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Reasons for Movement in the Global Coffee Prices

Info: 1472 words (6 pages) Essay
Published: 23rd Mar 2021 in Economics

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Several individuals across the world love coffee to the level of addiction to some. This love for the beverage has led to increased demand for the crop prompting farmers of the crop plant more of it (Rittenberg & Tregarthen, 2012). Coffee farming has been on the rise in various parts of the globe. The prices of this crop have not been stable due to different reasons, as is discussed in the paper.

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Primarily, Starbucks Coffee Company ultimately influenced the people of America who took their coffee. The company began in 1971, and fifteen years later, it had four outlets in Seattle (Giovannucci & Varangis, 2004). Several years later, with a change in ownership and management, the company boasts of over 16000 stores and the world (Brown & Narasimhan, 2019). It has been made possible by the increased love for coffee by individuals all over the world. Due to these encouraging reports on the demand and profits made out of coffee in the American market, several other retailers decided to venture into the business.

Nonetheless, coffee bean prices have been sort of not stable. Though the demand for coffee going up, in 1997, the cost of the bean harvested by the farmers was on the rise (Giovannucci & Varangis, 2004). This increased price was due to a strike by laborers in coffee-growing zones and too much rainfall, destroying the crops. Contrary, in early 2000, the coffee bean price fell after the supply of the produce from the farms was so much, especially that of farms in Vietnam (Ghoshray, 2010). Currently, coffee bean prices have risen once again due to the changes in weather patterns in coffee-growing counties leading to a decline of the product in the market. The graph below shows how coffee prices changed for 32 years.

Figure 1. Global changes in coffee prices. Giovannucci, D., & Varangis, P. (2004). Coffee markets: new paradigms in global supply and demand. World Bank Agriculture and Rural Development Discussion Paper, (3).

The quality also determines the coffee prices. Different farmers across the universe use different planting methods. Thus, each has its unique produce (Giovannucci & Varangis, 2004). These coffee grains, once harvested, the collection takes place at coffee collection points where categorization according to the quality happens. The best coffee quality is paid better as compared to inferior quality. Once the coffee is processed and ready for use, the determination based on its condition takes place. Consequently, farmers across the globe are customarily advised to ensure they practice the best coffee farming methods to improve the quality of their yields.

Weather conditions also determine the price of a coffee. Improved and stable weather conditions lead to improved yields of the product. The enhanced returns will make the supply high, leading to a significant drop in the price paid to the farmers (Ruben & Fort, 2012). Contrary, in poor weather conditions, the yield drops, thus having a scarcity of the product in the market, leading to an increase in the price of the coffee. Attack by pests on plants affects the supply negatively, leading to a rise in the cost of coffee.

The entry of several countries in the coffee farming business has a general effect on the prices of coffee. In the past few countries like Mexico and Colombia controlled the coffee prices since they were the sole growers of the crop (Pettinger, 2017). The emergence of several other states that could also grow the plant brought about competition and an end to monopoly. This explanation means that each country decides its coffee prices, and the country with the best prices makes the most sales.

Demand is the quantity of products customers are ready to buy at different prices over a given period. The demand for coffee is price inelastic; hence, a drop in the amount of coffee, there will be very minimal changes to the need for the product. This occurrence happens due to the uniqueness of the product (Donovan & Poole, 2014). No other product in the market matches, and thus its market is always constant. Therefore, a fall or rise in the price of the product does not affect its demand in any way.

Figure 2. Paradigm shift in coffee demand and supply. Geoff Riley (2019). Price Volatility in the Coffee Market. The New York Library.

Supply is the sum of a product that is accessible to the consumers at a given price. Supply of coffee, just like the demand, is inelastic. An increase in coffee prices in the market cannot lead to an increase in the supply of coffee (Pettinger, 2017). This state is due to the inability of a farmer to change the amount supplied to accommodate the change in prices. According to figure 2, the equilibrium point for coffee is its price at the point where demand and supply are the same. A decrease in supply leads to an increase in demand and the equilibrium point.

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Coffee has been regarded as the most important export commodity after crude oil, and is therefore of high economic importance for the coffee producing countries. More than 100 million people earn their living from the production and processing of coffee and many third world countries depend entirely on the coffee trade. The price of coffee changes every minute, like a stock or any other commodity. It’s defined by commodities exchanges, including The New York Stock Exchange (NYSE), which is the most important for Arabica coffee and which sets what’s called a Coffee price. Like any other exchange traded commodity, stock, bond, currency, etc., this Coffee price is determined by supply and demand.   

Therefore, coffee has always been a boom and bust market, depending on a bad weather, pests and other circumstances. The actual way of how it is purchased, makes the coffee market more unstable.

Overall, coffee should have an international board that controls all the coffee prices to promote fair competition. This body will ensure farmers are correctly trained to improve the yield and quality of their coffee. Lastly, any advancements in coffee-growing technology should be communicated to the farmers in good time through this body.

References

  • Brown, C., & Narasimhan, S. (2019). Principles of Macroeconomics. Economics2020, 300. Retrieved from https://www.colorado.edu/economics/sites/default/files/attached-files/2020-300_0.pdf
  • Daly, R. F. (2016). Coffee consumption and prices in the United States. Agricultural Economics Research10(1489-2016-125250), 61-71. Retrieved from https://ageconsearch.umn.edu/record/145039/
  • Donovan, J., & Poole, N. (2014). Changing asset endowments and smallholder participation in higher-value markets: Evidence from certified coffee producers in Nicaragua. Food Policy44, 1–13. Retrieved from https://www.sciencedirect.com/science/article/pii/S0306919213001383
  • Geoff, R. (2019). Price Volatility in the Coffee Market. The New York Library. Retrieved November 10, 2019, from https://www.thenewyorklibrary.net/economics/reference/price-volatility-in-the-coffee-market/
  • Ghoshray, A. (2010). The extent of the world coffee market. Bulletin of Economic Research62(1), 97-107. Retrieved from https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-8586.2009.00318.x
  • Giovannucci, D., & Varangis, P. (2004). Coffee markets: new paradigms in global supply and demand. World Bank Agriculture and Rural Development Discussion Paper, (3). Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=996111
  • Krivonos, E. (2014). The impact of coffee market reforms on producer prices and price transmission. The World Bank. Retrieved from https://elibrary.worldbank.org/doi/abs/10.1596/1813-9450-3358
  • Pettinger, T. (2017, November 14). What causes price fluctuations in agricultural markets? Economics Help. Retrieved November 9, 2019, fromhttps://www.economicshelp.org/blog/23840/economics/what-causes-price-fluctuations-in-agricultural-markets/
  • Ruben, R., & Fort, R. (2012). The impact of fair-trade certification for coffee farmers in Peru. World Development40(3), 570–582. Retrieved from https://www.sciencedirect.com/science/article/pii/S0305750X11002051
  • Rittenberg, L., & Tregarthen, T. (2012). Demand and Supply. Microeconomics Principles. Retrieved from https://2012books.lardbucket.org/books/microeconomics-principles-v2.0/s06-demand-and-supply.html

 

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