Coffee Crisis Essay

Introduction Stephen Quinlan and Jose Gomez-Ibanez describes, in â€Å"The Coffee Crisis†, that in 2004 the governments of coffee producing countries were considering how to respond to rapid decline to coffee prices. In 2001, coffee prices hit a forty-year low, which resulted in extreme hardships for the local farming communities. On that note, this decline in coffee prices was considered â€Å"the coffee crisis. † The coffee crisis came to be thanks in part to coffees: overproduction, under-consumption and oligopoly market structure. International Nature and Structure. At best, coffee should be grown in an area with a warm climate and an abundance of rain. Coffee is centrally grown near the equator; however, it is primarily consumed in the northern hemisphere. It is traded in 60-kilo bags and the annual crop exceeded 100 million bags in recent years. â€Å"In 2003, for example, 101 million bags were produced of which roughly 95 million bags were consumed and the remaining 6 million added to storage in the hopes of fetching higher prices in later years†(Quinlan & Gomez-Ibanez, p. 1, 2004). Coffee is comes in two types: Arabica, which is milder in flavor, and Robusta, which is acidic. Robusta, which is grown in Asia and some countries in Africa, is easier to grow and is primarily used to make instant coffee, espresso and local consumption in the producing countries (Quinlan & Gomez-Ibanez, p. 2, 2004). Arabica, which is grown primarily Latin America makes up, historically, two-thirds of the coffee produced and is the longest to produce. The long production time begins with a two year period before the coffee seedling can bear fruit followed by several more years before reaching full production (Quinlan & Gomez-Ibanez, p. 2, 2004). Supply and Demand Analysis There was a rapid decrease in coffee consumption due to an increase in soft drink consumption. In the U. S. , it is estimated that coffee consumption fell from 36 gallons to 17 gallons per person and soft drinks increased from 23 to 53 gallons per person (Quinlan & Gomez-Ibanez, p. 2, 2004). As U. S. coffee consumption began to slow down in the 1990s, due in part to the increased liking to premium coffees thanks to Starbucks, Pete’s and other coffee chains, European coffee consumption increased along with other countries helping offset the U. S decline. Beginning in 1962, the International Coffee Organization (ICO), an association of coffee exporting and importing countries, managed the coffee market by negotiating exporting and import quotas to support target prices (Quinlan & Gomez-Ibanez, p. 3, 2004). The ICA collapsed in 1989 and this opened the door for non-traditional suppliers like Vietnam and traditional supplier Brazil. During this period, Brazil had always been the world’s largest coffee producer, growing Arabica by traditional labor-intensive methods in frost-prone areas (Quinlan & Gomez-Ibanez, p. 3, 2004). Since most Arabica coffee is grown on steep slopes, Brazilians utilized new plantations on leveled ground; developed new large-scale coffee plantations in less frost-prone areas, mechanical harvesters along with other cost-cutting devices to replace donkeys in how they produce coffee. Vietnam, who had never exported coffee before through government assistance, was able to build irrigation systems to help in the production of Robusta coffee beans (Quinlan & Gomez-Ibanez, p. 3, 2004). These beans produced in Vietnam had a poor quality, less flavorful and were processed at lower quality standards than traditional Arabica. Within a couple of years Vietnam had become a top supplier and was setting the price in which all other Robusta producers would have to compete. By the end of the decade, Vietnam had become the largest Robusta producer in the world, although its costs were rising as the rapid growth in the Vietnamese economy was increasing local income and wages (Quinlan & Gomez-Ibanez, p. 3, 2004). Market Structure The overall coffee market resembled that of an oligopoly, which is defined as â€Å"a market dominated by a few large producers of homogeneous or differentiated product. Because of how few exist, oligopolies had considerable control over their prices, but each must consider the possible reaction of rivals to its own pricing, output, and advertising decisions† (McConnell, Brue & Flynn, 2012, p. 223). Oligopolies are also characterized by barriers to market entry (McConnell, Brue & Flynn, 2012). Although there were many countries producing and exporting coffee, the market was largely dominated by a few countries (i. e. , Brazil, Colombia, and later on, Vietnam). Oligopoly, by its very nature, limits transparency in the market place. Within ten years this country grew from a relatively insignificant producer to the world second largest – ahead of Colombia (producing ~11 million bags accounting for 10% world export) but behind Brazil (producing ~35 million bags accounting for 35% world export) – producing well over 11 million bags annually and accounting for approximately 12% of world exports (CRB, 2006). Factor Markets From the ICA collapse bringing forth Vietnam’s entrance into the coffee market to the quality degradation, the coffee crisis affected more than just the market. With a drop in coffee prices, the farmers not being able to cover all of their costs so grower’s families many had to remove their kids in order to help out at the farm (Quinlan & Gomez-Ibanez, 2004). There was the merging of coffee blends and the experimentation of new ways of creating low quality coffee beans in an effort to meet demands. As a result many of the beans were of poor quality, which caused the coffees to taste cheap. Furthermore, such an increase in low-quality beans causes the price to drop in order to remain competitive (Quinlan & Gomez-Ibanez, p.3, 2004). Many major roasters experimented with technical advances in finding new ways to mask the bitterness of the acidic bean. They even went as far as combining Robusta and Arabica beans together. This line of production caused the price of coffee to decrease, which hurt many producers because the profits weren’t enough to cover most of their overhead (roughly 65-90 US cents per pound) (Quinlan & Gomez-Ibanez, Exhibit 6, 2004). This caused the quality of coffee to diminish because many roasters were using beans that should have been discarded. It also caused countries whose costs were high (Central America, Colombia and Mexico) with average or lower quality coffee to be in trouble (Quinlan & Gomez-Ibanez, 2004). Reference: Commodity Research Bureau (CRB). (2006). The CRB Commodity Yearbook 2006. [eBook] Retrieved from http://books. google. com/books? id=GmzxkvNhxnIC&printsec=frontcover McConnell, C. R. , Brue, S. L. , & Flynn, S. M. (2012). Wage Determination. Economics (19th ed. ), (pp92-114). New York, NY: McGraw-Hill. Quinlan, S. & Gomez-Ibanez, J. (2004). The Coffee Crisis. Capella University. McGraw-Hill.