The World Coffee Market in 2011-2012 - Case Study Example

? The World Coffee Market in Table of Contents Technical Summary 3 Section World Coffee Market, 4 Section 2: Dynamics of WorldCoffee Prices, 2011-2012 7 Section 3: Price Elasticity, Coffee Demand and Supply 8 Price Elasticity of Coffee Demand 8 Price Elasticity of Supply 8 Section 4: Events/Factors that Affected World Coffee Prices, 2011-2012 9 Section 5: Key World Coffee Prices Determinants, 2011-2012 10 Section 6: Conclusions, Recommendations 11 References 13 Technical Summary The paper examines the world coffee markets and considers the underlying forces that affect demand and supply dynamics for the crop in the world markets. It looks at the underlying principles that govern the crop as one of the biggest commodity trades in the world markets; the dynamics of price setting relative to supply and demand; the shape and characteristics of the global coffee industry; the export and import figures; historical pricing; impact of price changes on supply and demand dynamics, how elastic or inelastic to price demand and supply is; the situation in the United States with regard to exports, imports, pricing; the top markets for coffee; factors that most impact supply and demand in the external environment for 2011-2012; figures for the top exporting countries and the top importing countries; total consumption; and the impact of various external factors on supply, demand, price and the intensity of volume and value exchanges in the coffee commodity markets. The paper also derives insights and conclusions relating to all of these considered factors, and makes recommendations moving forward. The general assessment is that of a coffee market on a global scale that is tilted towards the intermediaries being able to extract most of the value for coffee production from farmers, with the exporting countries themselves just getting a small percentage of the total value of their crop. Also, from the data, it is clear that the demand and supply are decoupled, or inelastic from the point of view of the indicator prices through time. The recommendations are along the lines of tilting the power balance slightly to give producers and exporters fairer value for their crops and to remove barriers to healthy market forces operating in the coffee markets (CTA, 2013; Boyd Coffee Company, 2013; Elliott, 2011; Harrington, 2011; International Coffee Organization, 2013; International Coffee Organization, 2013b; International Coffee Organization, 2013c; Investopedia, 2013; Igami, 2012). Section 1: World Coffee Market, 2011-2012 Data on exports reveals that the top exporting countries for coffee include Brazil in the top spot with 43.484 million bags exported in 2011 to 2012, followed by Vietnam, Indonesia, Colombia, Ehiopia, and India. The latter five countries’ total exports compare with the exports volume of the top country Brazil. The table below summarizes the exporting activities of the top ten exporting nations for the crop, from 2011-2012 and projections for 2013 (International Coffee Organization, 2013): Table Source: International Coffee Organization, 2013 On the other hand, the top importing countries for coffee are the EU taken as a whole, and the United States, with the US leading the ranking among individual nations, and also includes Germany, Italy, France, Japan, Belgium, Canada, Spain, the United Kingdom, and Austria. Total EU imports of coffee from 2011-2012 was 69.782 60-kilogram bags, while the US consumption was at 26.447 bags. Germany’s imports amounted to 20.84 million bags. Italy’s import figures for 2011-2012 was at 8.3 million bags; France 6.91 million bags; Japan 7.43 million bags; Belgium 5.84 million bags; Spain 4.79 million bags; the United Kingdom 4.15 million bags; Austria 1.47 million bags; Poland 3.4 million bags; the Netherlands 2.772 million bags; and Switzerland 2.52 million bags (International Coffee Organization, 2013b; Compare Infobase, 2013). World production figures for coffee for 2011-2012 is at 135.9 million bags, and represents growth from previous years, even as estimates for production for the following year are even higher, at 144.4 million bags (International Coffee Organization, 2013): Plot Source: International Coffee Organization, 2013 World consumption figures, on the other hand, for 2011 to 2012 was placed at 140 million bags, also reflecting continued growth in consumption and representing a figure that is higher than worldwide production for that year (International Coffee Organization, 2013): Plot Source: International Coffee Organization, 2013 Looking at the data and situating the United States among the importers and exporters, we see that the country ranks highest in terms of coffee imports, whereas it does not rank anywhere among the top exporting countries for the crop (International Coffee Organization, 2013; International Coffee Organization, 2013b). Considering the place of coffee in world commodity markets, that it is the top food import in the United States and the number two import overall after oil by the largest economy in the world places a high degree of importance on the crop. That it is also the subject of a trade paradigm where poor countries dominate production, where middlemen keep farm gate prices suppressed so that they are able to maximize their own profits through that paradigm, and that the end-consumers belong to the wealthiest