18.10.02

COFFEE CYCLES "Are you puzzled why wholesale coffee prices have dropped so much? Are you even more puzzled why the fancy latte you had this morning is still so damned expensive?", asks Atlantic Blog. He refers readers to a classroom-friendly study done by Miriam Wasserman of the Federal Reserve Bank of Boston.

I see $100 on the sidewalk, for someone alert enough to deal with the following realities.

1. The demand for coffee (as is true of foodstuffs in general and addictive foodstuffs in particular) is price-inelastic.
2. The short- and long-run elasticities of supply for coffee (as is true of any crop that grows on trees) are also quite low.
3. Vietnam has become a major producer of coffee for export (we'll co-opt the last communist, and he'll sell us the coffee that's served at the signing).

Taken together, there is the potential for great instability in coffee prices. But a cobweb cycle? I kid you not: "In the current price slump, enough farmers will eventually be driven out of business that the price of coffee will likely rise again. That means another potential shortage is looming in the future, particularly for the higher-quality coffees that are more costly to produce. And this shortage may drive prices high enough to encourage overproduction once again.
"It is not clear whether, or perhaps more aptly, when, this damaging cycle will repeat itself. What is clear is that new and better solutions are needed to help diminish the human price, a price that is now being paid mostly by the most vulnerable workers in already poor countries
." Isn't it the case that for each cobweb cycle, there is an arbitrage strategy by which someone can profit and end the cycle?

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