Coffee: The Epic of a Commodity (34 page)

Classical economists formulated the “law of gravitation of prices.” The law finds expression in the relationship of the coffee-planter to his own product. How does the law run?

“The market price of a product tends always to gravitate towards the natural price.”

What does that mean? First of all, the natural price is the price determined by the cost of production. The market price, on the other hand, is the price that depends upon the number and the eagerness of buyers and sellers in the market. When supply is scanty, the market price rises. Thereupon, this high price acts like a magnet attracting capital and labour. The planters would be superhuman if their intelligence enabled them to resist what is as irresistible as gravitation. Since they do not resist, the result is inevitable. Increased application of capital and labour increases production, and thus augments the supply until there are more sellers than buyers, and prices fall. They fall so low that the returns do not suffice to pay the interest on capital and the wages of labour. Thereupon capital and labour are withdrawn from this field of production.

In European lands, a sort of inertia prevents a too rapid change between the opening and closing of factories and workshops, between the engagement and discharge of workers. But in tropical countries (where as yet, for the most part, social legislation and labour-protection laws are unknown) such fluctuations occur with amazing speed. Coffee has always been a ticklish commodity. Its troubles have not been merely due to speculators in the European market, but to the vagaries of the coffee-planting States.

The coffee-bean is smooth and slippery!

When the Arabs lost the supremacy they once held in supplying coffee to the world, the Dutch were, for a long time, the chief sellers of coffee.

Amsterdam—in this respect a suburb of Batavia—was, of course, the principal place to which produce was shipped from the Dutch Indies. Still, Rotterdam came in as a good second. How did the magnates of the Dutch East India Company dispose of their coffee? Mostly by auction. Thus, in 1712, the first shipment of coffee from Java, eight hundred ninety-four sacks, was sold by auction in Amsterdam.

In every auction there is an element of uncertainty, of surprise. If you go into a shop to buy half a pound of coffee priced at three shillings, and cannot get it because somebody else offers four shillings, you will feel yourself back in primitive times. Are there no longer any fixed prices? Actually, it need hardly be said, in retail trade that sort of thing does not happen. For half a pound of coffee, as for other goods, there is a specified price.

Wholesale trade is different. Here coffee is too great a dignitary to be controlled by rules and regulations. The uncertainties of sale by auction correspond to the caprices of coffee’s abundance, to the quantities that have been shipped and to the quantities that are stored in warehouses.

Through auctions, the magnates of the Dutch East India Company secured what they wanted, which was that their warehouses should not remain glutted with coffee. Many buyers came to the salesroom, and, amid the excitement of competition, paid higher prices than they would have paid if their heads had kept cool. Still, there were disadvantages in the system. When the attendance at an auction was scanty, lower prices might prevail than corresponded to the true state of the market.

The Dutch did not remain for ever the dictators of the market. Other colonies than those of the Netherlands came into the field. Towards the end of the eighteenth century, the French were the most important coffee-brokers. Shipments from the French Indies were sold by auction in Bordeaux. Then Havre, being much nearer Paris, came to the fore in this matter. After that, both Holland and France were outpaced by England as rulers in the coffee-market. After the close of the Napoleonic wars, London could dictate prices. Then, towards 1850, the New York market became no less important than that of London, for the United States had developed into a great consumer of coffee, absorbing a considerable part of the harvest of the new coffee-growing giant, Brazil. Now Hamburg came third in the list after London and New York. The rise of the Hamburg coffee-market to importance was closely connected with the extension of coffee-planting in Brazil.

In Hamburg, coffee was seldom sold by auction. There the produce exchange decided matters. There was a good reason for this, inasmuch as auctions of produce are difficult to arrange except as regards the products of the auctioning country’s own colonies. No doubt the example of London can be quoted to refute this dictum. The British empire produces much tea, and Britain consumes comparatively little coffee, but nevertheless large quantities of coffee were auctioned in London.

