Starbucks CEO Points to Speculation as Cause of Rising Commodity Prices
Srtarbucks CEO Howard Schultz believes that rampant speculation on commodities like coffee and heating oil is inflating prices. (image: benzinga.com)
A huge increase in speculative commodity investment over the last decade has been and continues to be implicated as a leading cause of inflated consumer prices for heating oil, gasoline, and other important goods. From heating oil dealer Sean Cota to experienced oil trader Dan Dicker, important players in the business and financial worlds have called for market reforms to limit excessive commodity speculation and bring prices back in line with supply and demand realities.
Speaking to CNBC’s Maria Bartiromo on the Wall Street Journal Report business news program on Sunday (a video podcast of the episode is available on itunes), Starbucks CEO Howard Schultz joined the ranks of business leaders who believe financial speculation on commodity markets is artificially driving up prices. Although Schultz’s interest is obviously in coffee beans, a commodity traded at the NYMEX and other world markets, his statement extended to all commodities, which of course includes heating oil.
In response to Bartiromo’s question, “How are you dealing with increased commodities on all levels?” Schultz refers to his long experience to argue that today’s high commodity prices are not a product of fundamental forces, but rather novel financial activities:
Maria, I’ve been in this business for 30 years. I can tell you unequivocally with every coffee farmer and resource that we talk to in which we have decades of relationships, we cannot identify a supply problem in the world where we’re buying coffee. So one question is, ‘why are coffee prices going up?’ and in addition to that, ‘why is every commodity price going up at the same time?’ Why is cotton, corn, wheat, why? And I think what’s going on is financial engineering; that financial speculators have come into the commodity markets and drove these prices up to historic levels and as a result of that the consumer is suffering.
Coffee may be miles away from heating oil in terms of how the product is used, but Starbucks and your local heating oil dealer have one very important thing in common: they are both end-users of a globally-traded commodity. End-users depend on commodity markets to hedge against the risks that unpredictable material costs pose to their businesses. They serve as the counterbalance to speculators, who buy and sell commodities for financial profit and have no interest in the physical commodities they are investing in. Speculators are an important part of commodity markets because they feed excess money or liquidity into the markets that gives end users (also known as hedgers) the space to buy and sell as their business needs dictate.
However, too much speculative money can have a disruptive effect on markets and push prices above their “true” prices, as dictated by supply of and demand for specific commodities. Schultz believes that that is what’s happening in today’s commodity markets. Many believe that excessive speculation’s outsize effect on commodity prices is amplified by new trading products and technologies like high frequency trading—which could be part of the “financial engineering” Schultz refers to.
Schultz’s comments show that the debate over proposed regulation of commodity speculation is not big business vs. small business or big business vs. consumer debate. As more leading economic voices enter the debate, the makeup of the opposition to reform comes into sharper focus: investment banks, hedge funds, commodity exchanges, and other powerful financial firms that pull in hundreds of millions or even billions of dollars in profit every year that trading activity increases and commodity prices climb.
