Coffee’s Volatile Ups and Downs

By Mark Pendergrast, Author of Uncommon Grounds: The History of Coffee and How it Transformed Our World

The coffee market has always been volatile. Rumors of Brazilian frosts cause price hikes, while surprisingly large harvests produce dreadful price declines, along with misery for farmers and laborers, trouble for exporters and importers, and challenges for roasters and retailers.

Market forces, complicated by nature and human greed, have resulted in extended cycles of boom and bust. Since coffee trees take four or five years to mature, the general pattern has been for plantation owners to clear new lands and plant more trees during times of rising prices. Then, when supply exceeds demand and prices fall, the farmers are stuck with too much coffee. Unlike wheat or corn, coffee grows on a perennial plant, and a coffee farm involves a major commitment of capital that cannot easily be switched to another crop. Thus, for another few years, a glut ensues. The effects of plant disease, war, political upheaval, and attempts to manipulate the market complicate all of this.

As the coffee industry boomed during the 1870s, with international trade becoming more feasible through the addition of railroads and steam ships, large importing firms made huge profits, but at substantial risk. One syndicate of U.S. importers dominated the coffee scene, comprised of three firms known as the Trinity: B.G. Arnold and Bowie Dash & Co. of New York, and O. G. Kimball & Co. of Boston. The Trinity was headed by B. G. Arnold, known as “The Napoleon of the Coffee Trade.”  For ten years, according to a contemporary, Arnold had “ruled the coffee market of this country as absolutely as any hereditary monarch controls his kingdom.”

As vast amounts of Brazilian beans began to flood the market, the Trinity had difficulty holding so much of the available stock that they could demand favorable prices. They bought up Brazilian beans in a desperate bid to boost prices, but in December of 1880, the dam broke, and coffee prices plummeted.  Kimball died suddenly, an apparent suicide. The coffee market suspended entirely, producing “a record of loss and disaster such as never was experienced before in the coffee trade in the United States,” according to a contemporary expert.

Some who had been among the worst hit by the ruinous 1880 collapse decided to begin a coffee exchange. Though complex in execution, a coffee exchange is a simple concept: a buyer contracts with a seller to purchase a certain number of bags at a specified time in the future. As time goes by, the value of the contract changes, depending on market factors. Most real coffee men would use the contracts as hedges against price changes, while speculators would provide the necessary liquidity, since every contract requires a willing buyer and seller. While a speculator may profit, he may also lose his shirt. Essentially, they provide a form of price risk insurance for coffee dealers.

The exchange was duly incorporated on December 7, 1881, exactly a year after B. G. Arnold & Co. went bankrupt, inaugurating what we now know as the C market for arabica green bean prices. For quite some time, no one trusted the exchange, but eventually it became a frenzied scene of buyers, sellers, and speculators yelling and screaming at one another in the pit. Rather than discouraging attempts to corner the market, however, the exchange only added new wrinkles to the power play, as the ticker tape became the heart-stopping center of attention, spitting out price symbols. The boom-bust coffee cycle commenced, and it has yet to cease.

In ensuing years the coffee drama repeated itself many times, with rumors of over- or under-production, war, disease, and manipulation. In 1904, novelist Cyrus Townsend Brady penned The Corner in Coffee, a melodramatic tale of love, betrayal, bears, bulls, and coffee speculation. He conducted research by interviewing coffee dealers, brokers, and members of the Coffee Exchange. “I acquired enough information about speculation in coffee to cause me to make a solemn resolution never to touch it except as a beverage,” Brady wryly noted in his preface. In a dramatic passage in the novel, he wrote, “The corner was breaking, it was broken!…Around the coffee pit pandemonium reigned. It was the centre, the vortex, of a seething maelstrom of passion. One sale succeeded another, and the market was going down. Down, down, down!…Screaming men were frantically shaking their nervous hands aloft…Clothes were torn, a man fell and was trampled by the maddened crowd…Coffee fell 20 cents a pound in two hours.”

