Coffee prices have been falling on international commodity markets. In August, the International Coffee Organization’s ‘composite indicator price’ fell to its lowest level since September 2009 (see). This reflects changes in demand and supply. According to the ICO’s monthly Coffee Market Report for August 2013 (see):
“Total exports in July 2013 reached 9.1 million bags, 6.6% less than July 2012, but total exports for the first ten months of the coffee year are still up 3.6% at 94.5 million bags. In terms of coffee consumption, an increase of 2.1% is estimated in calendar year 2012 to around 142 million bags, compared to 139.1 million bags in 2011.”
But despite the fall in wholesale coffee prices, the price of a coffee in your local coffee shop, or of a jar of coffee in the supermarket, has not been falling. Is this what you would expect, given the structure of the industry? Is it simply a blatant case of the abuse of market power of individual companies, such as Starbucks, or even of oligopolistic collusion? Or are more subtle things going on?
The following articles look at recent trends in coffee prices at both the wholesale and retail level.
Articles
Coffee Prices Continue Decline Equities.com, Joel Anderson (17/9/13)
Arabica coffee falls Business Recorder (19/9/13)
Brazil Launches Measures to Boost Coffee Prices N. J. Douek, Jeffrey Lewis (7/9/13)
Coffee Prices Destroyed Bloomberg (4/9/13)
The surprising reality behind your daily coffee: The CUP costs twice as much as the beans that are flown in from South America Mail Online, Mario Ledwith (23/9/13)
Coffeenomics: Four Reasons Why You Can’t Get a Discount Latte Bloomberg Businessweek, Kyle Stock (19/9/13)
Here’s who benefits from falling coffee costs CNBC, Alex Rosenberg (9/9/13)
The great coffee rip-off is no myth Sydney Morning Herald, BusnessDay, Michael Pascoe (23/9/13)
Monthly Coffee Market Report International Coffee Organization (August 2013)
Data
Coffee Prices ICO
ICO Indicator Prices – Annual and Monthly Averages: 1998 to 2013 ICO
Coffee, Other Mild Arabicas Monthly Price – US cents per Pound Index Mundi
Coffee, Robusta Monthly Price – US cents per Pound Index Mundi
Questions
- Why have wholesale coffee prices fallen so much since 2011? Are the reasons on the demand side, the supply side or both? Illustrate your answer with a supply and demand diagram.
- What determines the price elasticity of demand for coffee (a) on international coffee markets; (b) in supermarkets; (c) in coffee shops?
- Why has the gap between Arabica and Robusta coffee prices narrowed in recent months?
- Identify the reasons why coffee prices have not fallen in coffee shops.
- The cost of the coffee beans accounts for around 4% of the cost of a cup of coffee in a coffee shop. If coffee beans were to double in price and other costs and profits were to remain constant, by what percentage would a cup of coffee rise?
- How would you set about establishing whether oligopolistic collusion was taking place between coffee shops?
- What is meant by ‘hedging’ in coffee markets? How does hedging affect wholesale coffee prices?
- Explain the statement “If they have hedged correctly, Starbucks and such competitors as Green Mountain Coffee Roasters (GMCR) are likely paying far more for beans right now than current market rates.”
- What are “buffer stocks”. How can governments use buffer stocks (e.g. of coffee beans) to stabilise prices? What is the limitation on their power to do so? Can buffer stocks support higher prices over the long term?
- What are “coffee futures”? What determines their price? What effect will coffee future prices have on (a) the current price of coffee; (b) the actual price of coffee in the future?
Valued by private investors at more than $10 billion, the future listing on the stock market of Twitter, is an eagerly anticipated event. The necessary forms have been submitted to the US Securities and Exchange Commission (SEC) ahead of the initial public offering (IPO). Twitter will be looking to avoid the mistakes made by Facebook when they were first listed in May last year. Twitter has also announced its intentions to purchase MoPub, which is a firm specialising in mobile advert exchanges.
