The World’s Fastest Growing Shortage: Contracts and the Rule of Law
Coffee farmers defaulting on forward sales. The eviction moratorium. Decriminalized shoplifting. The breakdown of personal responsibility is accelerating for the worse.
“War is the health of the state.” - Randolph Bourne
They say the biggest casualty in war is the truth. The very nature of war sprouts from an instinct of self-defense; an “us” versus “them” fight for survival. Warlords sing intoxicating tunes to our senses playing on emotions by targeting our fears and uncertainties. We are promised the comfort of safety and stability if we but relinquish our rationality to the better of them for societal well-being. From there, power is seized deforming society where traditions are broken and truth is expunged. This is how corruption festers and power is further consolidated. War becomes the health of the state.
Times of emergency share a parallel path. The dialects of propaganda are similar enough to be adapted for the prevailing purpose. Emergencies allow for identical extraordinary measures to be implemented and accepted. It leads to some revering their golden shackles and embracing the movement, shaming you for interrupting the social progress. Dissent quickly becomes the enemy itself over the initial crisis.
This road leads us to today. The current global emergency has sown a wind and we reap the whirlwind. Many may be familiar with the viral pillaging of stores in broad daylight following the de facto decriminalization of shoplifting in certain places. The core function of a government is supposedly in providing police power; that obligation has been chipped away and we see the consequences.
A much broader policy mandate came in the form of the CDC’s eviction moratorium limiting landlords’ and mortgagees’ abilities in enforcing contractual agreements for default of terms. This general suspension of contract obligations stresses the foundation of social exchange. Eroding the consensus behind legal and voluntary commitments individuals make with one another undermines the basic functions of society. The long-term implications will be embedded distrust in transactions on a go forward basis. How is business conducted efficiently like that?
Another example we have that’s just as concerning only on a global scale is the coffee market. Brazil is the world’s largest coffee exporter by a long shot, emitting over 5.4 billion pounds projected for 2021/22 marketing year.1 Due to drought conditions for the caffeine production powerhouse, global coffee prices have surged in recent weeks.2 Selling coffee today is more lucrative than it was yesterday.
One unanticipated fallout from this originates in Colombia, another reputable coffee grower. Farmers in every market become very savvy market observers as their livelihoods depend on the financial knowledge as much as their agronomic trade itself. These producers will sell forward their coffee beans locking in prices before they deliver the product. This provides price-certainty for the seller who is beholden to whatever the commodity markets say what they are selling is worth. That carries with it a written understanding to deliver the agreed upon sale when the time comes. In October 2021, that didn’t happen.
With news of a lackluster Brazilian crop being quickly discounted into the market price for coffee, Colombian producers ended up defaulting on their previously agreed-to obligations. What they had sold months ago (but had yet to deliver) for prices then was now at a premium they weren’t going to capture. So, they reneged on the contracts. An estimated 10% of Colombia’s coffee production was withheld and undelivered per the terms of these contracts. Colombia is the second largest exporter of arabica coffee, the type most commonly consumed.3
This resulted in coffee prices spiking even further as news permeated throughout the industry. Speculators dog-piled onto the frenzy with uncertainty abound. Colombian producers are now choosing to rewrite their own deal by selling at spot, or current, prices now that the market is in their favor. This creates a loss for those on the other side of the trade who now have no coffee for prices they knew they’d be willing to pay. If you need coffee for your operations and relied on those contracts, you now need to scramble for alternative sources and often the unfavorable spot market.
Stories like these undermine trust in the system. Contracts are fundamental to every business and individual transaction. Without that trust you now lack certainty, which reverberates and cascades throughout interwoven relationships. It becomes chaotic and untenable if sustained.
Rule of law and basic tenets of social exchange cannot be allowed to breakdown. The way we articulate this is through contract; the cornerstone of voluntary interaction. When basic societal decorum isn’t supported and shoplifting is allowed to proliferate, it strips away respect for private property. When rent payments are indefinitely suspended, it warps the duties between landlords and tenants, and who actually owns the property. When futures markets are accepted for price-certainty, but then reneged on at delivery due to price-favorability, it penalizes honest participants harshly.
These developments in dishonesty and the general lack of personal responsibility have only been enhanced with the emergency dictates. The longer these legal atrocities are left to linger, the more the social fabrics of nations become corrupted. If war is the health of the state, then truth is the health of society. Truth will win if we embrace it.
USDA: Foreign Agricultural Service. June 2021. Coffee: World Markets and Trade, 4. https://apps.fas.usda.gov/psdonline/circulars/coffee.pdf
Kurmelovs, R. September 30, 2021. Coffee bean price spike just a taste of what’s to come with climate change. The Guardian. https://www.theguardian.com/food/2021/sep/30/coffee-bean-price-spike-just-a-taste-of-whats-to-come-with-climate-change
Angel, M. October 11, 2021. Major coffee buyers face losses as Colombia farmers fail to deliver. Yahoo! News. https://news.yahoo.com/exclusive-major-coffee-buyers-face-135001605.html