Coffee Prices on the Rise

Based on the article in CNNMoney, which is the “Coffee prices on the rise”, link http://money.cnn.com/2010/09/10/markets/coffee_prices/index.htm, coffee lovers have to spend more on their morning coffee due to the bad weather happened in South America (Ellis, 2010).

Coffee can be counted as the second most traded commodity on worldwide markets other than oils. Arabica and Robusta coffee constitute beans build up the majority of the world’s coffee market while Liberica coffee beans assemble as a minority of the coffee market (Harrington, 2011). As compare with Arabica, both Robusta and Liberica are more inferior and the prices are relatively cheaper. Recently, large and developing countries such as Brazil, India and China have surged a huge demand in Arabica coffee. These countries considered as middle classes, therefore, they have high demand for quality coffee-Arabica coffee and they are fighting with United States for the gourmet coffee beans.

 Starbucks is one of the major corporations that control a large portion of the coffee supply.  It is the leading retailer, roaster and brand of specialty coffee in the world (Starbucks Coffee Company, 2012). Starbucks Corporation has built a huge success and developed a worldwide name for itself. Every week, there are approximately 40 million of people visit Starbucks retail stores to enjoy cup of coffee (Starbucks Coffee Company, 2012). Since 1990’s, the coffee consumption has increased significantly for the people living in United States. This is because coffee bars provided a place for people to hang out and the specialty coffee became an affordable luxury. Furthermore, the North Americans adopted a healthy lifestyle by replacing the alcohol with coffee. However, coffee lovers have to pay more for their coffee as the supply of coffee beans are decreasing significantly.

                                                                           Figure 1

            Figure 1 showed shortage in the coffee market. Suppose the price is $3 per pound. At that price, 20 million pounds of coffee would be supplied per month and 40 million pounds would be demanded per month. When there is more demanded than supplied, shortage occurred. At a price of $ 3 per pound, the quantity of coffee demanded is 40 million pounds per month and the quantity supplied is 20 million pounds per month. This results in a shortage of 20 million pounds of coffee per month.

            When shortage happened, sellers will raise the price of coffee. When the price increases, there will result in an increase in quantity supplied and decrease in quantity demanded until the equilibrium price is achieved.

The change of coffee price is determined by supply and demand fundamentals. There are some factors that cause the supply curve to shift such as bad weather, fall in income and rise in the price of sugar. Coffee production has always influence by drought and excess rains. A tiny insect (coffee berry borer) that live in warmer temperature is spreading progressively and devastating coffee plants in Latin America and around the world. Most of the Arabica coffee (premium coffee bean) is grown in Latin America and Ethiopia. There was no trace of beetle in 1960s but the pest was widespread in 2003 (Westly, 2010). 

                                                                              Figure 2

The picture above, Figure 2, showed an adult female coffee borer on a green coffee bean. It is 2 millimetres long but causes $500 million in damage each year.

 

                                        Figure 3

According to the law of demand, when the price of a good rises, the quantity demanded will fall. This happens due to income effect and substitution effect. For example, a person does not manage to pay for such a high price of cup of coffee with their money because their purchasing power of their income has fallen. Besides that, coffee is now more expensive as compare to other goods such as cocoa and fruit juices causing the consumers to change their taste as there are a lot of substitutes. Supply curve is the producers’ desire to sell or supply more and it is affected by price. In figure 3, the graph shows the law of demand when the coffee price is change. When the price is $10, the quantity demanded of coffee is 10. When the price is $20, the quantity demanded is 2. This shows that when the price of coffee increases, the quantity demanded decreases and vice versa.

Figure 4

            As for South America, it provides large portion of coffee bean supply to all over the world. However, the bad weather and coffee borer case causes coffee shortages occur and eventually lead to the rise in international coffee price. The farmers are unable to supply coffee beans to the market causes the supply curve shift to the left. Supply curve shift when the determinants of supply changes (other than price) and it will leads to a movement along the demand curve to the new intersection point. This changes effects in the rise in equilibrium price of coffee and follow by a decrease in the equilibrium quantity. In figure 4, the demand for coffee is D, supply of coffee is S1 and S₂ while equilibrium is g and h.  The bad weather and coffee borer cause the supply curve shift to the left: to S₂. There would be a shortage of g – j at the old price of P_e1. Price would rise from P_e1- P_e3. Quantity would fall from Q_e3 – Q_e1. In other words, there would be a movement along the demand curve from point g to point k and along the new supply curve (S₂) from point j to point k.

