Hedge funds getting high on coffee

Tim Jones, used to be policy officer

I don’t drink coffee. Good job as the price of coffee traded in London shot-up by 20 per cent in just three days at the start of this week.

What could possibly cause such a huge jump in prices? Maybe it’s extra demand for the stimulant after the lack of stimulation in the first week of world cup matches? Seems unlikely.

Has a massive catastrophe wiped out huge swaths of coffee production? Not that I have heard. World exports of coffee have fallen a bit between October and April. But this should cause a gradual rise in price, not a sudden spike.

The Financial Times reports that hedge funds have been betting on the price of coffee falling for the past two years. This betting or speculation has depressed the price of coffee, leading to lower prices for farmers, but a cheaper cuppa for you.

Earlier this week one unidentified trading company decided to call the hedge funds on their bets; they asked for them to sell some real coffee. This is a bit of a problem in the world of speculation, where contracts in food are continually traded without any food changing hands. The hedge funds didn’t have any coffee to sell, so they had to buy back contracts they had sold.

The result was a correction in prices. Coffee is now trading at closer to the value supply and demand would suggest, before the hedge fund speculators got involved.

The hedge funds may have got their fingers burnt on this occasion but they will be back. Regulations to prevent such speculation on food – and the sudden rise and falls in price they bring – are urgently needed. Someone should launch a campaign.