows on previous posts about price gouging, speculators, and windfall profits for OIL prices and OIL companies.
Here's the point:
When oil/gas prices go up (e.g. by 34%) we have Congressional and state-level investigations of: a) oil companies for "windfall profits, b) "speculators" for driving up oil prices and c) retailers for "price gouging."
To be fair and consistent, now that coffee prices have increased by 77% shouldn't we also have similar investigations?
How many cups in a gallon? 16 cups (2 cups in pint etc.)
How many cups of coffee does a pound of coffee make? In the range of 32 to 48.
So, anywhere from 2 to 3 gallons of coffee per pound.
Obviously hard to quantify, as compared to a gallon of gasoline.
Thus, coffee price per pound (or kilo) vs. gasoline per gallon is the logical comparison.
"To be fair and consistent, now that coffee prices have increased by 77% shouldn't we also have similar investigations?"
No. You don't look for trouble where none exists because enough trouble will find you anyhow. Ask one of the Congressmen walking around D.C. if he or she wants to publicly announce a series of hearings over increased coffee prices next week.
The 34% increase in gas prices hurt me financially much more than the 77% increase in coffee prices because my gas expense is a larger percentage of my weekly income. I assume more people are like me than not, but I don't expect Congress to be able to do anything about it.
I'm surprised you are using the word "fair" now.
Buddy R Pacifico,
If you want to be logical, you have to ask whether you need gasoline more than you need coffee. If the answer is gasoline, and you can eliminate buying coffee, your personal inflation rate for coffee is actually negative. In that case, you take the savings from not buying coffee and apply that to your gasoline purchases and your standard of living is not affected.
Your chart is still meaningless, as it compares wholesale unprocessed coffee to refined gas at the pump. You might as well compare the price of gas to the change in google hits for Lady Gaga.
But back to your question: Is something beyond supply and demand behind the recent spike in wholesale coffee prices? Howard Schultz thinks so: http://tinyurl.com/6am43lo
However, there are important differences between coffee and oil.
Coffee is not a simple commodity. There are several grades of arabica and robusta, and many companies mix them depending on price. It takes several years for a coffee tree to begin to produce, and can last for over twenty years. So a farmer cannot respond quickly to price signals. Some 25 million farmers grow coffee, although a handful of roasters dominate global distribution (an oligopsony). Finally, a consumer can purchase coffee in several ways, from buying it in bulk and brewing at home, using a K-cup brewer, buying at a cafe, or getting a fancy beverage.
Oil is a classic commodity. Once refined, a consumer gets it from the pump, and one brand is the same as another. Here, you have a few major producers and a small number of distributors (closer to an oligopoly).
Now classical economics says that when you are selling a commodity, in a perfectly competitive market, the price should be close to the cost of production, and profits should be very small. Yet, as we know, oil company profits have been at record levels lately. That should indicate that a closer look is warranted, at the least.
With coffee, a more interesting question is whether speculators actually play any useful role at all. Speculators don't care about coffee, they are just placing bets -- usually leveraged with other people's money. The classic argument is that they help minimize price swings and help producers and consumers hedge. Yet, the history of coffee price booms and busts is that the speculators do neither. All they do is capture rents that do nothing to help anyone who actually consumes, grows, or sells coffee.
Worried Dad,
I think you should perhaps be much more worried about the price of anti-anxiety medication than the price of either coffee or gasoline. I'm worried about how worried you are.
Here, you have a few major producers and a small number of distributors (closer to an oligopoly).
You are very wrong. There are many many upstream, midstream and downstream companies in the United States alone. Just because you've only ever heard of the large integrated companies like Exxon and BP doesn't mean the others suddenly don't exist. The oil industry is very competitive and it is by far not an oligopoly.
Also, in the same way that a coffee grower can't just plonk a tree in the ground and start producing coffee beans the minute he sees prices rise, oil producers and refiners can't ramp production and refining up quickly in response to rising prices. The lead time for a well is years and regulations make it virtually impossible to add refining capacity.