Why? Because London was the banker of the world. At any rate it was the banker of many coffee-growing countries. There was so much capital seeking investment in the London market, that exporters of coffee could reckon with fair confidence upon the disposal of their goods. Even if no English out-and-out buyers were forthcoming, there would be London firms to bid at auction in order to reship coffee to the continent. Moreover, London was the best place in which to sell coffee on commission. It was a place where banks would lend money upon shipments, so that the shipper could get his cash without waiting for the produce to be sold.

The earlier London auctions took place in certain coffee-houses, and were popularly known as “auction by candle.” The auctioneer had a lighted candle-stump on his desk, and continued to receive bids as long as the candle was burning. When it flickered out, the lot was knocked down to the last bidder.

During the nineteenth century these auctions assumed very peculiar features. No outsider could take a hand in the game, because he could not understand the dialect. The auction-room had a slang of its own. One who intended to become a coffee-broker, had to serve years of apprenticeship before he could “know the ropes.”

The coffee that was to be sold by auction was divided into lots, graded by quality and in accordance with the place of origin. Samples of each lot were exposed for inspection. Lists of these lots, containing a precise description of the wares, were sent round to the dealers. One who did not wish to bid in person at the auction would go to the salesroom, examine samples, roast small quantities, make coffee and taste it, and then give a purchasing broker his instructions. The actual buyer would make secret signs to the broker while the auction was in progress.

The genuine buyers were dealers who really wanted to get coffee in order to sell it again. But among the bidders were speculators who had no intention of buying, and only wished to keep up prices.

A produce exchange is a market where goods are sold without being actually on the premises. A coffee exchange is such a market, where coffee is sold, although there is no coffee there. It is a part of our manifold human nature that we are influenced by absent things. A man may have a peculiarly active faith—or the reverse—in things unseen, which are known to him only by repute. The rise and fall of prices in a produce exchange depends, in the last analysis, upon the workings of the human imagination.

A shortage in supply would, in any case, raise prices without the intervention of speculators. Still, in such circumstances, speculators seize their opportunity, combining with financiers to form a ring, in order to maintain high prices as long as possible. Before the ’seventies, when there were no submarine cables, few steamships, and the telephone had not yet been invented, such a ring would buy all the coffee in the market, and run up prices to a fancy level. Wholesale traders had to pay whatever the ring demanded. Its activities were only frustrated when unexpected shipments arrived.

In 1823, as already related, when the tension between France and Spain did not culminate in war so soon as had been anticipated, there was for a time such a fanciful rise in prices. Then the bottom dropped out of the market, and many of the speculators, being ruined, committed suicide. In the beginning of the eighteen-seventies, there was a similar swindle, when exaggerated tidings of a failure in the coffee-crop were disseminated. The price of coffee soared to a higher level than it had reached for fifty years. When large quantities of the staple now began to pour in from across the seas, the bears in the coffee-market seized their opportunity, laid a counter-mine, defeated the bulls, and forced the price of coffee below the figure warranted by the actual situation. In 1874, submarine cables were laid down from South America to New York and from New York to London. Thenceforward, the daily receipt of messages in the market modified the technique of speculation. Prices were regulated, not by actual shipments, but by expected harvests. News from Brazil concerning frost and rainfall or favourable weather while the crops were ripening came to play a great part in the game.

In 1888, an ill-conceived attempt to raise prices glutted Havre with supplies of coffee. Catastrophe was imminent. To avoid disaster, the bulls tried to enlist the aid of capital from elsewhere. The attempt took the form of trading in “futures.” This helped the speculators, with the aid of extraneous capital, to avoid having to unload their stocks of coffee at knock-down prices; but the result further showed that capital thus used was strong enough to distribute the produce of the harvest quietly and equably throughout the ensuing year.

The introduction of dealing in futures in the coffee trade was natural enough. Coffee, though used in much the same quantities throughout the year, is marketed in vast amounts at a particular season when the staple has been produced in distant lands. The function of commerce is to bridge differences in time and space. Capital could not fulfil this important function without the aid of the “time-bargain,” as dealing futures is sometimes called. The capital invested in time-bargains renders possible a coalescence of the funds of numerous gamblers who are not genuine traders, in the sense of performing some function in relation to the commodity, but wish only to earn profits. One who enters into a time-bargain contracts to sell stocks, shares, or a commodity such as coffee, for a stipulated price at a future time. But the speculator is not interested in a genuine deal with the commodity in question. He does not aspire to handle coffee, not being a real merchant; he wants only to earn a profit from his contract when the term expires—or before. He hopes to gain out of the difference between the price at which he has agreed to sell months ahead and the price which now rules in the market.