economies in the world, means that coffee is also a very valuable crop overall for the world economy. The presence of so many state actors as consumers and producers, like oil, makes this so. On the other hand, considering the market competitiveness of the current structure of the world coffee market, one can say that it is not competitive, given that there is a glut of supply, that there is a massive capacity for its production in the producing countries, and that a powerful intermediary market controls its production and keeps production tightly controlled in order to control the prices. Price controls in place means that the competitiveness of the entire world coffee market structure is not competitive (International Coffee Organization, 2013; International Coffee Organization, 2013b; Global Exchange, 2011; Igami, 2012). Section 2: Dynamics of World Coffee Prices, 2011-2012 ICO tells us that it gives weights to the four types of coffee beans, Colombian mild, Other milds, Brazilian naturals and Robustas, and then sets the ICO composite indicator price according to the weights associated with the prices of those four coffee bean types. The weightings are issued in circulars for particular time periods. For instance, for March 2011 onwards the issued weightings for those four bean types are 12, 23, 31 and 34 percent respectively (International Coffee Organization, 2011). The current composite indicator price is the April 29 price, which is 129.42 US cents per pound (International Coffee Organization, 2013c). Looking at the ICO indicator prices for 1998 to 2012, one can see that there are fluctuations in the indicator price from year to year, with prices trending downwards and bottoming out in 2001 prior to ascending to its highest level at around 210 US cents per pound in 2011before going down to about 156 US cents per pound in 2012. The overall trend for 2011-2012 is that of an increase in the indicator price, followed by a somewhat steep drop towards the end of 2012. From the 230 US cents per pound peak in April of 2011, the trend has been one of reductions in the indicator price, a trend that has persisted through the first quarter of 2013 (International Coffee Organization, 2013d). It is interesting to note that the prices have peaked and then waned from April 2011 to the present day, and that the downward trend has a steep negative slope in comparison the more gradual fluctuations in the indicator prices from 1998 to the early part of the new millennium. In contrast, the reductions in the indicator prices over the past year and a half can be considered as somewhat very rapid and steep relatively speaking (International Coffee Organization, 2013c; International Coffee Organization, 2013d). Section 3: Price Elasticity, Coffee Demand and Supply Price Elasticity of Coffee Demand We look at the data on indicator prices for coffee for the most recent periods, extending to the last few years, and we see that a downward trend in indicator price from 2011 to the present has not translated to reductions in figures for recorded imports and projected imports of coffee from the major final consumer countries. This indicates that the price elasticity of demand for coffee is low. In other words the coffee demand is price inelastic to some degree. This same conclusion can be gleaned from the steady increase in recorded demand over many years, even as the indicator prices have fluctuated greatly relatively speaking (International Coffee Organization, 2013; International Coffee Organization, 2013b; International Coffee Organization, 2013c; Investopedia, 2013). Price Elasticity of Supply Again looking at long term export figures for coffee one can see that there is some fluctuation in the export figures even as the general trend is one of a small but sustained upward movement in export figures. Using this as proxy for supply, we see that there is also inelasticity in the price elasticity of the supply of coffee, because we know from the data that the indicator prices have swung relatively greatly during the period from 2001 to 2012. In the period when indicator prices have been trending down from 2011 to 2012, for instance, supply has remained relatively at the same levels judging from exports. This is true in the short run and the long run (International Coffee Organization, 2013; International Coffee Organization, 2013b; International Coffee Organization, 2013c; Investopedia, 2013). Section 4: Events/Factors that Affected World Coffee Prices, 2011-2012 The literature tells us of several factors during the period in question that impacted supply considerations in the coffee market, chief among them fears that the preceding periods and the coming periods from the current vantage point would be marked by boom and bust economics, particularly so given the long gestation period for harvests; weather conditions that have caused havoc in supplies availability and reliability; and partly due to the way speculators have focused on coffee in the world trading markets causing volatility and uncertainty in the pricing. On the other hand, the demand factors for this period includes the continued rise in demand for coffee in emerging economies; the continued rise in demand in the traditional markets of Europe and the United States; and the somewhat subdued but favorable trends towards economic recovery in the aftermath of the economic crisis that