Research conducted by the World Bank indicates that, more than half of the developing countries depend on coffee exportation which, contributes to, about 50% of the earnings from exports. The annual coffee sales are estimated to about 70 billion dollars, and of this amount, only 5 billion dollars make it to the developing countries. The rest is absorbed by the developed countries somewhere along the way.
For a long time, the global coffee market has been facing the issue of lack of price controls. This has caused a steady decline in the prices implying that the coffee farmers are not in a position to generate sustainable profits. In the recent past, this reduction in prices has been attributed to the increase in the number of new entrants in the market hence increasing the level of competition.
An example of such economies that have recently joined the coffee market is Vietnam. The result of this is an extension in production at a higher rate than the increase in demand which at the end of the day creates a surplus in the market. The leading economies in producing coffee globally include Brazil which has been, on top for many years and Vietnam whose progress seems to be a threat to Brazil (Osorio, 2005).
The world’s coffee market trends have in a long time been affected by many factors that have put the market’s strength at stake. One of such factors includes the already mentioned issue of excess surplus whereby the supply is greater than the demand by a great margin such that the result has been a significant downturn in prices.
The prices of coffee in the past five years have been decreasing by approximately 65%, and this might eventually force the farmers to shift to other more productive activities. This may also lead to an acute shortage of the product (Osorio, 2005).
The main problem here is not in the high level of production but the lack of price controls. The prices are left for the market to make the adjustments and the market automatically adjusts to the production and the general laws of demand and supply.
The other significant factor in the coffee market according to this article is the gradual increase in fuel prices. This led to the increase in the cost of transportation that is a great disadvantage to the exporting countries. The prices of the coffee beans in the market did not rise to offset this increase in transportation cost hence the farmers incurred an added expense.
At the end of the day, the farmers tend to withdraw from coffee production since it was no longer profitable to export coffee. Coffee processing is done by four major companies which tend to increase the prices of end product when faced with a shortage of the raw materials.
The developing countries tend to export the raw material at very low prices but import the end product at exceptional prices amounting to exploitation (Sloman et al, 2010). This trend for example, led to the creation of alternative cash crops in the leading producing countries such as Vietnam and Brazil owing to the need to supplement their export earnings.
Crop diversification led to a change in the coffee market, and the establishment of the international coffee organization made this better as they took over the role of setting prices for the coffee market.
Some information regarding the changes in the coffee market is however, not clearly presented in the article. This includes the details of the effects of these trends in different regions. The article has been generalized on the international coffee market neglecting the whole idea of the specific markets in different countries. A slump in the general market does not imply the same effect on the specific economies.
Some economies have their own established domestic market and hence, seem not to be affected much by the international coffee market prices. The other unmentioned issue that is of great importance is the effects of these changes on the different varieties of coffees. The most commonly produced coffee types are the Arabica and Robusta coffee (Osorio, 2005).
The price effect affects each of the classifications at different levels depending on quality and popularity. Including this information in the analysis of coffee prices is important as it may regulate the production decision making in the producing countries which instead of terminating production might lead to changing to the production of an alternative variety.
The coffee market industry can be classified under either the oligopolistic market structure or the appropriate competition market structure depending on the side the market is approached from. From the raw materials perspective, this industry is closer to being a perfect competition model.
This is owing to the free entry or exit in the market, presence of large number of firms, production of homogeneous commodity with similar costs and the producers being the price takers while the prices are determined by the forces of demand and supply in the market (Osorio, 2005).
The commodity also has many sellers and buyers bringing it more close to the perfect competition market structure. It is however, not possible for any market structure to simulate a total appropriate structure. The prices are set at the level of the minimum average cost.
From the refined product perspective, this industry can be classified as an oligopoly. It has a few numbers of firms, and entry is restricted by the high cost of production and the intense competition in terms of quality and market share. There are only four major producers of coffee in the world market, and these include nestle, Procter and Gamble, Kraft and Sara Lee (Sloman et al, 2010).
These companies compete among themselves but set up strategies of ensuring that new entrants in the industry are blocked before they get the chance to succeed. This is referred to as competition, and collusion in economic terms and it ensures that the companies are sheltered from competition outside their umbrella.
They set the prices and the market here is the price taker. This explains the high prices of the processed coffee that does not respond to changes in demand. The consumers are therefore forced to adjust to these prices instead of the prices adjusting to the changes in demand.
Companies in this market use the accumulated stock strategy to create demand when the demand seems to be outdoing the production hence threatening the cost. This is whereby instead of reducing the prices due to increase in demand the producers withdraw the product from the market creating an artificial shortage. This automatically leads to an increase in prices and the consumers are forced to adjust to these prices.
This strategy is however, costly since it leads to a reduction in the level of performance and it also results in to the loss of sales between the time the product is withdrawn from the market and the time the consumers adjust to the high prices. This may take long as the consumers may first decide to withdraw their purchases anticipating a decrease in price (Sloman et al, 2010).
This however, has a number of benefits, the most important of them being the fact that the prices in the long run will stabilize and they will not be altered by increased demand or production as dictated by the forces of demand and supply.
The macroeconomic implications of these changes experienced in the coffee market are a reduction in the balance of trade in the exporting countries. This is whereby the expenditure in imports exceeds the income from exports and the country ends up making losses. The developing countries which are the largest producers of the coffee crops are the most affected by these trends (Sloman et al, 2010).
This is because they export their products as raw materials at lower costs and since they do not have the capacity to process these products, they end up importing the processed output at a higher cost from the developed countries.
References List
Osorio, N. (2005). The world coffee market: Lessons from the crisis and future scenarios. Minneapolis, MN: International coffee organization.
Sloman, J., Norris K. & Garratt D. (2010). Principles of Economics, 3rd ed. Sydney, Au: Pearson.