So, what will this listing mean for Twitter? The public will now be able to purchase shares in Twitter, in much the same way as you can buy shares in RBS or Facebook. The financial performance of Twitter will come under much greater scrutiny from its shareholders, who will be interested in short term returns and long term stability. Becoming a public limited company will attract investors and is likely to provide a much larger scope for expansion for Twitter. However, as yet no details have been released on a likely date for the flotation or on the prices we can expect.
One thing Twitter will be trying to avoid is a repeat of the problems that beset Facebook and indeed of the problems that other public listings have created for giants such as Google, Zynga and Groupon. When Facebook moved to public ownership, its share prices initially fell below its IPO and subsequently Facebook lost more than half its value. More recent success in mobile advertising has restored the fortunes of this company, but Goldman Sachs, which is handling Twitter’s transition will be looking to avoid a similar occurrence. As Sam Hamadeh from PrivCo (a firm that gathers data on private companies) said:
Twitter will learn from Facebook’s flawed playbook and do the opposite … Unlike Facebook, which waited too long to IPO (until its growth rate decelerated), Twitter will IPO at just the right inflection point: while revenue grows in triple digits.
Twitter is a rapidly growing business, but still has significant scope for expansion and this move to public ownership may be just the thing. Setting the right IPO and the right date will be crucial, as a multitude of factors can and do affect the price of shares listed on the stock market. Twitter will also need to ‘focus on doing the right stuff’ to make a success of the listing and its purchase of Mopub looks to be a step in the right direction. For now, all we can do is speculate, but if the launch is successful, then the founders of Twitter are likely to bring in hundreds of millions of dollars each.
Twitte files for IPO The Telegraph, Sophie Curtis (13/9/13)
Twitter plans stock market listing (see also) BBC News (13/9/13)
Twitter files for IPO, hopes to avoid Facebook’s mistakes Independent, Nikhil Humar and James Vincent (12/9/13)
Facebook shares close 11% below flotation price BBC News (21/5/12)
Twitter fails to answer key IPO questions Financial Times, Richard Waters and April Dembosky (13/9/13)
Twitter IPO: how much is it worth? The Guardian, Juliette Garside (13/9/13)
Twitter IPO: Tech float successes and disasters The Telegraph, Gabrielle Putter and Szu Ping Chan (13/9/13
Twitter to see ‘strong demand’ for share sale BBC News (13/9/13)
Twitter IPO: Firm in stock market launch bid Sky News (13/9/13)
Questions
- What are the characteristics of a public limited company? Are there advantages and disadvantages?
- Which factors affect (a) the supply of shares and (b) the demand for shares?
- What mistakes were made by Facebook when it made the transition to public ownership?
- How does advertising generate revenue for Twitter?
- How might you go about valuing Twitter or Facebook?
- Companies such as Twitter and Facebook have hundreds of millions of subscribers. Are there network externalities of this?
- Twitter is purchasing MoPub. What type of takeover would you classify this as?
The growth of emerging economies, such as China, India and Brazil brings with it both good and bad news for the once dominant countries of the West. With growth rates in China reaching double digits and a much greater resilience to the credit crunch and its aftermath in these emerging nations, they became the hope of the recovery for the West. But, is it only benefits that emerge from the growth in countries like China?
Chinese business has grown and expanded into all areas, especially technology, but countries such as the USA have been reluctant to allow mergers and takeovers of some of their businesses. Notably, the takeovers that have been resisted have been in key sectors, particularly oil, energy and technology. However, it seems as though pork is an industry that is less important or, at least, a lower risk to national security.
Smithfield Foods is a US giant, specialising in the production and selling of pork. A takeover by China’s Shuanghui International Holdings has been approved (albeit reluctantly) by the US Committee on Foreign Investment. While the takeover could still run into obstacles, this Committee’s approval is crucial, as it alleviates concerns over the impact on national security. The value of the deal is some $7.1bn, including the debt that Shuangui will have to take on. While some see this takeover as good news, others are more concerned, identifying the potential negative impact it may have on prices and standards in the USA. Zhijun Yang, Shuanghui’s Chief Executive said:
This transaction will create a leading global animal protein enterprise. Shuanghui International and Smithfield have a long and consistent track record of providing customers around the world with high-quality food, and we look forward to moving ahead together as one company.
