Coffee is today one of the world’s highest earners. There have been several shifts in the market over the years, coffee prices have risen and, after some time, because of many factors, have decreased significantly. Most economists argue that environmental conditions lead to this because bad conditions have an adverse effect on the production of coffee, and as a result, prices change as well. This analysis will cover the causes of these changes in prices in 1997, and other subsequent years as well as reveal significant details about the elasticity of demand and supply of this precious commodity.
What do you think caused the large increase in the price of coffee in 1997? Discuss.
The events surrounding the subsequent increase in the market price of coffee on the onset of 1997 are dependent on the demand and supply of this commodity. Significant properties of the two components are known to affect the prices of all commodities. For instance, whenever the weather elements and other factors such as pests and diseases spread out, the production of coffee is affected from the initial stage which implies that there is a deficiency in terms of the coffee that gets to reach the world market and consequently the demand is barely satisfied. In the end, the prices of coffee get to increase over time up until such demand gets to be fully catered for.
Further belaboring on the above premise, there was a bedlam in terms of the coffee produced in 1997. The major event occurring around this period got to be termed as El Nino, a weather event that is known to occur each half decade. This occurrence is known to greatly affect agricultural commodities and coffee is no exception to this. The period surrounding 1997, showcased the El Nino catastrophe which recorded increased downpour. As a result, many agricultural produces were affected and thus the level of production was greatly reduced. The Coffee produced during that period was lower than the expected demand for the commodity. This implies that the coffee available in supply could not sufficiently meet the demand. As a result, the prices of coffee increased since there was very little coffee that was available in supply at the time.
There are, however, three major reasons provided to explain the increase in coffee prices in 1997. First of all, the inventory levels of coffee in the United States got to 25-year lows by May 1997 (CARBAUGH 2015, p.67). At the same time, it appeared that there was barely any chance for a rebound to be experienced. The depletion of inventories led to substantial increase in the quantities and prices of coffee resulting in increased market volatility. Secondly, Just-in-Time inventory procedures were adopted for roasters brand (Philpott and Dietsch 2013, p.1844). This occurred around March the same year. At the same time storage became almost eliminated with the costs experiencing considerable reduction. This reduction was bound to later translate to a lower price for the commodity, and concurrently lead to a tradeoff which would lead to uncertainty culminating in increased price volatility. Thirdly, the El Nino is believed to be a major contributor of this occurrence (Angrist and Krueger 2010, p.59). Uncertainty in terms of production in South America led to increased prices. By this time, such an event was unexpected. Owing to this there was insufficient commodity reserved to meet the demand. Further still, around the same period, some farmers opted to diversify and grow other crops thus leading to a shortage of the coffee being produced. Additionally, some additional markets for the produce, China included, emerged leading to a shortage of the commodity.
The fall in coffee prices in the late 1990s and early 2000s
Subsequent changes in prices of coffee have been observed in the recent past. This has been attributed to a number of factors as observed above. In the years following the advent of the 21st century, coffee prices were observed to plummet owing to a variety of reasons. Chief among this is the idea that there was a general increase in the amount of coffee produced due to the increased growth in new areas in countries such as Brazil. Initially, this seemed like a good idea. However, it was bound to result in a pandemonium. Around this period, having learned some great lessons after the 1997 shortage, coffee was produced in large quantities (NECHYBA 2017, p.76). The insatiable demand could now be satisfied to a point where there was additional stock of coffee left over after sale to all markets. This means that there was an overproduction in terms of the product, and thus the amount of produce available in the market was more than the demand for the same commodity.
Owing to the aforementioned scenario, the prices of coffee dropped in a bid to bring about equilibrium in the demand and supply of coffee. As illustrated in the above diagram, changing the price of a commodity without altering the other factors affecting demand essentially results in a slope of the demand curve. This means that if the price of coffee around the same period dropped from $6 to $4, then the demand for the product would increase from 20 to 30 million (DAVIRON & PONTE 2013, p.4). People are greatly attracted to price reductions since with such incentives it means that they can now consume more of the product which is very economical for them. During this period, there was also an increase in the population, which means that the increment required to be satisfied by increased coffee production. This led to more coffee being produced in order to satisfy the additional demand. In the end, there was more coffee than was required which means that prices have to be reduced for more of the product to be purchased.
Increase in coffee prices from 2004 to 2011 and in 2014.
In 2004, the coffee prices increased owing to the diversification of farmers into other farm products. It appeared that most of them had become disappointed by the general reduction in prices of the commodity and for most of them, it appeared to be a burden to produce this commodity. This ensured that the coffee being produced decreased and consequently leading to an increase in demand for the commodity. This demand then resulted in increased prices. This is typical to the popular demand scenario, where an increase in demand leads to greater pricing and similarly a reduction in demand results in the reduction of prices. Additionally, as initially mentioned around this same period, there emerged new markets for coffee. Countries such as China which have wide consumer bases, got into the coffee business, and as a result, the prices for the product increased, and once more the product became an asset for many farmers.
