Issue link: http://read.dmtmag.com/i/763665
28 STiR coffee and tea / Issue 6, 2016 (December/January) MDA Information Systems monitors vegetative health of the planet. The map indicates trouble in Brazil, Vietnam, and Africa. Source: Copyright © 2013 MDA Information Systems LLC, 820 West Diamond Ave., Suite 300 Gaithersburg, MD 20878. All rights reserved. in May 2011. When adjusted for inflation the median price of coffee was $2.93 per pound during the period 1973-2000. It has since declined to an inflation adjusted $1.73 per pound for the period 2001-2014. In his presentation at Sintercafe 2016 Scalla described three scenarios, for the first few months of 2017 each with a range of prices. He said that projections beyond six months are unreli- able given the more than 20 variables FCStone takes into con- sideration when making forecasts. In the first scenario prices rise to between $1.60 and $1.90 per pound due to speculators. Key assumptions include con- tinuing weather concerns in Brazil with the harvest falling below 52 million bags; European stability with a weakening dollar and the widely held belief that globally demand is outpacing supply. In the second scenario modest rains increase the harvest to 54 million bags in Brazil, the dollar remains stable and other ori- gins maintain current production levels. Prices will range from $1.40-1.60 per pound through the early months of next year. Scenario three assumes abundant rain with a Brazilian har- vest greater than 55 million bags, a global excess of 5 million bags, currency devaluation, and troubles in Europe due to Brit- ain's decision to exit the European Union. Prices will fall to be- tween $1.20 and $1.40. The timing of crop estimates moves the market. In August professor Rodrigo Lanna da Silveira, who stud- ied coffee futures contracts during 2004-14 found that "crop reports generally affect price volatility. The impact is particularly strong when they provide information following the flower pe- riods in Colombia, Brazil, and Vietnam." His work with Fabio L. Mattos and Maria Sylvia M. Saes, was published in the Journal of Emerging Markets Finance and Trade. Production estimates from reputable government, trade as- sociation and industry experts sometimes vary by millions of bags. Every weather report sends prices to the winds. Risk management Disruption in long-established patterns "cause trends to break down, to break up, or simply to break," observes Richard Dobbs, director of the McKinsey Global Institute and co-author of No Ordinary Disruptions: The Four Global Forces Breaking all Trends. "We work in a world in which even, perhaps especially, pro- fessional forecasters are routinely caught unawares. That's partly because intuition still underpins much of our decision making. "Our intuition has been formed by a set of experiences and ideas about how things worked during a time when changes were incremental and somewhat predictable... that's not how things are working now—and it's not how they are likely to work in the future," writes Dobbs. Precaution and protection Given the sheer complexity of the global marketplace manag- ing risk seems at best a guessing game but "risk management today is much more akin to buying insurance to protect against negative turns of events. When used properly, it can also create opportunities to gain market advantages," INTL FCStone's se- nior risk management consultant Julio Sera told attendees at the National Coffee Association convention last March. One example is that roasters can use risk management tools to set their own prices, which in turn can enable them to create custom-tailored buying and selling programs for customers – months ahead of their competitors. Risk management is protecting yourself against (or at least minimizing) potential damage. Proactively managing risk before harmful events entails a strategy built on a combination of risk reduction, risk transfer, and ideally risk avoidance. Every participant in the coffee sector is concerned with the unpredictability. What distinguishes participants is how they re- act. Assessing the immediate impact and learning the long-term trends is the best means of limiting harm from things you can't control.