ABSTRACT
Coffee is an important cash crop in the world market. It fetches a lot of money for those who engage in the coffee business. Over the past few years, there has been a change in coffee prices. Sometimes they are high while at other times they are very low which is similar to other commodities traded in the international market. This write-up contains factors that affect changes in commodity prices, specifically coffee. Among the factors identified are market forces of demand and supply, speculative effect, climate conditions, and geopolitical factors. The key participant companies in the coffee trade are Nestle, Kraft, Sara Lee, Proctor & Gamble and Tchilo. The impact of commodity price changes is manly felt by producers. For instance, coffee farmers depend on coffee sales for their livelihoods. They use proceeds from coffee sales to provide basic needs for their families, take children to school as well as live a comfortable lifestyle. Thus, when price changes to the worse, their livings standards are affected which in turn affect their families and the economy at large.
INTRODUCTION
Coffee is a cash crop that is important, and it is highly traded in the world market. It is ranked as the most important cash crop that is traded by tropical countries. Its consumption globally is very high as it is said to continue increasing in the future. Around twenty to twenty-five million families, especially in the developing countries rely on coffee for their livelihood (FairTrade Foundation 2012). They produce and sell it either to their government for export or to brokers. More families depend on coffee production through industries where they seek employment or sales whereby there are brokers, wholesalers, and retailers. Coffee production is thus crucial to the global economy at large. The main aim of this write-up is to explain the fall in coffee prices, and its impact on business and the global economy.
REPORT
The coffee market is very unstable, and this is mainly due to the changes in global production which vary. As a result, the prices of coffee tend to change now and then. Coffee prices in the 1970s and 1980s were higher than 100 US cents/1b. Coffee farmers and traders, thus had no worries, and they were able to maintain their families and households. However, in 1989, the coffee market was liberalized. The International Coffee Agreement had kept prices high by restricting new entrants into the market and controlling quotas from exporting and importing countries. They, however, failed to improve their policies as to meet the free market economic policies as were advocated. As a result, their economic clause was suspended. The main reason for its suspension was its abuse of quota system which did not agree with the free market economic policies. (Topik 2014)
Following the suspension of the international coffee agreement economic clauses, World Bank, and the IMF encouraged the governments of the countries that produced coffee to privatize coffee production. As a result, there was increased efficiency in the production of coffee as well as increased competition. Despite this, the absence of regulations from ICA led to the price decline of coffee for the next five years. Prices went as low as eighty cents a pound, which were less by half what coffee initially cost. In 1994, Brazil experienced a change in climatic conditions as frost covered the area. As Brazil is the world largest producer of coffee, there was a shortage in coffee production in the world market. It resulted in an increase in the prices as supply was lower while the demand for coffee was high. Since then, prices have continued to increase attributed to the rising demand for coffee. Consumption of coffee increased and new markets were identified leading to the increase in demand, thus the increase in coffee price (FairTrade Foundation 2012).
As prices increased and new markets were found. Most producing countries increased their supply. For instance, the Vietnam government advocated for increased coffee production and aided the farmers through input supply. They also help in the exportation of the crop. Brazil also did the same and so many coffee producing countries increased their production due to goo prices they obtained in the world market. As a result, there was increased the supply of coffee in the world market between 1999 and 2004. During this period, coffee prices reduced and export earning reduced from $10bn to $6bn. The most affected people were the coffee farmers and their families who experienced poverty. Some even decided to change from coffee production to other crops. (International Coffee organization 2009)
Since then, prices have started to increase, although at a slow rate. By 2007, prices of coffee had recovered once more and averaged 150 US cents/1b. However, in 2008, there was a decline in coffee prices attributed to the global financial crises at that time. Between 2009 and 2010, prices increased to about 300 US cents/1b and in 2011, they further increased to 306 US cents/1b. The rise was due to increased global demand and bad harvest experienced in key coffee producing countries. By 2012, the prices reduce to 200 due to favorable climatic conditions in producing countries. It was predicted that Brazil would experience drought while other producing countries would be affected by El Nino in 2014 leading to increased coffee price so the price boom was short-lived as the supply of coffee from Brazil and other countries remained stable. It is predicted that in the future, prices will rise due to changing climatic conditions which will make some producing nations unfavorable for coffee production, thus reducing supply in the world market (FairTrade Foundation 2012).
Figure 1: Coffee price changes over time: (FairTrade Foundation 2012).
