The Coffee Crisis

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Table of Contents

Introduction
Discussion
Conclusion
References

Introduction

Low prices have become common in most agricultural products with coffee being the most affected. Coffee is the main tropical agricultural product accounting for nearly half of the total exports in developing countries though it is facing substantial price falls. Following a short recovery in the 1990s when coffee stocks were cleared, its prices have dramatically fallen to unexpected levels.

In reality, today’s coffee prices are higher than the costs involved in its production. The International Coffee Organization (ICO), asserts that this has a direct effect on about 20-25 million families in the coffee producing nations and an indirect effect on about 100 million families which rely on coffee (McConnell, Brue & Flynn, 2012).

This paper will discuss the nature of this crisis and the industry’s reactions towards eliminating the crisis. It will put into consideration experiences on the exporters and producers side to effect market fundamentals through demand promotion and supply control.

Discussion

Economic implications of operating in different market and industry structures with additional details and strong supporting evidence

The fact that the coffee industry operates in different markets and industry structures has led to the precipitous fall in coffee prices. The rise of Vietnam as a chief producer and exporter of coffee, the decline in Brazilians under-consumption levels, poor utilization of market power by retailers, changes in technology, local market liberalization and the abolition of public marketing bodies are the reasons attributed to the products decline.

The fall of coffee prices has been cited by the European government as having resulted from the fall of the global coffee agreement and policies that have been formulated by the WTO (World Trade Organization) (McConnell, Brue & Flynn, 2012).

Nature and structure of global economic markets with additional details and strong supporting evidence

The current coffee prices are low and below the production costs for many producers in the world. The coffee crisis is in nature structural with fluctuations in supply and demand and coffee producers in the world including laborers and exporters are facing new challenges.

Since coffee is very important in the economy, the crisis is actually part of a wide financial crisis. This crisis has led to adverse financial and social impacts with declining earnings, unemployment and poverty across all coffee producing countries and production systems (Mbataru, 2001).

Analytical tools to create value in a market economy with additional details and strong supporting evidence

Low prices have called for international action to deal with predicaments of market imbalance with proposals of both supply regulation and demand promotion. These two analytical tools have been applied by the coffee industry to create value in the market. Supply regulation of coffee involves encouraging producing nations to offset the long run decline in international coffee prices.

These types of agreements made are known as “producer only agreements.” The agreements involve several strategies such as retention of exports, formulating a scheme that regulates the global stock and channeling low quality coffee to other uses such as using it as a fuel.

This condition of creating value is easy to achieve since coffee production is geographical. For instance, the Association of Coffee Producing Countries (ACPC) has created a retention plan whereby about 20% of coffee is to be retained and released when prices rise (McConnell, Brue & Flynn, 2012).

Since the demand for coffee is typically inelastic, demand promotion is another analytical tool that the industry uses to create value in its market economy. Difficulties in managing supply regulation have led to demand promotion in the coffee industry.

It has, however, been realized that demand promotion is a way of influencing long term demand trends without addressing short term price fluctuations. The coffee industry in the world undertakes demand promotion through promotional messages and campaigns (McConnell, Brue & Flynn, 2012).

The laws of supply and demand with additional details and strong supporting evidence

The law of supply states that when prices are high, producers offer more goods for sale than when prices are low. As a result, when prices are high, companies produce more to increase profits. The law of demand dictates that people will tend to buy goods when they are lowly priced. The coffee crisis has been caused by the factors that affect both the supply and demand.

The coffee supply in the international market has increased while the demand has remained the same. The market in most developed countries has not been expanding and this has been attributed to preference of soft drinks to coffee in these countries.

It is said that over the last two decades popularity of soft drinks has increased among consumers more than coffee consumption. For instance, in the 1990’s coffee’s export earnings ranged between US$10-12 billion compared to the current earnings of US$5-6 billion (Mbataru, 2001).

Consumer behavior and its implications for business decisions with additional details and strong supporting evidence

Consumer behavior is the study of customers in relation to how they purchase, consume and dispose goods. Consumers gain when they understand how to make their verdicts better. Producers can gain from a better understanding of their consumers since through this they can predict what their customers need and the best way of supplying this to them.

Forces such as personal motives and decision-making capacities guide consumer behavior. Consumer behavior is to some extent an influential aspect in the declining international coffee prices. It is tempting to imagine that the fall in coffee prices is because of changes in consumer behavior.

The features of a product thus determine whether consumers are going to purchase it. Since the low coffee prices do not lead to significant supply reductions, then the result is constant falling of prices (McConnell, Brue & Flynn, 2012).

Dynamics of factor markets and their role in creating value with additional details and strong supporting evidence

The dynamics of factor markets that will help the coffee industry is competition. The coffee industry should compete with its rivals to help create value of its products. This should be done through product promotion. For instance, in the year 1976, the industry spent US$43 million on campaigns designed to create value and build the coffee market (Mbataru, 2001).

Conclusion

The solution towards overcoming the low prices in the coffee industry can only be addressed by diversification from coffee production especially in marginal areas. Many organizations including Oxfam have recommended diversification into other agricultural produce as the solutiojn to the coffee crisis that is affecting many countries.

This it says will help in creating more jobs and increase the income of the farmers. This diversification, however, requires governmental assistance to farmers to help them identify suitable market opportunities.

References

Mbataru, P. (2001). The Coffee Crisis. Copenhagen: Centre for Development Research.

McConnell, C. R., Brue, S. L., & Flynn, S. M. (2012). Economics. New York: McGraw-Hill.

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