           Columbia, the world’s second biggest producer of hand-picked Arabica coffee (Kona Coffee Roasting, 2011). It was expected to produce 11 to 12 million bags of coffee in 2010 but it only produced 8.9 million bags of coffee. The excess rains in Columbia during 2011 brought a high humidity which spread fungus on the coffee crops. The coffee leaf rust- roya attacks coffee plant leaves causes the Arabica coffee plants creating yellow-orange lesions and shrinking coffee yields. There are more serious cases where it will damage or even kill the coffee plants.

                      

  Figure 5

                                                                 Figure 6   

Figure 5 and 6 showed that the coffee plant attacked by roya.

           

Recently, the Vietnamese coffee beans too experienced exactly the same figure 4 as Columbia and South America. Due to the unexpected early droughts, the wells are dry and the fresh water supply is terminated (Business Recorder, 2013). The farmers from Central Highlands belt, Vietnam had sold most of their coffee bean during the peak harvest crop last year. Now, they just left 30 to 40 percent of crop in stocks to sell until this coming September. The two supply determinants are seller expectations and number of sellers. Seller expectations happened because the farmers hold their price because they expect the price to increase in the future. Since they expect to make higher profit, they are going to reduce the coffee supply, which cause the supply curve shift to the left. The other supply determinant is the Vietnamese coffee farmers anticipate drought happens in the next harvest season and resort to hoard their current crop by keeping it instead of selling it. This will decrease the number of sellers and force the supply curve shift to left.

Figure 7.1

           

Even though the price of coffee bean increases rapidly, however, it won’t affect the coffee lovers’ demand for coffee.  In this case, price elasticity of demand is used to measure the rate of response on quantity demanded when the price change. Perfectly inelastic demand is suitable to explain this situation. It happened whenever the price changes, it will not affect the demand for coffee. Figure 7.1 showed the graph of perfectly inelastic demand of coffee.

Figure 7.2

However, there are other possibilities that some people are not that addicted to coffee and can replace the coffee with substitute commodities such as tea and Horlicks to get the same pleasure and satisfaction, this is where elastic demand happened. In this case, the coffee price rise tremendously leads to the enormously fall in quantity demanded to coffee. Figure 7.2 showed the elastic demand of coffee.

In addition, the bad weather, fungus and coffee borer attacked causes the shortages to happen and increase in coffee price. It happened when coffee price is below equilibrium. A shortage is the amount when the quantity demanded is greater than the quantity supplied at current price (Web Books Publishing, 2012).

In conclusion, half a degree change has big influence in coffee. The growth of coffee is affected when the temperature, humidity, plagues and diseases rise. When the coffee price increases because of coffee shortage, it is often regarded to market failure because the markets fail to bring to a stable equilibrium. The government from every country especially Columbia and South America should come out some government interventions to overcome coffee shortage, market failure and prevent the price from increasing rapidly. I would like to end my blog with a video regarding coffee price. Check it out:

References

Business Recorder (2013) Vietnam’s coffee prices at 4-1/12 month high. Available from: http://www.brecorder.com/agriculture-a-allied/183/1158231/ [Accessed 5 June 2013]

Ellis, B. (2010) Coffee prices on the rise. Available from: http://money.cnn.com/2010/09/10/markets/coffee_prices/index.htm [Accessed 28 May 2013]

Harrington, D. (2011) Espresso & Coffee Guide. Available from: http://www.espressocoffeeguide.com/2011/02/coffee-price-increase-in-2011-due-to-coffee-shortage/ [Accessed 28 May 2013]

Kona Coffee Roasting (2011) Coffee Price 2011. Available from: http://www.konacoffeeroasting.com/coffee-price-2011/ [Accessed 28 May 2013]

Sloman, J., Wride, A. and Garratt, D. (2012) Supply and Demand. 8^th ed. England: Pearson Education Limited.

Starbucks Coffee Company (2012) Team up with a leader in the premium coffee business. Available from:  http://starbucksfs.com/Company/About [Accessed 28 May 2013]

Web Books Publishing (2012) 3.3 Demand, Supply, and Equilibrium. Available from: http://www.web-books.com/eLibrary/NC/B0/B63/018MB63.html [Accessed 28 May 2013]

Westly, E. (2010) Spurred by Warming Climate, Beetles Threaten Coffee Crops. Available from: http://e360.yale.edu/feature/spurred_by_warming_climate_beetles_threaten_coffee_crops/2312/ [Accessed 28 May 2013]