It’s been a real challenge finding the good news of late with headline after headline of dreary economic statistics. Home sales are dropping. Job cuts are rising. Interest rate slashing is having little effect on stimulating consumer spending. The panic continues. But it can’t be all bad, can it? Commodity prices have fallen and fallen hard after spiraling upward at breakneck speed earlier in the year. This generally should be good news for consumers and manufacturers. Energy and fertilizer prices have both pulled back sharply, giving farmers a fighting chance at survival. Yet, on both sides of the spectrum, these factors don’t seem to bring any solace, and both buyers and sellers remain glum about the bumpy economic road they’re traveling. While farmers and roasters, or exporters and importers, are usually on opposite sides of the fence, the tightness in the credit market is taking a toll on every aspect of the supply chain and making it difficult, if not impossible, to conduct business as usual. Despite the drop in input costs, without proper financing, farmers cannot afford these purchases and are still forced to cut back, which could jeopardize production prospects. Exporters can’t extend credit to producers to finance the purchase of new-crop coffee and forward sales, bringing in the necessary cash to operate farms and even pay wages to pickers. Roasters are finding it difficult to finance inventory purchases and may need to let coverage slip. Loans for new investment in plant and equipment are hard to come by, and cash is being reserved for “rainy day” emergencies. The wheels of commerce are not being greased and, therefore, are slowing down.
Fundamentally, the coffee market has more “going for it” than most other markets. The global economic downturn is not expected to “kill” consumption. Coffee drinking habits are hard to break, and relative to total household budgets, coffee remains an affordable luxury. There might be some downscaling in the purchase dollars spent on coffee, but not necessarily on the quantity consumed. Coffee is one of the more recession-proof commodities, if one exists. Where I continue to see troubles brewing is on the supply side of the equation…
The passages above are excerpts from an article I wrote in December 2008. That year, oil prices had similarly surged in part due to geopolitical tensions in the Middle East and attacks on oil infrastructure. Disruptions in Nigerian supply have also added to the volatile mix. Demand for oil at that time was strong due to greater use in emerging markets (especially China), while supply was constrained. A weak US dollar had helped to bolster demand. Now headlines are screaming about oil prices breaking over $100 per barrel, but with fears that prices could even double if the Strait of Hormuz remains blocked. In 2008, Crude oil raced higher, peaking at a record $147 per barrel. Then, in late 2008, the rug was pulled out from under the markets, and prices plummeted because of the financial crisis. The backdrop of that year is similar to the current situation, although voices of defiance and vows to press on with the war could rattle the markets for even longer than the quick sprint up in 2008. But the rise in oil prices is only the beginning of the story, and the broader impact on the global economy is the expected surge in fertilizer prices and the implications for world food supply.
Historically, it is rare for oil prices to rise sharply without raising the probability of an economic downturn or even a recession. The times when oil prices have rallied without a negative consequence for the global economy were when the upturn was driven by strong demand rather than a supply disruption, as is happening now. To avoid an economic crisis, the world needs to absorb the current shock by being sufficiently energy-efficient. The United States has the capacity to release reserves and ramp up production, but the blockade of the Strait of Hormuz must be lifted to resolve the current situation. Too much of the world supply passes through this choke point. There were signs of the global economy already slowing prior to the coordinated attacks on Iran; therefore, today’s situation is more comparable to the oil crises in 1973, 1979, 1990, and 2008, which were followed by severe belt-tightening. Commodity prices initially had booming years, followed by longer stretches of depressed values and tight credit. If the global economy can instead, surprisingly, absorb higher oil prices or the price spike is short-lived due to safer passage assured through the Strait of Hormuz, then a recession could be averted, similar to the price spikes in 2005-2006, 2011-2014, 2018, and post covid in 2021-2022.
