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Essay on Global coffee market

Words : 2000

Write an essay of maximum 2,000 words on the Global coffee market.

Read the following extract alongside online supplementary materials and answer the subsequent questions:

Coffee Crises: An unfair bean count?
The cultivating, processing and retailing of coffee is a big industry. Yet, the late 1990s and early 2000s marked something of a crisis for coffee producers. During this period the world supply of coffee rose relative to demand causing a slump in the price. The graph below shows the trend in the average price of coffee (there are many varieties and prices) between 1996 and 2016. Having reached $1.80 per lb in May 1997 (an imperial pound (lb) is equivalent to 454 grammes). It then fell more or less continuously over the next five years, reaching around $0.44 in 2002: a fall of some 75 per cent.
EMBED PowerPoint.Slide.8
Source: HYPERLINK "http://www.ico.org/coffee_prices.asp"Online statistics (International Coffee Organization)
Coffee prices (average of all coffees) and output

During this period, the supply of coffee increased by around 3.6 per cent a year, outstripping the 1.5 per cent annual increase in demand. The growth in supply was largely caused by new plantings in Vietnam and Brazil. In 2002 world demand was estimated to be around 106 million bags; but production was over 120 million bags with a further 40 million bags held in stock.
The effect of the low price on many coffee growers, who are mainly to be found in some of the world’s poorest countries, was catastrophic. Many farmers were driven into debt; others left the land and migrated to cities, worsening the often appalling conditions there. Others switched to growing narcotic drugs, such as coca in Vietnam.
As we can see from the chart, the price of coffee recovered after 2004, peaking in July 2008 at $1.33 per lb, its highest level since July 1997. In part, this was due to farmers diversifying into other crops; in part, it was due to buoyant global demand, with the emergence of new coffee markets, such as China and Russia, and strong demand in coffee producing countries themselves.
In 2008, however, a combination of good harvests and a recovery in the coffee prices caused supply to increase substantially. Although demand was still growing in developing countries, the onset of recession in developed countries was halting the growth in demand and, as a result, the world growth in supply outstripped the world growth in demand. By the end of 2008 the price had fallen back to $1.03 per lb.
Coffee prices then HYPERLINK "http://www.guardian.co.uk/business/2010/jun/14/commoditries-coffee-prices-rising-sharply"soared in2010, reaching over $2.30 by April 2011 ( HYPERLINK "http://www.ico.org/historical/1990 onwards/Excel/3c - Indicator prices.xlsx" see). These price rises were largely the result of poor harvests in central America and Vietnam and were then driven further upwards by speculation. But then with world growth stalling, and signs that the 2011/12 crop would be larger, HYPERLINK "http://www.agrimoney.com/news/coffee-prices-vulnerable-to-a-collapse--3735.html"coffee pricesstarted falling again. By the end of 2013 prices were at a six year low.

However, with Brazil, which produces approximately a third of the world’s coffee, seeing its worst droughts for a decade, and with a coffee fungus spreading through Central America, HYPERLINK "http://www.refinery29.com/2014/07/71565/coffee-production-decrease"coffee prices soared in early 2014. The price rose from $1.01 per lb in November 2013 to $1.71 in April 2014 – a 69 per cent increase in just five months. Conversely, during the latter part of 2015 and into 2016 coffee prices fell as ample rains boosted crops in Brazil, the world’s biggest producer and exporter. As favourable weather increases crop yields, pushes down prices and causes currencies in producing countries to decline, so farmers are encouraged to export supplies that fetch dollars in return.

The retail price of coffee
You might be wondering why the price of a latte or an espresso in your favourite coffee shop did not follow the fall in price received by coffee growers in 2011–13 and again in 2015. This is partly explained by the fact that, of the price you pay for a cup of coffee, only a very small proportion is accounted for by the coffee beans. The rest pays for the wages of staff, overheads, advertising and profits.
Fine, but why has the price of coffee in supermarkets not more closely followed the wholesale price of coffee? The answer here lies in the actions of coffee roasters. About a half of the world’s production of coffee is bought by just four huge companies –Nestlé, Kraft, Sara Lee and J.M. Smucker. These companies do not, in general, pass on the reduction in the price of coffee to producers but instead take advantage of the lower costs to increase their profits.

1.   What do you think caused the large increase in the price of coffee in 1997? Discuss.
2. Use supply and demand diagrams to explain:
a) the fall in coffee prices in the late 1990s and early 2000s, in the period 2011–13 and the latter part of 2015 and into 2016;
b) the increase in coffee prices from 2004 to 2011 and in 2014.
3. Discuss the concepts of elasticity of demand and supply and external factors influencing the equilibrium position of coffee market in 2017.

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