RENEE MONTAGNE, HOST:
Let's go now to Dollar for Dollar. That's our series where NPR's Uri Berliner is trying to figure out what to do with his money, specifically, $5,000 in a savings account that's losing value to inflation. He's put some of that cash to work in various investments. Today, Uri dips into the commodities market.
URI BERLINER, BYLINE: I saw this headline a few weeks ago. It said: "Cooling Coffee Prices Hit a Three-and-a-Half Year Low." I like coffee. Most people like coffee. That's not going to change. So maybe I could buy coffee low and sell high, not by hoarding sacks of actual coffee beans, but with a bet on the futures price.
I caught up with Jack Scoville at the Price Futures Group in Chicago. He's a futures broker who analyzes the market for agricultural commodities, including coffee. He ticks off reasons why coffee prices have tumbled.
JACK SCOVILLE: We've had a significant uptick in production. When you look at Colombia, their production's increased, and Brazil has had just a whopper year.
BERLINER: Add in Vietnam, which has quickly become a major grower, and you get the picture: coffee beans flooding the global market. Consumers around the world, they still like coffee, but many have scaled back their spending. All of this helps to explain why the commodity price of green, unroasted coffee - also known as the futures price - has fallen to around a $1.20 a pound. When I visited, the price was a little higher.
SCOVILLE: We're up a couple of cents, 1.2880. The highest, 1.29. The Sep is 1.3085. And that's pretty much the high.
BERLINER: That's Scoville on the phone with a coffee grower in El Salvador. Farmers often participate in the futures market. So do big coffee producers. Farmers don't like it when the price is low. Coffee producers don't like when the price is high. A futures contract offers them a chance to lock in protection from price swings, a hedge. Others are the market simply as a bet. It's all done through contracts on the futures exchange.
A price is set for the delivery of coffee or some other product at a date in the future. Buyers of futures contracts win if the price then goes up. Sellers win if the price later goes down.
SCOVILLE: If you really want to watch raw economics in action, come into the futures market. That's where it is, even more so than the financial markets, because this is - these are commodities. This is where life starts.
BERLINER: Before my visit to Chicago, I invest $227 in a fund that's linked to the futures price of coffee. When it comes to coffee or other commodities, there are hedgers like farmers and coffee roasters. And then are others who never touch a coffee bean. They're called speculators.
SCOVILLE: Well, a speculator is most of the public...
SCOVILLE: ...most anybody that would be interested in trading, that is not directly involved in using the underlying product itself.
BERLINER: So my small investment makes me a speck of a speculator. Before I leave, I ask Jack Scoville what it would take for coffee prices to come back and make my bet pay off. It could be crop disease, he says, and weather in the Southern Hemisphere.
SCOVILLE: Is there a chance we could see a freeze in Brazil? Absolutely. Would that affect their production? Absolutely. Would that affect price? Probably.
BERLINER: Scoville says prices often pick up when roasters buy extra coffee in advance of the winter season. People drink more coffee when it's cold. And over the long-term, there's always the world's biggest market.
SCOVILLE: You know, we always look to China. They've become a major consumer. There's a lot of people in China, and they have discovered that coffee tastes good.
BERLINER: Coffee tastes good. That's one of the reasons I decided to make this bet in the first place. So I went to a place where they've been roasting beans and selling coffee for a long time. Gillies Coffee has been in business in New York since 1840. Donald Schoenholt runs the place. It's been in his family since the early part of the 20th century, and he really knows the coffee business.
DONALD SCHOENHOLT: Everything in my life is coffee beans, relates to coffee beans. My dad used to take me in with him to help out in the business, so to speak. Come, you'll help me make coffee today. And we would go to the coffee business instead of school.
(SOUNDBITE OF MUSIC)
BERLINER: With coffee roasting machines roaring in the background, Schoenholt brings me to his green coffee room. It has sacks of unroasted coffee from around the world.
SCHOENHOLT: And as we walk along, I can point them out to you. These are Colombia supremos. That's a very big-bean coffee from Colombia. Here we have coffee from Peru.
BERLINER: Schoenholt describes himself as a coffee control freak. He can control the quality of the beans he buys, their country of origin, how they're roasted and packaged. But he can't control the price.
SCHOENHOLT: Coffee is something that is a like a roller coaster in terms of values. And it has always been that way.
BERLINER: In some ways, Schoenholt operates outside of the futures market. The specialty beans he buys are different from the commodity coffee traded on the exchange. And yet the futures price still has a big influence on his costs.
SCHOENHOLT: It means buying in small quantities of very special things for a very special clientele. And that is the way that we buy.
BERLINER: How do you protect yourself against big price fluctuations?
SCHOENHOLT: I do a lot of prayer.
BERLINER: And that's coming from a man who has worked in the business for half a century. My two $227 wager on the price of coffee could be in for a bumpy ride.
Uri Berliner, NPR News.
NPR transcripts are created on a rush deadline by a contractor for NPR, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of NPR's programming is the audio.