The volatile price of coffee has combined with politics to produce U.S. Congressional hearings and public outcry every time the price of coffee has gotten too high. In 1912, as German-American importer Hermann Sielcken helped the Brazilians stockpile excess beans, the price went up, and Sielcken was called to testify. He was asked, “Then the fact that the price of coffee has gone from 5 cents a pound to 14 cents a pound has not anything to do with the fact that you gentlemen kept these millions of bags off the market?” Sielcken replied, “Not that much,” snapping his fingers. He was exaggerating, but he was probably correct that the fundamentals underlying the boom-bust cycle underlay the price movement.

The same kind of Congressional hearings took place in 1950, 1954, and 1977, during times of high coffee prices. Politicians postured and accused Communists and coffee men of manipulating the market. In 1950, Colombian coffee man Andrés Uribe eloquently testified in defense of higher coffee prices.  “Latin Americans generally have been profoundly disturbed—even shocked,” Uribe told the committee, “that the national integrity of their countries has been impugned; that they have been accused of gouging; of defrauding the American consumer, of engaging in plots and cabals.”

Uribe went on to tell me, “Gentlemen,” he said, “When you are dealing with coffee, you are not dealing only with a commodity, a convenience. You are dealing with the lives of millions of people.” He paused for emphasis. “We in Latin America have a task before us which is staggering to the imagination—illiteracy to be eliminated, disease to be wiped out, good health to be restored, a sound program of nutrition to be worked out for millions of people. The key to all of this…is an equitable price for coffee.”

His words ring true to this day, but the U.S. elected officials ignored him.  If coffee were corn, a product produced domestically in large quantities, it is unlikely that complaints about price swings would produce such protests, but people in developed markets have come to expect relatively cheap goods from the tropical, developing world.

The Coffee Exchange for Arabica beans has gone through several name changes and mergers over the years. In 1998, the New York Board of Trade subsumed it, along with cotton, sugar, and cocoa. The exchange was housed in the World Trade Center, destroyed in 2001 by terrorist attacks  – coincidentally, during one of the worst bust cycles of history, dubbed the global Coffee Crisis, caused in part by overproduction of coffee in Vietnam. The NYBT then moved to the World Financial Center headquarters of the New York Mercantile Exchange, where it remains. In 2007, the NYBOT became a unit of IntercontinentalExchange.  Futures contracts for Robusta coffee are traded on the London International Financial Futures and Options Exchange and, since 2007, on the New York Intercontinental Exchange.

When coffee prices soared to $2.80 a pound on the C market in 2011, some coffee professionals asserted that the boom-bust cycle was over, that increased demand – from traditional consuming countries as well as producing countries such as Brazil and the Pacific Rim – would outstrip supply in the future. That has not turned out to be the case, as we are currently in the throes of yet another bust cycle, with the C market tumbling below $1.20 a pound, despite the current devastating impact of roya (the coffee rust fungus) in Latin America.

So what? What can we learn from the history of the boom-bust cycle? Philosopher George Santayana famously said, “Those who cannot remember the past are condemned to repeat it.” Those in the coffee business arguably do remember the past, but still it repeats itself in many ways. Because of the nature of coffee production, the fact that the beans are grown in so many countries, and the ways of the free market, the price swings appear unavoidable. Various quota systems and price controls have been attempted, mostly notably the International Coffee Agreement system of 1962-1989. It did help to moderate price swings, but it also produced a two-tier pricing system and widespread cheating. Few countries were ever happy with their quotas, and when the system collapsed as the Cold War ended, no one seemed to mourn its demise.

Nonetheless, another quota system may be necessary in the future. We can look back at the past, try to learn from it, and adjust accordingly. There are too many complex factors for me to predict solutions, however. How will global warming impact the trade in the coming decades, for instance? Fair Trade and other certifications have been one approach to ameliorate the effect of the boom-bust cycle, and the entire specialty coffee movement, seeking to get higher prices for higher quality beans, another. Yet neither of them has been able to stop the whipsaw ups and downs of the volatile coffee market.

Mark PendergrastMark Pendergrast is the author of Uncommon Grounds: The History of Coffee and How It Transformed Our World (Basic Books, 2010, 2nd ed) and other books.  He can be reached through his website,