German merchants were slow to follow the example set them by Havre. But the Hamburg exchange had to introduce trading in futures when it saw, year after year, all the capital available for trading or speculation in coffee flow away to Havre.

Time-bargains were, indeed, originally devised, not to promote speculation, but to hinder it. With their aid, a prudent merchant could ensure himself against the risk to which he was exposed from future fluctuations in prices. These prices were unknown. By covering purchases or sales in the futures market, by “hedging” in fact, he was able to safeguard his position. But who were his partners in this matter? Speculators, of course! Since these speculators absolved the merchant from risk, they quickly gained control of the market.

Thus, very soon after the introduction of time-bargains into the Hamburg produce exchange, excesses of speculation ensued. There was an unhealthy swing of prices from high to low and from low back to high again, so that ten times as much “paper coffee” changed hands as there was coffee actually produced. That was in the year 1888, when sixty-one million sacks of coffee were bought and sold in seven futures markets, although the harvest amounted to only six million sacks. Gaming-houses where roulette was played had been closed, but people could gamble as much as they liked in time-bargains. What distinguished the time-bargain market from the gaming-house was that in the former the lowest possible stake was five hundred sacks of coffee, and that one could gamble without staking anything in hard cash.

It was no longer the traditional oscillation of the balance between supply and demand that now led to fluctuations in the price of coffee. These latter were determined by the shrewdness and the boldness of rival groups, the bulls and the bears.

“Overseas harvests and speculation,” writes Hans Roth, “affect the movements of the world markets as the winds affect the waves of the sea. Crests and depressions follow each other in a perpetual rhythm. Only when the wind blows against the current of the waters are the big waves broken up into the little ones of a choppy sea. If, on the other hand, the wind and the current are in the same direction, the waves grow higher. When the wind rises to a storm, the waves grow mountains high, and break at their crests. There you have an image of the contest between the bulls and the bears, of the great battles in the exchange. The wreckage after the storm takes the form of bankruptcies and repudiation of contracts.”

These kinds of storms, however, are seen only at or near the surface. The consumer, dwelling at peace in the depths, knows nothing of this turmoil on the surface. Were it otherwise, the consumption of coffee would soon come to an end.

Genuine wholesale dealers within any country are influenced only to a moderate extent by wild fluctuations in the produce exchange. There are other factors besides the price in the world market that determine the wholesale price of coffee in England, Germany, or France. Freightage, customs dues, and other overhead charges do not vary with the fluctuations in the original price of coffee, or at any rate they vary less extensively and swiftly, and the extent of the fluctuations is thereby damped down.

Besides, the trader must not expect too much from the consumer. The majority of petty buyers want to go on buying the kinds of coffee with which they are familiar and to buy them at the accustomed prices. To the unskilled eye, all coffees are alike, so the purchaser regards the price of a coffee as a measure and a guarantee of quality. The individual purchaser reacts against a rise in price by restricting his personal consumption. That is only natural. Oddly enough, however, he is also estranged by a fall in the price of coffee, if that fall affects only certain varieties of coffee, and not coffee in general. “Why is coffee cheaper?” you may hear him ask, with suspicion in his voice. Even when a low price is due to exceptionally large harvests or to other conditions affecting the world market, it is difficult to persuade the purchaser that anything but a decline in quality can account for a decline in price. The retail price must remain stable, if the retailer is to dispose of his stock successfully. The price at which he has bought will differ to a varying degree from the price at which he sells, since the price at which he buys depends upon vacillating conditions in the world market. The larger the difference between purchasing and selling price, the better for the dealer. At times, however, this difference becomes smaller and smaller, until at length the retail trader cannot make any profit. To help himself out of the difficulty, he sells inferior kinds of coffee at the old price. Of course the purchaser must not know anything about this. The retailer’s art lies in a skilful blending which will deceive the consumer’s palate.