An Unlikely Player in the Global Commodities Boom

Aug 11th, 2006 | By Penny Sleuth Contributor | Category: Commodities, International, Investing Strategies, Macroeconomics

I recently saw the movie The Devil Wears Prada. It was a perfect waste of $10 but I’m such a sucker for “chick flicks,” I just couldn’t help myself. However, one statement in the movie did get me thinking about the commodities boom.

In the movie, Meryl Streep plays a New York fashion editor who is a powerful and cynical taskmaster. Anne Hathaway plays a young, eager-to-please assistant. She is not thin enough, fashionable enough or fast enough for Streep.

Hathaway’s initial assignments consist of buying complex orders of gourmet coffee for the over-caffeinated Streep. One day, a stressed out, frazzled Hathaway runs to the local Starbucks to get Streep’s order of double espresso, extra foam and skimmed cappuccino (or something like that).

An impatient Streep seethes venomously, “Where is my coffee?!! Has she gone to Rwanda to buy the beans??”

As sarcastic as that statement is meant to sound, there is truth in it. Chances are, your gourmet coffee comes from Rwanda. Now, I’m not suggesting you invest in Rwanda, but I’m pointing out the economic possibilities in post-war countries. So read on…

Postwar economies are generally robust. Just look at the spectacular rise of the Dow after World War II, or the nearly 2,000-point jump in the Index in the six months immediately following 9/11. Soon after a war ends, or any other kind of political turmoil ceases, economies rebuild. This means that the government spends money on infrastructure, thereby creating jobs.

Pent up consumer demand is also released soon after a war. And in developing parts of the world, economic aid flows into newly peaceful and democratic countries. This results in new business opportunities while prices are still low.

For postwar prosperity to be sustainable, three factors are essential:

1. Stable political institutions
2. Established corporate institutions
3. A free market

Take Rwanda, a small East African nation that has emerged from a treacherous internal ethnic conflict that left nearly a million people dead. After a terrible genocide ended in 1994, Rwanda established a constitution and an elected government. We can safely say that a political institution is in place.

Does Rwanda have an established corporate institution? As far as coffee production goes, it does. Not only has the U.S Agency for International Development pumped $10 million into Rwanda’s coffee market to improve quality of production, it has also set up farming cooperatives.

The cooperatives provide the link between the coffee farmers and gourmet roasters all over the world. And Rwandan farmers get a fair price for their coffee. The cooperatives have done wonders for the nation’s coffee quality and its exports. According to a New York Times article:

“Maraba [was established in] 2001…[was] Rwanda’s first coffee cooperative and the initial experiment of A.I.D.’s Partnership to Enhance Agriculture in Rwanda Through Linkages.

“The partnership, which is known by its acronym as the Pearl project and is directed by Timothy T. Schilling of Texas A&M University, has since made a 300 percent return on its investment, with 90 percent of its revenue being paid to farmers. Pearl has promoted the production of higher-grade coffee by organizing farmer co-ops and training their members in farming techniques, coffee processing, quality control, marketing and by building relationships directly with the roasters who buy coffee…

“Five years ago, all Rwandan coffee sold at the C-grade, or lowest-quality, price. Now, demand for fully washed Rwandan coffee (about 7 percent of the crop) far exceeds supply. ‘The emergence of Rwandan specialty coffee on the global market is stunning,’ said Michael D. Ferguson, a spokesman for the Specialty Coffee Association of America, a trade group in Long Beach, Calif. ‘Everyone inside the specialty coffee industry is excited about it.’”

USAID now has a special agreement with coffee giant Starbucks, whereby it sells premium coffee from Rwanda. The roast is appropriately called “Rwandan Blue Bourbon.” Costco (COST: NASDAQ) will also start selling coffee from Rwanda later this year.

Before coffee cooperatives were established in Rwanda, farmers had little reason to cultivate coffee. In the mid/late 1990s, farmers returned their war-ravaged farms, but cultivated other crops that were cheaper and took less time to harvest. And whatever coffee was grown was of poor quality.

Before the savage genocide, 60% of Rwanda’s total exports were coffee. This is a fertile land and is called the “land of a thousand hills” for a reason — the hills, soil and climate are perfect for coffee growing. But after the genocide, Rwandan coffee exports declined to 30% of the national total. Today, coffee accounts for 30% Rwanda’s total exports and is a $35 million industry. Besides, Rwanda’s coffee is now marketed as premium quality.

So as far as coffee production goes, both political and corporate institutions in Rwanda are conducive. But is there a free market? President Paul Kagame recently liberalized his nation’s coffee trade and has made coffee exports one of his top priorities.

Not only is there a free market for coffee trade in Rwanda, the global coffee market is also helping things. After years of depressed prices, coffee has now joined the global commodities boom. According to the International Coffee Organization, mild Arabica coffee sold for 80 cents a pound in 2004. Today it sells for $1.05 and coffee prices recently hit six-year highs.

Social, political, economic and global environments have all come together to lift Rwanda’s coffee industry. Its achievements are just another example of the robustness of a postwar economy. It is an example of the abundance of its land. And more importantly, it is an example of the promise of Africa…

Regards,

Sala Kannan
August 11, 2006

Penny Sleuth Contributor

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