A while ago I was commissioned by our company president, Lloyd Bernhardt to look into the current state of global commodity trading. Being far from an expert on the subject I turned to coworkers and of course the World Wide Web to educate myself on the subject at hand. As I fell deeper down the rabbit hole I was often shocked with my findings and how little attention the subject granted, given the degree of the consequences.
Green coffee prices have roughly doubled over the past year, which has put a huge strain on both Ethical Bean and the rest of the coffee industry. Global demand for coffee has risen, especially in developing nations, while climate issues have hindered supply. The golden question is; has demand increased and supply decreased to the extent that it warrants a double in prices? If not, then what other forces are at play? If you can’t relate to coffee prices think about the price of gas, as most of the same principles hold true for the world oil trade.
In commodity trading there are two distinct groups. Those that trade physical commodities in the traditional sense, and those that make trades with paper contracts trying to buy low and sell high for a profit without ever dealing with a physical product. The former are necessary in the market to take the other side of contracts entered by farmers and producers who want the security of a guaranteed price for their goods in advance. In the past speculation was highly regulated to ensure the market stayed in equilibrium – supply and demand determine price – and didn’t become distorted by paper traders artificially betting up prices. However, recent deregulation has dramatically altered the commodity trading landscape.
Commodities are our most basic goods, essential to our survival and way of life. The following paper explores the changes in who is now allowed to speculate on commodities, on what scale and the effects this has had worldwide.
Paper composed by Stuart Kerr, a University of Victoria business student currently in a co-op work term with Ethical Bean Coffee. Guidance and editing provided by Lloyd Bernhardt and Erin Mussolum.