Analysis of the Article
Analysis of the Article
Coffee is one of the most important commodities of the world trade. It took first place among agricultural exports in twelve countries, and became the largest by value agricultural export commodity in the seventh part of the world. Two of the most farmed sorts of coffee are highly revered - Arabica and Robusta coffee. The main factor, which affects on the value of coffee, is the length of ownership. Coffee is bought and sold by coffee roasters, capital-investors and brokers. Coffee futures contracts are concluded on the New York Mercantile Exchange (NYMEX) every year.
/>
The world production of coffee is growing along with its consumption. Coffee is the second product by popularity after oil. The increase in volumes is closely related to the growth of coffee production in exporting countries. Only in recent years coffee consumption has increased in Eastern Europe and it continues to grow around the world. Social and cultural factors lie at the basis of this trend of growth. Drinking coffee is a kind of social phenomenon like sitting with friends in a bar, except only that you can have a cup of coffee at any time of day and in almost any environment, even on the move. The research on the useful properties of coffee motivate buyers to keep drinking coffee.
The world price of robusta increased by 13% in 2012 due to rising global demand. At the same time the world price of arabica decreased by 37% because of its overproduction in Brazil, which is one of the world leaders in coffee production (Josephs, 2013). This is not the only reason. There are two parts of the coffee world market – traditional market (the United States, Canada, Western Europe and Japan) and non-traditional market (Eastern Europe, South America, Australia, Asia and Africa), that have different demand for coffee. Buyers in the traditional market prefer arabica and the demand growth is flat (about 2-3% per year). The situation in the non-traditional market is different. It shows a high demand for robusta with overall demand growth about 5% per year. Thus the gap in prices for these two types of coffee has become smaller and analysts say this will continue in the coming years.
Let us consider the U.S. market as an example. It has one of the biggest levels of consumption of coffee drinks and packaged roasted coffee. There is the continuing growth in the retail sector of the U.S. coffee market. Americans, on average, drink three cups of coffee a day and generally prefer arabica, that’s why sellers purchase arabica coffee mainly. In respect that price of arabica is significantly lower this year, coffee retailers have lower costs while prices are the same. This leads to the obvious benefits. For example Starbucks Corporation, that uses only arabica beans for its coffee drinks, has its profit increased by 25% in the third quarter of 2013 in comparison with the same period last year.
Steady growth of the demand for coffee in the United States is caused by the population growth. The increasing demand for coffee in non-traditional markets is caused not only by the growth of the population, but the income growth more. Consumers in non-traditional markets, particularly in Asia, prefer instant coffee, which is made of robusta.
The supply for robusta is stable, there is even a little deficit, which is compensated by replacing with arabica. Robusta world stocks decreased by 55% in 2012. The stocks of arabica in the world increased by 2,6 million 60 kg bags last year (Josephs, 2013). Favorable weather conditions this year have led to the large harvest of arabica in Brazil and respectively its overproduction. Coffee production in Brazil has reached 57 million 60 kg bags this year. This is not good for Brazil, because low prices for arabica are combined with rising costs as coffee is still a labor-intensive product collected and processed by hands mainly. Two factors may change the situation on the market - the decrease in coffee crop caused by rust disease and bad weather. The global demand for coffee this year can’t compensate the supply.
In my opinion, the demand for coffee in the U.S. is price-inelastic because the reduction of the price of arabica coffee by 37% led to only 2-3% of the increase in its consumption. The demand for coffee in the United States is also income-inelastic because of the stable high income level of its citizens. The effect of high price or lower income will make the US customer rather to change the coffee blend for the cheaper one than drink coffee less (Josephs, 2013). The effect of lower price or higher income (that we see now) won’t change the size of the demand, but can shift it towards a better quality coffee. Coffee drinkers should only benefit from lower prices, but for those who prefer to drink elite class arabica nothing is going to change. As far as the demand in this sector is steady, the price for elite arabica isn’t going to change.
References
Josephs, L. (2013, February 8). The Wall Street Journal - Breaking News, Business, Financial and Economic News, World News & Video - Wall Street Journal - Wsj.com. The Wall Street Journal - Breaking News, Business, Financial and Economic News, World News & Video - Wall Street Journal - Wsj.com. Retrieved October 10, 2013, from http://online.wsj.com