DISCUSSION
Several factors can be identified as contributing to price changes of coffee in the international market. The main factor is the influence of market mechanism of demand and supply. Whenever the demand for a product is high, the prices increase. Farmers respond by increasing their supply. Increased supply in the market, reduced the demand and as a result, prices reduced. As far as coffee is concerned, the price elasticity of supply is weak in the short-term. The growth cycle of coffee takes time from harvest to maturity or from one harvest to another. As a result, after a change in price, supply responds slowly. An increase in supply does not instantly meet the increase in the price. Similarly, the price elasticity of demand is also weak. The final price of coffee, which is sold to consumers does not reflect a significant part of the price of raw materials. Most of the price is attributed to the processing and other factor prices other than the price of raw coffee itself. Additionally, Income elasticity of demand is strong. The higher the person’s income, the more the amounts demand (International Coffee Organization 2009).
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Figure 2: Supply and demand curve
Other factors influencing coffee prices include climate conditions. Coffee is a commodity that is very sensitive when it comes to climatic requirements. Weather conditions have to be right to encourage the growth of the crop. For instance, there must be enough rain at a certain time and enough sun, especially during flowering to ensure that the crop does well. Unfavorable conditions, however, reduced harvest and supply of coffee in the international market. Reduction in supply leads to a shortage which causes prices to increase. The vice versa is also true. Favorable weather conditions lead to increased harvest, thus increased supply in the world market. It also results in oversupply, which reduces demand and thus prices reduce.
The speculative effect is another factor that influences coffee prices. As coffee is a highly traded commodity, any action by traders affect the pricing of coffee. When trading activities increase, prices increase. It is due to the fact that increases in trading activities mean that there is an increase in demand and thus the increase in prices. Geopolitical factors also contribute to price changes. When the top five countries experience political instability, there is reduced supply of coffee in the world market. It is met by an increase in the price of coffee. The vice versa also happens. When political stability reigns and favorable climatic conditions are experienced, coffee prices average to equilibrium or are higher or lower depending on other factors.
The structure of the coffee market is perfect competition. In the coffee market, there are no regulations for the new entrants and the exits. However, five countries control more than 60% of world coffee. They are Brazil, Vietnam, Indonesia, Colombia, and Ethiopia. Similarly, five companies process most of the produced coffee and are the key participant countries in the coffee market. They are Nestle, Kraft, Sara Lee, Proctor & Gamble and Tchilo. They are the big five corporations, and they control around half the global market for coffee (FairTrade Foundation 2012).A great problem would arise when such companies or producer countries decided to unite. They would form a monopolistic market or a monopsonistic market structure which would harm small producers and small businesses marketing coffee.
Price changes have a great impact, especially on companies that deal with coffee sales or production. Whenever the prices of coffee increase, producers gain and their income increases. The farmers, thus increase their income. They gain the capability to take care of their families by providing basic needs to them. They are also able to take their children to school, which is important for the sake of the child’s future. All this contributes to the improvement of the living standards of farmers in producer countries. Poverty in these countries reduces and as a result, the economy of these countries improves. The global economy also improves. Regarding sellers or marketers, when prices increase, their income increases. Their living standards also improve, and the global economy similarly grows.
Increased coffee prices lead to the establishment of job opportunities in the coffee industry. Increased employment opportunities help to reduce unemployment rates in the world. As a result, living standards of people increase as they have income from their job, the economy in turn also grows. A decline in prices of coffee causes reverse results. Farmers experience reduced income. At times, whenever prices fall below the production costs, they do not have enough capital to maintain their families. They thus struggle to get their children to school and to meet their basic needs. As a result, they are struck by poverty. It causes their living standards to decline to lead to a drop in the global economy (Stephan Klasen & Jan Priebe & Robert Rudolf 2013).
CONCLUSION
In conclusion, coffee is an essential commodity that is traded on the world market. Any price changes in the market, cause changes in livelihoods of the millions of people who depend on it either directly or indirectly. It also causes changes in the economies of producing countries and the world as a whole. Lower prices causes a decline in the global economy while an increase in prices causes an improvement in the global economy. Among factors that influence coffee, prices are supply and demand function, climatic conditions, speculative effect and geopolitical factors. It is predicted that coffee prices will continue to rise as a result of unfavorable weather conditions. It is said that in future, some producing countries will become unsuitable for producing coffee thus the reduced supply will cause an increase in coffee prices (International Coffee Organization 2014).
References
FairTrade Foundation. (2012). FairTrade and Coffee. London: FairTrade Foundation.
International Coffee Organization. (2009). Cofee Price Volatility. International Coffee Council 103rd Session.
International Coffee Organization. (2014). World coffee trade (1963 – 2013): A review of the markets, challenges and opportunities facing the sector. International Coffee Council 112th Session.
Topik, S. (2014). World Coffee Market In The Eighteenth And Nineteenth Centuries, From Colonial To National Regimes. California: University of California: Department of History.
Stephan Klasen & Jan Priebe & Robert Rudolf, 2013.'Cash crop choice and income dynamics in rural Areas: Evidence for post-crisis Indonesia, Agriculture Economics, International Association of Agriculture Economist, Vol 44(3) pages 349-364, 05
