The coffee industry in developed countries is traditionally perceived as prosperous and stable. Also, the coffee business grows in developing countries, but this stability is apparent. Fluctuations of minimum coffee prices create serious difficulties for countries, which economies are directly dependent on coffee production. It happened that coffee sector in Mexico faced the crisis due to the evanescence of control tools, the decrease of prices, the insolvency of numerous local and global exporters, the shortage of loans, and the removal of the government from the coffee segment changed the situation in the industry (Renard, 2010).
Before the crisis many small producers operate on the Mexican coffee market (Renard, 2010). It was a perfect competition market structure. Firstly, the market had a number of independent business entities, who decided what to build and in what quantities. Secondly, there were no limits to market access and a way out of it for everyone. Thirdly, single-purpose products were the same by essential characteristics (not differentiated). Fourth, the economic agents did not participate in the control of market prices; non-price methods of competition were not practiced. Fifth, market participants had equal access to market information, in particular the true knowledge of the committed transactions (McConnell, Brue and Flynn, 2014).
However, after 1989, big exporting corporations found themselves led by the agro-industrial network and were able to spread their regulation over Mexican coffee by expanding globally via mergers and acquisitions of small- and even medium-sized manufacturers. The coffee market turned into oligopoly (Renard, 2010). The small amount of firms contributed to their monopolistic agreements on pricing, distribution or separation of markets or other methods of restricting competition between them. As a result an oligopoly moved closer to monopoly. It is proved that the competition in an oligopolistic market is the more intense, the lower the level of concentration of production is, and vice versa (Mankiw, 2014).
An important difference of the oligopolistic market from perfect competition market is due to the price dynamics. If in a competitive market the prices pulsate continuously and irregularly, depending on the demand and supply fluctuations, in an oligopolistic market, they have tend to a stable fixation and change less often. The so-called price leadership, when its advantage is dictated by one leading company, while the remaining oligopolists follow it, is very common (Varian, 2009).
Features of interrelation of state and companies leave their imprint not only on the nature of economic and social relations in modern society but also on the mechanism of its regulation. State and private companies carry out their functions in the regulation of economic life independent of each other and in close unity. The more companies under the influence of the development of the productive forces objectively contribute to the degree of socialization, the more they are forced to resort to state aid to preserve their dominance and the closer their interaction is (McConnell, Brue and Flynn, 2014).
The change of the economic role of the state is of key importance. The state creates various tools with which to intervene in the economic activity. As the monopolization of the economy increases and the degree of socialization deepens the state should take on the important function of raising capital and managing the process of reproduction, which the companies limited by the scope of the appropriate form of ownership are unable to perform (Varian, 2009).
As oligopolists are well aware of what is profitable, they operate smoothly, and usually this result is the same as in a monopoly. However, in every country there are special bodies that monitor the activities of oligopolists, who can actually put their monopoly on the market conditions. The main complaint against the oligopoly is boiled down to the fact that they are so strong that they have an impact on the international market (Mankiw, 2014).
The crisis of 1999-2004 in the coffee industry was caused by an imbalance of supply and demand of coffee. Then, many farmers-producers were actually on the verge of starvation. In Mexico in 2004, farmers paid 10 cents per kilogram of green coffee. The reason for the fall in the price of coffee was a steady increase in production volumes, which had increased by 17% for three or four years. At the same time, the consumption volumes remained relatively stable and amounted to 105-106 million bags. Thus, in the global coffee market, the situation of a significant excess of supply over demand of coffee was observed. The responsibility for overproduction was laid on Brazil and Vietnam, which together increased production of coffee by 17.3 million bags for the same period (Krugman, P., Obstfeld, M. and Melitz, 2014).
In May 2000, 11 member countries of Association of Coffee Producing Countries (ACPC) agreed to curb up to 20% of its exports, at least for two years. The plan was supported by the five countries that were not members of the ACPC, including Vietnam, Mexico and Guatemala (Krugman, P., Obstfeld, M. and Melitz, 2014). The purpose of the program was to raise the price of coffee, measured by composite price indicator of International Coffee Organization (ICO) up to 95% per pound. The crisis of overproduction, the competition between producing countries and, as a consequence, the continued decline in prices, in spite of the export restrictions, led to the cancellation of the program (Renard, 2010).
The next step of the countries producers was the development of the program to eliminate from treatment the coffee, which quality was below a certain standard. It is believed that the execution of this program, on average, improved the quality, thereby increasing consumption and the global price rise (Renard, 2010). This idea, as opposed to supply containment had an advantage – it provided the irrevocable reduction of the oversupply. However, it was difficult to apply this scheme for all its attractiveness. The main objections were received from countries specializing in the supply of low-quality coffee (Krugman, P., Obstfeld, M. and Melitz, 2014).
Over years, medium- and large-sized manufacturers diversified their production of coffee through fruit or timber-yielding plants on their farms. Some producers entered the eco-tourism business. Others opened their own coffeehouses offering improved value of coffee and new types of beverages, namely cappuccinos and spiced coffees that interest another audience. Currently, such companies face high competition from Starbucks. As a final point, there were firms, which occupied such market niches as the epicurean, organic, and/or Fair Trade coffees. Fair Trade permitted coffee-manufacturer companies to overcome, develop, and become united throughout crisis by getting funds before the harvest gathered. As Mexico was the main organic coffee manufacturer in the world, the manufacturers sustained the formation of a Mexican certifying organization (Certimex). However, Fair Trade and organic segments attracted many large-scale companies, which enforced operation conditions and led to the formation of small manufacturer associations to penetrate the market under less unfavorable circumstances (Renard, 2010).
Thus, the current dynamics in many respects depends on how successful the attempts of exporting countries are to devalue their currencies in order to stimulate domestic production amid the crisis.
References
Krugman, P., Obstfeld, M. and Melitz, M. (2014). International Economics: Theory and Policy. 10th ed. Upper Saddle River: Prentice Hall.
Mankiw, N. G. (2014). Principles of Microeconomics. 7th ed. Boston: South-Western College Pub.
McConnell, C., Brue, S. and Flynn, S. (2014). Microeconomics: Principles, Problems, & Policies (McGraw-Hill Series in Economics). 20th ed. New York: McGraw-Hill Education.
Renard, M.-Ch. (2010). The Mexican Coffee Crisis, Latin American Perspectives, 171, 37(2), p. 21-33. Doi: 10.1177/0094582X09356956.
Varian, H. R. (2009). Intermediate Microeconomics: A Modern Approach. 8th ed. New Yprk: W. W. Norton & Company.
