Liam Dann: No use crying over spill in coffee price

The 61 per cent fall in coffee bean prices since its 2011 peak is unlikely to drop the price of your morning flat white. Picture / Richard Robinson

Commodities are at the mercy of some unprecedented global trends and struggling to find stable values.

Globally, coffee bean prices have plunged 61 per cent since their 2011 peak but I'm not holding my breath waiting for a the price of an Auckland flat white to fall.

Try complaining about that one and you'll quickly be reminded what a small input cost the coffee beans actually are when it comes to a cup of your favourite blend.

There's rent, labour, milk and all the rest of the business costs that make even a large percentage fall in the price of the beans relatively inconsequential.

Funny, though that the same logic doesn't hold for petrol prices - especially when they are going up. Never mind the input costs involved in turning the crude oil into petrol and getting it to your car - the retail price seems to react almost overnight to any movements on the commodity markets.

Some products like dairy seem more consistent. Kiwis get hot under the collar about the price of dairy in much the same way the Chinese do about the price of rice and the French do about the price of bread.

It's a foodstuff of cultural significance. For that reason it gets a lot of coverage and it has become clear over the past few years of spikes and slumps that prices for cheese and butter do seem to correlate pretty well to what is happening on commodity markets.

There is a delay of several months before this commodity price flows through to the supermarket shelves. So we've seen pretty low cheese prices this year reflecting a commodity price slump last year. But Fonterra's global dairy price auction has recorded a big bounce back this year and that is inevitably pushing the retail price of cheese higher.

But you could go nuts trying to keep track of commodity prices right now.

Just like currency and equity markets, commodities are at the mercy of some unprecedented global trends. The double whammy of a rebounding US economy and a slowing Chinese economy is causing some weird side-effects.

For example, the price of gold has fallen through the floor this year along with other so-called hard commodities such as iron ore, copper and coal. The industrial metals and fuels have been coming off because of China's efforts to slow economic growth, particularly in its manufacturing sector.

Gold, which is down about 30 per cent this year, is also falling because its value as a safe haven investment is lower now that the US dollar and US markets are seen as safer bets.

Oil is a hard commodity too, so it seems unfair that it should be touching 14-month highs, but traders seem more interested in the ongoing resurgence of the US economy (which consumes about 21 per cent of the world's oil) than the slowing of China's (which consumes just 11 per cent).

Then there is the added concern about unrest in Egypt. Egypt doesn't produce much oil but it controls the Suez Canal through which most of Middle Eastern oil travels. Suez has been a focal point for protests by supporters of deposed President Mohammed Morsi. So far the flow of traffic through the canal has not been affected, but it has markets worried.

Improvements in the US economy are causing the US dollar to strengthen, which has investors selling out of previously hot currencies such as the Aussie, the kiwi and the Brazilian real. In New Zealand the lower kiwi is exacerbating the pain at the petrol pump as it now costs more in local-dollar terms to fill the tank.

It is good news for farmers, though, as the lower exchange rate means they can bank more kiwi dollars for every kilogram of milks solids sold in US dollars.

So far dairy prices - and most other food commodities - have been immune to the Chinese slowdown.

Which gets us back to the coffee prices. Why are they falling so fast when other food commodities are still strong?

The answer offers a warning to other food exporters around the world.

The slump in value of the coffee isn't anything to do with demand. It is being caused by oversupply. As the Brazilian real has fallen, coffee exporters there have begun shifting huge stockpiles of beans to cash in on the increased returns.

That's dropped the price to the point that the Brazilian Government is now looking to intervene and buy up beans itself.

All of which is something to ponder over your cup of coffee this morning, particularly if you're picking it up from a service station while filling your tank.

The rebalancing of the global economy over the next 18 months or so is going to be messy.

Markets are struggling to accurately price things in a world where the US economy doesn't need to print money any more. And they are struggling to get pricing right for a world where Chinese GDP isn't growing at 10 per cent a year.

The clarity of "cause and effect" on global markets is going to be worse than usual and it will no doubt look as murky as the bottom of that takeaway coffee cup by the time prices flow through to consumers.

Follow Liam Dann on Twitter:

@liamdann