11 May 2011

Starbucks boss Schultz attacks high coffee prices

The current high price of coffee on commodity markets is down to “financial institutions orchestrating an unnatural acute rise” Starbucks Chief Executive Howard Schultz complains to Channel 4 News.

For many commentators Starbucks Chief Executive Howard Schulz is something of a poster-boy for global capitalism. As the boss of a chain of coffee shops that spans the world, the fact that coffee is currently at a 34-year high on world commodity markets is naturally of concern. But Mr Schulz maintains that the fact that not just coffee, but most agricultural food commodities are all at a record high is not down to issues of supply and demand:

“We are seeing a seismic change in the cost of commodities and ultimately the cost of food in grocery stores at a time when we have high unemployment. I just think it’s inapproriate that there are a group of financial institutions who are somehow orchestrating an unnatural acute rise in commodity prices that ultimately will create a windfall profit for a select few and a significant problem for a whole host of people,”

The price of coffee is at a 34-year high. Howard Schultz, Starbucks CEO

Mr Schultz says the present situation might be “justifiable” if it was clear that coffee farmers were actually reaping the benefits of the current high prices. The Starbucks CEO has warned: “It is not a good situation for the consumer and I am not convinced that the farmers benefit from this.”

Exacerbating the fundamentals
But the view that commodity speculation is the main reason for current price levels is disputed by the head of the organisation which oversees relations between coffee producers and consumers.

Jose Sette, acting executive director of the International Coffee Organisation, told Channel 4 News: “There has been a lot of influence of speculative funds in commodities and markets in general, not just coffee. That may have had some effect on prices.

Coffee stocks in producing countries are at historical lows. Jose Sette, ICO

“On the other hand, there are very sound fundamental reasons why the price of coffee has increased in the last year. Stocks in producing countries are at historical lows. We’ve never seen them so low.

“The large inflows of money from funds into commodities have an influence on prices. But what they can do is exacerbate the behaviour of existing fundamentals. They do not make the market go up or down by themselves.”

Starbucks CEO Howard Schultz blames commodity speculation for the high price of coffee (Getty)

Arabica versus robusta
Coffee is the best-performing agricultural commodity this year, with the cost of a pound of quality arabica – whose supply is relatively low at the moment – rising to a record high last week. The cost of lower-grade robusta beans has not reflected the surge in arabica prices, however. Starbucks uses only 100 per cent arabica beans in its blends.

The Bank of England’s latest monthly inflation report, published today, notes that the strengthening of global inflationary pressures in the past 12 months is likely to reflect increases in commodity prices, including non-energy commodities such as agricultural products.

But the rise in the price of coffee in the past 12 months has outstripped that of most other agricultural commodities. The International Coffee Organisation’s composite indicator price for a pound of coffee in April 2010 was $126.89; a year later, that figure had risen by more than 80 per cent, to $231.24.

Tackling speculation

So can governments intervene to restrain speculation? The Bank of England’s Deputy Governor Charles Bean has told Channel 4 News that the Bank is helping with an international study into the impact of speculation on the economy:

“This is something that is very much on the G20’s radar at the moment. There is a working group which is reviewing all the evidence and is due to report to Finance Ministers and Central Bank governors later in the year. There are some policy recommendations that could come out of that if the conclusions are that the increased use of commodities as an asset class has led on occasions to excessive price volatility and is therefore having an effect on the real economy. As far as I am concerned and the bank is concerned we have an open mind on that question.”