Yet, as we know, oil company profits have been at record levels lately.
The absolute profits are not what's important. Profit margin is what counts. In terms of profit margin, even in record years, oil companies are very much in line with other industrial companies.
In the mid to late 1990's, oil prices dropped - at one point to below $10/bbl, which would be even less in today's dollars. Independents were going out of business left and right. It was a horrible time for the industry. The profit margins were negative! They were losing money. For years. It was a truly dismal time for them.
Do you not suppose that if they had all this power to manipulate price, the oil companies would have manipulated it upward then?
OPEC tried, but it couldn't cut production enough to raise the price (you can't just cap wells willy nilly because there's a fairly high probability you won't be able to bring back the production later).
And you you think that speculators are screwing up coffee prices, you should see what the lack of speculators is doing to onions!!
Methinks
"Yes, but it tastes like you're sucking on your cat's ass. Some things are just not worth the savings."
Thank you for the colorful comparison. You have doubtless saved many here from what sounds like an unpleasant experience, as they search for ways to describe something equivalent to the taste of Robusta coffee.
I have no experience with either Robusta coffee, nor my cat's ass, but I suspect based on your helpfull description, that I should avoid both, and I will.
Thank you
Normally, speculation plays an important role by keeping future supply and demand in equilibrium by making price changes today based on perfect information (for example, when speculation drives up prices, demand falls and supply rises).
I agree, the coffee market should be investigated rather than the oil market, because it seems more likely there is more illegal manipulation in the coffee market.
Ron H.
I consider it a matter of public service! Since smell and taste are closely linked, I feel my assessment is fairly accurate :)
Although, I was just reminded that there is a very expensive coffee that is roasted after first passing through a cat's digestive system. Literally, cat crap coffee. So, what the heck do I know?
@Methinks: obviously you haven't seen my blog: reallyworried.blogspot.com
You really think speculators are unable to manipulate prices? You might want to read the news: http://tinyurl.com/422ffvh.
You might be interested to learn how a single speculator in Europe bought the continents entire stock of cocoa last year. http://tinyurl.com/42e2ern
@Mark: Your graph shows both relative and absolute change, so changing to real dollars is warranted. You are saying "wow, look at these big price changes over time" as well as "these two things BOTH have big price changes". Since it's just a three year period and inflation has been low, it won't make a huge impact, but it would flatten out the lines a bit.
As to the question of why no one is calling for investigations into the spike in coffee prices (much more dramatic if you extended the chart a few more years back), is because coffee is not as strategically important as oil is (although I personally would cease to function without coffee), it is a much tinier share of the average consumer's household expenditures, and, as I've already noted, coffee companies have not passed along the full cost of the commodity price increase to consumers as have oil companies (which is why your chart is less than informative). There is also a long history, including many recent cases, of actual market manipulation in oil by speculators.
But don't let your ideology get in the way of the facts.
No, Worried Dad, I do not read your blog. If your posts here are any indication, I haven't been missing anything.
The CFTC, the SEC and, in fact, every regulatory body will examine, charge and generally make fuss whenever they find it politically necessary. They can do this because people like you don't understand how markets work.
Your cocoa article was particularly funny. I don't have the desire to explain basic economics to you right now because I've done it a million times to people just like you and it has been a complete waste of time. You are very ignorant and very certain. Not a great combination and one that lowers the expectancy of your ability to learn.
"I don't have the desire to explain basic economics to you right now because I've done it a million times to people just like you and it has been a complete waste of time. You are very ignorant and very certain. Not a great combination and one that lowers the expectancy of your ability to learn."
Methinks:
Economics is only 1/3 of the social, political, and economic dynamics that drive our lives. Make sure you don't key on that 1/3and ignore the other 2/3 just because you do not like them or understand them. You might be calling other people ignorant when you are ignorant yourself.
Methinks
"Although, I was just reminded that there is a very expensive coffee that is roasted after first passing through a cat's digestive system. Literally, cat crap coffee. So, what the heck do I know?"