The date of September 24th looks to be the decider, when a shareholder meeting is scheduled to take place. There is still resistance to the deal, but if it goes ahead it will certainly help other Chinese companies looking for the ‘OK’ from US regulators for their own business deals. The following articles consider the controversy and impact of this takeover.
US clears Smithfield’s acquisition by China’s Shuanghui Penn Energy, Reuters, Lisa Baertlein and Aditi Shrivastava (10/9/13)
Chinese takeover of US Smithfield Foods gets US security approval Telegraph (7/9/13)
US clears Smithfield acquisition by China’s Shuanghui Reuters (7/9/13)
Go-ahead for Shuanghui’s $4.7bn Smithfield deal Financial Times, Gina Chon (6/9/13)
US security panel approves Smithfield takeover Wall Street Journal, William Mauldin (6/9/13)
Questions
- What type of takeover would you classify this as? Explain your answer.
- Why have other takeovers in oil, energy and technology not met with approval?
- Some people have raised concerns about the impact of the takeover on US pork prices. Using a demand and supply diagram, illustrate the possible effects of this takeover.
- What do you think will happen to the price of pork in the US based on you answer to question 3?
- Why do Smithfield’s shareholders have to meet before the deal can go ahead?
- Is there likely to be an impact on share prices if the deal does go ahead?
House prices in the UK are rising and the rise seems to be accelerating – at least until the latest month (August). They are now growing at an annualised rate of nearly 4%. This is the fastest rate for three years (see chart below: click here for a PowerPoint of the chart).
This may be worrying for Mark Carney, the Governor of the Bank of England, who is committed to avoiding a new house price bubble. 
The problem is that, under the recently issued forward guidance, the Bank of England is set to retain the current historically low Bank rate of 0.5% until unemployment has fallen to 7%. But that could be some time – probably around two years.
So what can the Bank do in the meantime and what will be the consequences?
The following article from The Guardian looks at the options.
Article
How can the Bank of England prick the house price bubble? The Guardian, Patrick Collinson and Heather Stewart (30/8/13)
Data
Links to house price data The Economics Network, John Sloman
Questions
- What constitutes a housing price boom? Is the UK currently experiencing such a boom?
- What factors have led to the recent house price rises? Have these factors affected the demand or supply of houses (or both)?
- Who gains and who loses from rising house prices?
- Explain the policy adopted in New Zealand to curb house price inflation.
- Consider the merits of this option?
- Could borrowers find ways around this measure?
- Are there any other options open to the Bank of England?
Since the beginning of 2009, central banks around the world have operated an extremely loose monetary policy. Their interest rates have been close to zero (click here for a PowerPoint of the chart) and more than $20 trillion of extra money has been injected into the world economy through various programmes of quantitative easing.
The most recent example of loose monetary policy has been in Japan, where substantial quantitative easing has been the first of Japan’s three arrows to revive the economy (the other two being fiscal policy and supply-side policy).
One consequence of a rise in money supply has been the purchase of a range of financial assets, including shares, bonds and commodities. As a result, despite the sluggish or negative growth in most developed countries, stock markets have soared (see chart). From March 2009 to May 2013, the FTSE 100 rose by 91% and both the USA’s Dow Jones Industrial average and Germany’s DAX rose by 129%. Japan’s NIKKEI 225, while changing little from 2009 to 2012, rose by 78% from November 2012 to May 2013 (click here for a PowerPoint of the chart).
The US economy has been showing stronger growth in recent months and, as a result, the Fed has indicated that it may soon have to begin tightening monetary policy. It is not doing so yet, nor are other central banks, but the concern that this may happen in the medium term has been enough to persuade many investors that stock markets are likely to fall as money eventually becomes tighter. Given the high degree of speculation on stock markets, this has led to a large-scale selling of shares as investors try to ‘get ahead of the curve’.
