The long cycle for commodities - the seeds are sown in years past

Coffee is a perfect example of how long cycles develop in commodity markets. Costa Rica, the center of Arabica high quality beans has seen declines of 30% in production over the last few years. This surprising given the increased demand for specialty coffee and the movement away from the lower quality robusta beans. 

To talk about the impact of prices on commodities today, you often need to go all the way back a decade and see how farmers reacted to the last great decline in commodity prices. 

The large price coffee declines in 2001 have had important ramifications for the price of coffee today. There has been less infrastructure development and a desire to diversify production over the last decade. When there is  large price decline there will be less growers as farmers go bankrupt. There will be less development in infrastructure because capital is not available. First, banks will not provide capital given the significant fall-out from a price decline and second, farmers expect that price could have a future significant flu which will cause less investment. Finally, higher price volatility will create desire to diversify production into other crops. 

The seeds of a future super cycle are created from the last major decline in price. For agriculture where there is a large lead-time for production, the impact on cycles will be longer.