I can only conclude that there are actually people who love the taste of their cat's ass, and will pay dearly for a similar experience when their cat isn't available.
"Economics is only 1/3 of the social, political, and economic dynamics that drive our lives. Make sure you don't key on that 1/3and ignore the other 2/3 just because you do not like them or understand them. You might be calling other people ignorant when you are ignorant yourself."
Of course, this being an economics blog, I would expect the focus to be mainly on that 1/3 that involves economic, wouldn't you?
Have you followed the links provided, and judged their quality for yourself? While it might be harsh, the criticism doesn't seem entirely inaccurate.
"Of course, this being an economics blog, I would expect the focus to be mainly on that 1/3 that involves economic, wouldn't you?"
Yes, and that is the problem. If you are a hammer, everything looks like a nail. You need economics' rational man to make most economics' theories work; however, society tends to operate more like Simon's bounded rationality man in real life. As goofy as our political system is, it does tend to make a huge difference in our lives that cannot be ignored or wished away because we don't understand it or like it.
Economics has to work within the context of a bigger puzzle. You can't see the picture without all the pieces because piece exposes nothing but a glimpse of the overall picture.
I could not get the tynurl links to work, and the reallyworried blog has nothing I care to know about. I agree with you that most Carpe Diem readers are not likely to find a reason to want to return to that blog more than once.
Ron H.,
LMAO!!
Walt,
I'm sure Worried Dad isn't ignorant about everything. I'm almost certain he's quite knowledgeable about many things I know nothing about. I was talking only about basic economics.
"I was talking only about basic economics..."
Also how regulators operate and how commodities markets work.
@Methinks:
I was deeply pained to learn that I have joined the ranks of those lessor minds who are not able to comprehend your genius in the field of economics.
It's a wonder that I'm able to help run a successful company that buys and sells millions of pounds of coffee, cocoa, and other agricultural commodities a year without having the slightest idea about how commodity markets work --and I even got a Masters in agricultural economics from an Ivy League school without learning the most basic economics (I'll ask for a refund right away).
It's truly astonishing that people might even consider that speculators try to (and occasionally succeed in) illegally manipulate markets.
Maybe the guy in this story should retract his confession: http://www.baltimoresun.com/business/bal-bz.enron06aug06,0,2325994.story
I can't believe I actually argued that oil isn't a free market (Note to OPEC: Methinks says you are wasting your time!).
The links need to be copied and pasted. Sorry, I don't spend all my waking hours posting on blogs like you, so my html skills are lame.
And the mention of my blog was only to explain my handle. But who cares?
Anyway, thanks for setting me straight. I only posted on this blog to point out some whopping errors that the author had made in his graphs. He even made those corrections, but given what an idiot I am, you should double check the math.
I'll get back to my job in the real world (in coffee! go figure!) and leave the important work of commenting on blogs and discussing cat assholes to the experts like you.
Wow, Worried Dad. And you still don't understand markets at all? I wish I could say I'm surprised, but I merely find you more disappointing.
These are basic concepts that don't require genius to understand.
BTW, I believe Ron H. was referring to how lame the stories in all of your links were, not that the way you posted them was lame. So, I think you might have a reading comprehension problem as well. You may want to look into that when you're done worrying about the bogey man.
"You need economics' rational man to make most economics' theories work;"
Actually, economics theories that actually work as advertised, are those that describe human nature, and explain how actors are likely to operate in an economy.
The tinyurl links are to commentaries at news outlets. Not what we usually consider serious references.
I was just surprised that you mounted such a spirited defense of a comment thet pretty much missed the point.
Ron H.
As a college instructor, I always have a problem with anyone calling someone else "very ignorant". I am in the process of helping to hire instructors for a new bachelor degree program. and I can assure you I will not be approving any "Methink's" instructors.
Concerning economics theories:
The challenge in any field is understanding and bridging the gap between theory and practice and being willing to adjust either one as necessary. Simple can be good, but we have to be careful we don't oversimplify just so we can understand. It is a very complex world we live in.