In 2008, there was a greater harvest, and due to this, there was an increase of coffee available in supply. Owing to this, the price of coffee recovered and subsequently, demand in some of the developing nations was still increasing. The result was the reduction in prices by the end of 2008. Later on, prices increased in 2010 from $1.03 per lb to $2.03 for each pound (Osorio 2012, p.12). This was caused by the poor harvests in some of the world`s greatest producers such as Vietnam. Growth stalled in the following 2 years before the prices began plummeting in 2013. A year later, the prices soared again owing to the drought experienced by Brazil, a country that produces 1/3 of all the coffee supplied in the world market. This situation continued to the end of 2014 (Osorio 2012, p.14).
The concept of elasticity is very fundamental because it determines the pricing of any commodity. One can think of the scenario by imagining that a new form of technology has emerged meaning that the prices of the commodity would be greatly reduced (Angrist and Krueger 2010, p.14). In our current scenario, there has been a great fluctuation in the prices of coffee. In some developing countries, the production of coffee has been low due to the prevailing drought situation. This means that very little coffee has been available in supply to meet the insatiable demand for the product. Owing to this fact, the prices of the commodity have increased resulting in an inelastic demand curve. In this case, the equilibrium price shifts from one level to another leading to a change in price levels.
Similar to the stocks, the price of coffee has been observed each time. If there is little coffee being produced that price shoots up dramatically. Similarly, if there is a lot of coffee available in supply, prices go down. This means that coffee forms an inelastic demand curve. A shift in this curve is affected by the change in behavior of the commodity. Weather is bound to be the greatest factor affecting this product. In 2017, for instance, some of the developing nations which greatly rely on coffee as a means of livelihood were observed to record reduced production (Calo and Wise 2005, p.7). This can be attributed to the low levels of rainfall experienced in these countries. Uganda, where more than half of its exports constitute of coffee, was observed to have a great reduction in terms of coffee produced this year. This may imply that prices of coffee are bound to continue increasing over time,
Initially, the price for Arabica brand was $1.465, and now it is set to increase to $1.50 in the second part of 2017 (Jaramillo et al. 2011, p.23). This is largely due to the situation in some countries such as Brazil which contribute to the largest portion of coffee produced. There are a number of factors that could influence the quantity of coffee being demanded in the market. One of these factors could be the increase in incomes of individuals within the year. As such, their demand for the product would improve since by then many of them can afford to purchase the product. Another factor that is bound to influence the price is the increase in population. In the course of the year, however, it has been observed that some of the developing nations are leaving the coffee business owing to the low returns they get as a result of producing the commodity. Instead, these people are shifting to the real estate business, as more and more land is cleared to give way to the constructions.
It is evident as illustrated above that the demand for coffee is connected to the supply. The production of this commodity in 1997 greatly reduced culminating to an increase in the price of this product. Conversely, the increase in production in the subsequent duration led to a reduction in the price since there was a lot of coffee in the market. Price elasticity of demand and supply to a large extent affect the equilibrium price in the market. On the other hand, it is evident that continued reduction in the production of coffee, will stimulate high prices in the coming years, and some farmers may even opt to venture into other commodities. It is the high time that people began taking the necessary steps in ensuring that they keep track of the production of coffee in the forthcoming years to ascertain that it maintains its relevance.
Angrist, J. and Krueger, A.B., 2010. Instrumental variables and the search for identification: From supply and demand to natural experiments (No. w8456). National Bureau of Economic Research.
Calo, M. and Wise, T.A., 2005. Revaluing peasant coffee production: Organic and fair trade markets in Mexico. Global Development and Environment Institute, Tufts University.
CARBAUGH, R. J. (2015). International economics.
DAVIRON, B., & PONTE, S. (2013). The coffee paradox: global markets, commodity trade, and the elusive promise of development.
Jaramillo, J., Muchugu, E., Vega, F.E., Davis, A., Borgemeister, C. and Chabi-Olaye, A., 2011. Some like it hot: the influence and implications of climate change on coffee berry borer (Hypothenemus hampei) and coffee production in East Africa. PLoS One, 6(9), p.e24528.
NECHYBA, T. J. (2017). Microeconomics: an intuitive approach.
Osorio, N., 2012. The global coffee crisis: a threat to sustainable development. International Coffee Organization, London.
Philpott, S.M., and Dietsch, T., 2013. Coffee and conservation: a global context and the value of farmer involvement. Conservation Biology, 17(6), pp.1844-1846.