Posted: May 24th, 2022
Coffee Crisis is a case study that represents the dilemmas inherent in the production of coffee by many developing nations. The coffee market fluctuates with changes in supply and demand. When supply exceeds demand the price or if the demand for coffee weakens in international markets then this can have vast implications on the price of coffee. In 2001, coffee markets were at a forty year low for a variety of reasons. As a result of the low price, many coffee growers in the third world were not even earning what would be considered a subsistence wage and were having trouble meeting their basic needs. Many industries also have to encounter decreases in demand that reduce the products margins; especially with any commodity.
However, coffee is a particularly sensitive issue because many of the coffee producers have little other opportunities and already living in subsistence conditions. One idea presented in the case was that some growers could focus on growing specialty coffees. However, it is unlikely that this would be a widespread solution and would only fit some growers. Some of the coffee farmers were starting to unionize and form an alliance which offered some abilities found within collective bargaining. This group was referred to as “fair trade” coffee and although this strategy showed a lot of promise, it is unlikely that it would provide a comprehensive solution as well. This case represents a complex scenario in which the free market has created a situation in which demand has peaked and there is some industry fall out.
Coffee grows the best in certain climates and most of these climates are found within developing countries. The case estimates that there were roughly twenty five million coffee farmers in Latin America, Africa, and Asia. Of these farmers, when the market price dropped, many were effectively forced to attempt try to make up the financial loss in other ways. Some farmers took their kids out of school and had them help with the coffee growing so that they would make up the price drop with more products. Other farmers switched to different products including specialty coffee and others even switch to coca, which is made to make cocaine, a far more profitable product even though it is illegal.
It is difficult to imagine these macroeconomic changes from the perspective of a poor coffee grower in the developing world. Growing coffee may have been passed down for several generations and could be the only skill that some people have. It is doubtful that they would be able to understand the changes in the market prices. Although many might suspect that they should look for other work opportunities, most will not know how and even if they did there are probably few opportunities that they can pursue. It is likely that many of the coffee growers feel a sense of hopelessness in their situation.
The United States accounts for nearly twenty percent of the entire world’s coffee demand. The consumption rate of coffee in the U.S. dropped from thirty six gallons in the early 1970s to about seventeen gallons in the 1990s. Much of this was related to the increase in the consumption of soft drinks which increased from twenty three gallons to fifty three gallons over the same time period. Despite an increase in premium coffees that helped to stabilize coffee demand, the overall trend in the market is that coffee demand has not kept up with population growth.
There are two different types of coffees that serve as the chief export for many coffee producing nations. The two types consist of Robusta which is much easier to grow and Arabica which has a milder flavor but has lower yield rates. Another key driver of the market price was spurred by technology. Many of the major coffee producers found new ways to blend flavors and coffee bean types to retain most of the flavor through a lower cost blend. The producers have used every opportunity possible to lower their raw material costs by these means while also decreasing quality standards.
Furthermore, until 1989 coffee prices were somewhat controlled by an international agreement known as the ICA. However, this agreement collapsed but the world prices were buffered, at least temporarily, to market forces. In the mid-1990s there were a series of droughts in Africa that had substantial implications for the coffee markets since the world supply was lowered by these droughts. These prices also attracted many new growers to the coffee industry. Vietnam for example, went from virtually no coffee produced in the country to becoming of the world’s largest exporters in just a couple of years.
The same trend was evident in other parts of the world as well as many producers were attracted by the high market prices at the time. However, the flood of new coffee producers did not have immediate effects on the market price because it takes roughly two years for the first coffee crops to produce beans once the farmers begin planting crops. Therefore, while the prices might change rather quickly, the delay in the producers trying to meet demand is not felt immediately. This seemingly caused many suppliers to enter simultaneously and as a result the supply of coffee increased substantially but after a few years’ time since the high prices were produced that followed the drought.
The coffee commodity industry seems to need more stability and some kind of coordination. The delay in the time it takes for new crops to be added and the crops to reach the market have produced a volatile arrangement in which the producers are somewhat blind to the future market prices and global supplies. While the Fair Trade organization does show promise in providing some amount of coordination, it is unlikely to stabilize the commodity effectively. It is suggested that a new version of the ICA be created to help pool collective data about supply and demand to all of the participating members so that they can disseminate this information to local growers. Just having better visibility in the industry could also act to advert many of the problems related to oversupply.
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