Walt,
Allow me to point out the obvious: I'm not an instructor and this is not a classroom. If the unvarnished truth offends you, tough.
Ron H.
The articles were lame not because of the source, but because of the content. Each was provided as proof of manipulation, none of the content showed any manipulation.
One guy bought a lot of cocoa. Hope he likes hot chocolate because the minute he starts to sell it, the additional supply will bring down the price of the commodity.
Another took physical delivery of oil and then sold futures against it. That's called hedging. The article points out that traders made money on the short futures position without ever mentioning that they lost on the long physical position.
It's possible for traders to move prices in illiquid markets (oil is very large, cocoa is tiny - the whole European market was only $1B, the market cap of one not so big company in America). But, there's an ocean of difference between manipulation and moving prices.
It may be possible with enough money and in an illiquid enough market to use futures to try to manipulate prices for a while. I guess. It's a pretty risky strategy, IMO. But, not when you're taking physical delivery (as cocoa man did).
There's a lot of market manipulation, but all successful manipulation is government manipulation. I'm sure individuals have tried, but it's very hard to do. You need to have a bottomless pit of money (not "a lot", a bottomless pit) and the ability to change the rules to successfully manipulate.
Maybe I'm wrong, but I don't think these are such difficult concepts. I remember an undergraduate professor of finance bringing in articles like this to force us to think about markets. And you know, If an undergrad can do it....
"Allow me to point out the obvious: I'm not an instructor and this is not a classroom."
I am very glad to hear that. Maybe it's not that you don't have the desire to teach someone as you stated, but you don't have the ability.
"If the unvarnished truth offends you, tough."
Right back at you.
"And you know, If an undergrad can do it...."
But only 27.5% of the U.S. population over 25 has a bachelor's degree (24.5% in Michigan) (Source: U.S. Census Bureau), so what's your point?
LOL! So, what's your point, Walt? You want to get into a flame war with me? Okay. I'll bet that'll impress the administration at the junior college where you're an instructor.
Methinks
"The articles were lame not because of the source, but because of the content. Each was provided as proof of manipulation, none of the content showed any manipulation."
I agree. Perhaps my wording was poor. I just assume that those sources will generally have lame content, but I'm sure that's not ALWAYS the case.
But in this case...
Methinks:
My point is you call someone else "very ignorant" because they don't agree with your point-of-view about "facts" you have not established while claiming you have the "unvarnished truth". You then infer everyone can understand non difficult concepts because of undergraduate training that only 1 out of 4 U.S. adults over the age of 25 has finished.
I don't really care who I impress. If I did, I would probably hang out somehwere else besides here because these guys are hard to impress :-)
It has been a convenient excuse for politicians to accuse speculators on driving up commodity prices.
The truth is, without speculators, there will be no liquidity, and commodity price will be more volatile. I am sure that Starbucks CEO won't be happy seeing price of arabica shoots up in few minutes of trading due to lack of liquidity.
Politicians may impose strict regulations or choke speculator by forcing a margin rise. But lots will follow their actions.
Let's don't forget that during the 90's Starbucks acquired several interests of coffee growing in Colombia. Since then, the local entity in charge of controlling fair trade, has have multiple problems with Starbucks speculating on prices of Colombian Arabica. That will be worthwhile for the U.S congress to investigate. Another note, neither Kenia and Colombia are hostile nations to the U.S. On the contrary, the are stable democracies that ride alongside U.S policies.
Another note, planting coffee is not easy, there is a combination of soil and weather patterns that must be obtained. I will be even more expensive to reproduce them that to buy coffee from Kenia and Colombia.
Last one, Other countries like Europeans and some Asian do contribute to the increase of the price of coffee. Even though they pay up to $12/pound, most of that profit stays in the hands of the traders and not the hands of the growers. So, we must be careful before starting a witch hunt here. It would not be fair with the coffee growers.
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