Analysis Of The International Coffee Market Economics Essay

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Coffee like any other commodity is subjected to swings in the competitive market. Among the commodities, a lot of the world's attention has focused on the ups and downs of the coffee beans. Coffee is one of the most important commodities and it contributes to almost half of total net exports of tropical products. Coffee has become representative of the issues faced by all developing country agricultural commodity exports (David Hallam, 2003).

In the late 1990's to the early 2000's, the world was faced with an international coffee crisis (refer graph 1). In an economic point of view, the up and down of a price will replicate the evolving demand and supply situation. It is clear that the big fall in coffee price during the crisis is due to the supplies of coffee on the world market having dash ahead of the growth in demand. The "coffee crisis" results not only from the price fall but also from the economic importance of coffee in many producing countries.


Graph 1: world coffee crisis

The effects of the fall in coffee prices after 1997 had both economic and social effects and were documented by a recent ICO survey of producing countries. Nicaragua reported 122 000 job losses, Costa Rica 10 000. According to statistics by the international coffee organization, Papua New Guinea employment in the estates sector has fallen by 40 percent and in Ecuador the coffee processing sector is operating at only one third capacities. Almost all countries reported falling incomes and expenditures among coffee-dependent households (International Coffee Organization, 2003).

The fall in coffee prices also had macroeconomic cost among highly dependent producers/exporters, declining prices and export revenues, and declining incomes in the coffee sector can have an impact on government revenues. Current research shows this decrease in prices continues to be particularly strong for African coffee exporting countries in spite of market liberalization, although there is apparently no significant statistical relationship in Latin America (Gilbert, 2003).

The international coffee crisis has come to a past. Now, In March, the monthly average of the ICO composite indicator price raised by 3.8%, from 216.03 in February to 224.33 US cents/lb, the highest level in 34 years. The price increase was marked in the case of Robusta, reducing the differential with prices of other milds by 2.6%. Price volatility also increased during the month of March compared to February. In terms of fundamentals of the coffee market as a whole, the outlook remains generally unaffected and continues to support firm prices. This increase is attributable to improved crops in some producing countries, especially in Africa and Central America, and to current high price levels (International Coffee Organization, 2011). The increase in price of coffee is due to inflation which is heating up the coffee market, as bean prices surpass $3 per pound - the highest level in about 34 years. The bad weather in Colombia, the world's second-biggest coffee producer, has put a major depression in supply, while global demand is soaring due to a growing middle class in India and China (Farnoosh Torabi, 2011).

The increase in the price of coffee is credit to the efforts which the International Coffee Organization (ICO) has made on both the supply and demand side. The international coffee organization is an intergovernmental organization established by the United Nations in 1962, together with both producing and consuming member countries. They also deal with coffee problems and issues around the world in terms of coffee's economic importance and developmental implications.

On the supply side, ICO has used strategies on namely three sectors which are quality improvement, diversification and production monitoring. In February 2002 the ICO implemented a new global Coffee Quality-Improvement Programme (CQP) which sets a minimum grading standards and maximum moisture content for coffee exports. The consumer will advantage from upper overall quality standards in coffee blends and the producers from the decrease in the current surplus through removal from the market of sub-standard coffee. Through this, Governments and the coffee trade can benefit long term in their part of supporting and implementing this strategy. In diversification, the ICO promotes action by encouraging more programs and larger coffee product segmentations to reduce farmers over dependency on coffee. Finally in production monitoring, The ICO will take action as a centre for information on member country production programs to make sure that such strategies would not cause imbalances. Additionally, the ICO will make sure that multilateral and bilateral donor institutions are informed of the coffee balance in order to avoid inappropriate projects.

The Association of Coffee Producing Countries (ACPC) also helped on the supply side when they promoted a retention scheme from 1 October 2000 to retain 20 percent of exports to maintain prices above 95 cents/pound and release supplies onto the market when prices exceeded 105 cents/pound. While 19 countries joined, including non-members of ACPC such as Viet Nam, few actually retained any coffee at all: only Brazil, Colombia, Costa Rica and, temporarily, Viet Nam cooperated. Exports and stocks continued to rise, and prices continued to drop.

On the demand side they are strategies being made through promotion and barriers to trade. The ICO will seek out to build on highly successful promotion activities in new markets, such as China and Russia, to promote consumption of coffee particularly in partnership with the private sector and in producing countries themselves as well as new and existing markets. In barriers to trade, ICO will work within the framework of WTO negotiations to seek the elimination of tariff and other barriers to all forms of coffee, mutually with those affecting all agricultural products originating in developing countries. The cost of such activities would take about three to five years in the making. Defensive activities that are important management issues might achieve their goals in a briefer period. Without exception the longer-term the objectives of the project, the bigger the challenge to maintain political support and campaign funding. Maintaining support over the longer term is an apparent challenge for all advertising and marketing campaigns. It can be even more difficult to convey the benefits derived from generic promotion to stakeholders when each has competitive and varied interests. Promotional campaigns need to include provable effective use of funds; commonly agreed goals and realistic targets; specific measurable activities to track campaign efficiency. General promotion campaigns also faces risks of communicating to each stakeholder how those measured results impact the interests of that particular stakeholder to justify continuing support.

These strategies shave both demand and supply benefits. The superior quality might be expected to encourage demand and make room for a higher price, while the removal of low quality coffee would reduce overall supply. The burden of implementing the scheme will fall most heavily on those producers with the lowest quality at least in the short-run until their quality is improved. In terms of enforcement, coffee not being able to meet the specified standards can be refused the ICO certificate of origin by exporting countries. As a conclusion, the high demand in coffee will continue to cause an increase in coffee prices, and consumers should be aware of this and be willing to pay for them if they would like to enjoy coffee.

(1229 words)

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