From mid-May to mid-June, the FTSE 100 fell by 6.2%, the Dow Jones by 2.6%, the DAX by 4.5% and the NIKKEI by 15%. In some developing countries, the falls have been steeper as the cheap money that entered their economies in search of higher returns has been leaving. The falls in their stock markets have been accompanied by falls in their exchange rates.
The core of the problem is that most of the extra money that was created by central banks has been used for asset purchase, rather than in financing extra consumer expenditure or capital investment. If money is tightened, it is possible that not only will stock and bond markets fall, but the fragile recovery may be stifled. In other words, tighter money and higher interest rates may indeed affect the real economy, even though loose monetary policy and record low interest rates had only a very modest effect on the real economy.
This poses a very difficult question for central banks. If even the possibility of monetary tightening some time in the future has spooked markets and may rebound on the real economy, does that compel central banks to maintain their loose policy? If it does, will this create an even bigger adjustment problem in the future? Or could there be a ‘soft landing’, whereby real growth absorbs the extra money and gradually eases the inflationary pressure on asset markets?
Articles
How the Fed bosses all BBC News, Robert Peston (12/6/13)
The great reversal? Is the era of cheap money ending? BBC News, Linda Yueh (12/6/13)
The Great Reversal: Part II (volatility and the real economy) BBC News, Linda Yueh (14/6/13)
The end of the affair The Economist (15/6/13)
Out of favour The Economist, Buttonwood (8/6/13)
The Federal Reserve: Clearer, but less cuddly The Economist (22/6/13)
Global financial markets anxious to avoid many pitfalls of ‘political risk’ The Guardian, Heather Stewart (13/6/13)
Dow Falls Below 15,000; Retailers Add to Slump New York Times, (12/6/13)
Global market sell-off over stimulus fears The Telegraph, Rachel Cooper (13/6/13)
Nikkei sinks over 800 points, falls into bear market Globe and Mail (Canada), Lisa Twaronite (13/6/13)
Global shares drop, dollar slumps as rout gathers pace Reuters, Marc Jones (13/6/13)
The G8, the bond bubble and emerging threats BBC News, Stephanie Flanders (17/6/13)
Global monetary policy and the Fed: vive la difference BBC News, Stephanie Flanders (20/6/13)
The Federal Reserve’s dysfunctional relationship with the markets The Guardian, Heidi Moore (19/6/13)
Global stock markets in steep falls after Fed comment BBC News (20/6/13)
Federal Reserve’s QE withdrawal could signal real trouble ahead The Guardian, Nils Pratley (20/6/13)
Central banks told to head for exit Financial Times, Claire Jones (23/6/13)
Stimulating growth threatens stability, central banks warn The Guardian (23/6/13)
BIS Press Release and Report
Making the most of borrowed time: repair and reform the only way to growth, says BIS in 83rd Annual Report BIS Press Release (23/6/13)
83rd BIS Annual Report 2012/2013 Bank for International Settlements (23/6/13)
Data
Yahoo! Finance: see links for FTSE 100, DAX, Dow Jones, NIKKEI 225
Link to central bank websites Bank for International Settlements
Statistical Interactive Database – Interest & exchange rates data Bank of England
Questions
- Why have stock markets soared in recent years despite the lack of economic growth?
- What is meant by ‘overshooting’? Has overshooting taken place in stock markets (a) up to mid-May this year; (b) since mid-May? How would you establish whether overshooting has taken place?
- What role is speculation currently playing in stock markets? Would you describe this speculation as destabilising?
- What has been the impact of quantitative easing on (a) bond prices; (b) bond yields?
- Argue the case for and against central banks continuing with the policy of quantitative easing for the time being.
- Find out how much the Indian rupee and the Brazilian real have fallen in recent weeks. Explain your findings.
Coffee prices have been falling on international commodity markets. In August, the International Coffee Organization’s ‘composite indicator price’ fell to its lowest level since September 2009 (see). This reflects changes in demand and supply. According to the ICO’s monthly Coffee Market Report for August 2013 (see):
