In a previous episode, Coffee Economics with Karl explored the basic concepts of supply and demand, and price theory — i.e., the notion that supply and demand determine price.
The newest episode, led by Karl Wienhold of Colombian green coffee trader Cedro Alto, delves further into these concepts, exploring the fundamentals of why coffee prices change. Here’s more from Karl:
Have you ever wondered why, really, the coffee price changes? Last week we learned how supply and demand come together to determine the price of coffee (or of anything). This week we look at how shifts in supply and/or demand cause upward and downward pressure on price.
This is also a very basic and simplified explanation of an incredibly complex and nuanced subject, but needed as a foundation for further discussion. Understanding these relationships will allow us to evaluate events and potential events and understand how they are or would affect supply and/or demand and, subsequently, the spot price of coffee.
At the moment of this writing, the ICE base price for arabica for December futures contracts — a.k.a., the “C price” — was exactly $1.0700 per pound. According to Karl, it’s important to note that prices such as this are not set by some mad puppeteer.
“These changes in price are cold, robotic movements caused by the aggregate of millions of personal decisions going on every day. There is no Wizard of Oz behind the coffee price determining what the price is going to be one day or another,” Wienhold says in the video. “These are the natural forces that we have to understand and respect as we try to make real changes in how coffee is traded. If we ignore supply and demand, and the way equilibrium price is determined, we’re bound to fail.”
The full Coffee Economics with Karl playlist is available here. And here’s the latest: