Old Coffee Grounds

A nation that loves its coffee was treated last week to one of the muddiest cups yet brewed. The Federal Trade Commission filed a formal complaint against the New York Coffee and Sugar Exchange and eight of its members. The charge: restraining coffee trading and thereby causing prices to rise out of all proportion to supply and demand. As it had before (TIME, Aug. 9), FTC hit hard at the exchange's "restrictive" contract, which permits trading only in "Santos 4" coffee, an average grade shipped from Brazil's port of Santos and accounting for 10% of U.S. consumption (2.78 billion Ibs. last year). FTC suggested that the exchange "cease and desist" from the narrow-futures trading that prevents coffee prices "from being an adequate reflection of supply and demand.". Said FTC: "There is a direct relationship existing between the prices specified in a contract for delivery of coffee at a future date and the spot price of that same coffee on this date."

What's Wrong? But when FTC's vague complaint was combed for specific charges of wrongdoing by the exchange, even commodity experts wondered just what coffee-men had done wrong. If FTC hoped to prove that coffee traders had rigged prices last winter by sale of far-futures contracts, i.e., contracts made between November 1952 and October 1953 for coffee to be delivered a year later (see chart), it had only to look at the figures to see that there was no correlation. If FTC hoped to prove that current far-future prices, i.e., on contracts sold between November 1953 and October 1954, are affected by current spot prices, it would find a widening gulf over the past three months.

If FTC expected to prove that in a period of rising prices, speculation helps run them up, that would be easy. On the Coffee Exchange, as on other commodity markets, speculative buying often runs prices up in a rising market, just as speculative selling pushes prices down in a falling market. But such trading, with the speculators taking the risks, is the traditional way that has been worked out to guarantee to coffee roasters that they will have supplies at a certain time and price.

Standard of Value. Coffee Exchange President Gustavo Lobo Jr. said that FTC's complaint about coffee was made on "flimsy grounds," and put the blame on the July 1953 frost that threatened a coffee shortage and touched off a wild rise in prices. Lobo explained that Santos 4 coffee is the basis for trading because it "is the most popular coffee, the . . . standard of value." But the exchange does trade in other grades, said he (in all, about 40% of U.S. coffee). Actually, prices are set not by the exchange alone. Such big roasters as A. & P., General Foods, Standard Brands, etc.. which have their own buyers in Brazil, import much of the coffee brewed in the U.S. If the price of Santos 4 climbs too high on the exchange, as happened this summer, Colombian coffee soon moves in and prices start to slide.

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