gripped the world from the financial crisis in 2007 to 2008. The top five factors with the greatest impact on supply and demand dynamics for coffee are rise in demand in emerging markets; rise in demand in traditional markets; weather conditions; speculations in the trading markets; recovery in the global economies after the 2007 financial crisis, with exception in some countries in Europe (CTA, 2013; Boyd Coffee Company, 2013; Elliott, 2011; Harrington, 2011). Supply Impact Demand Impact Price Impact Impact on Amount Exchanged in Market Emerging market rise in demand Increase in demand Increase Increase Traditional markets rise in demand Increase in demand Increase Increase Adverse weather conditions Decrease in supply Increase Increase Trading markets speculations on price Fluctuations in price, downward movement in price Increase Recovery in global economies Increase in demand Increase Increase Table inputs sources: CTA, 2013; Boyd Coffee Company, 2013; Elliott, 2011; Harrington, 2011 Section 5: Key World Coffee Prices Determinants, 2011-2012 As can be gleaned from the indicator prices, one can see that as a whole there has been a downward trend in prices for 2011-2012. On the one hand, from the factors above, the strongest factors affecting supply dynamics has been the hesitation of the exporters to produce more, as well as the supply constraints put forward by weather difficulties. Meanwhile, the biggest factors affecting demand have been the uptick in demand in emerging economies, as well as the continued strength in demand in the EU and the US, the traditional markets. The price inelasticity of demand and supply on the other hand indicate that the pricing movements are decoupled from the continued steady presence of supply and the continued rise in demand (CTA, 2013; Boyd Coffee Company, 2013; Elliott, 2011; Harrington, 2011; International Coffee Organization, 2013; International Coffee Organization, 2013b; International Coffee Organization, 2013c; Investopedia, 2013; Igami, 2012) Section 6: Conclusions, Recommendations The rise and fall in coffee prices is seen as not affecting the consumption and the supply of coffee in the United States, which has seen steady growth in demand over the years. In general, it can be said that the price for coffee in the United States, or the farm gate or market prices for coffee in the world market, is just a small percentage of the total market value of coffee in the destination or consumer markets. On the other hand, we see too that the demand and supply of coffee is inelastic with respect to the indicator prices through time. It is the coffee producers or exporters who are affected by falling and rising prices the most in the long run, given that the way the industry is set up gives the exporters little power in terms of setting prices and margins for their produce. The recommendation is to tilt the balance of power somewhat in favor of the exporters, to give them a larger share of the economic value of their produce and to shift the market dynamics so that they are more in tune with natural supply and demand forces (CTA, 2013; Boyd Coffee Company, 2013; Elliott, 2011; Harrington, 2011; International Coffee Organization, 2013; International Coffee Organization, 2013b; International Coffee Organization, 2013c; Investopedia, 2013; Igami, 2012). References Boyd Coffee Company (2013). Coffee prices remain firm: Arabica demand forecasted to exceed supply. Boyd’s Coffee. Retrieved from http://www.boyds.com/news/coffee-prices-remain-firm-arabica-demand-forecasted-to-exceed-supply/ Compare Infobase (2013). World Map- Top Coffee Importing Countries in the World. Maps of the World. Retrieved from http://www.mapsofworld.com/world-maps/top-coffee-importing-countries.html CTA (2013). Executive Brief Update 2012: Coffee Sector. Agritrade. Retrieved from http://agritrade.cta.int/en/layout/set/print/Agriculture/Commodities/Coffee/Executive-Brief-Update-2012-Coffee-sector Elliott, L. (2011). Global financial crisis: five key stages 2007-2011. The Guardian. Retrieved from http://www.guardian.co.uk/business/2011/aug/07/global-financial-crisis-key-stages Global Exchange (2011). Coffee FAQ- Coffee in the Global Economy. GlobalExchange.org. Retrieved from http://www.globalexchange.org/fairtrade/coffee/faq Harrington, D. (2011). Coffee Prices 2011-2012- Coffee Price Increase- Coffee Shortage. Espresso & Coffee Guide. Retrieved from http://www.espressocoffeeguide.com/2011/06/coffee-prices-2011-2012-coffee-price-increase-coffee-shortage/ Igami, Mitsuru (2012). Oligopoly in International Commodity Market: the Case of Coffee Beans. Yale Department of Economics. Retrieved from http://www.econ.yale.edu/seminars/IntTrade/it12/igami-120926.pdf International Coffee Organization (2011). Annex 1: Share of the Markets in Each Group of Coffee and Their Weightings in the Calculation of the ICO Composite Indicator Price. ICO.org. Retrieved from http://dev.ico.org/documents/icc-105-17e-rules-indicator-prices-a1.pdf International Coffee Organization (2013). Outlook for the World Coffee Market. ICO.org. Retrieved from http://www.ico.org/presents/1213/march-ico-outlook.pdf International Coffee Organization (2013b). Imports of All Forms of Coffee by Selected Importing Countries From All Sources January 2013. ICO.org. Retrieved from http://www.ico.org/prices/m4.htm International Coffee Organization (2013c). ICO Daily Indicator Prices 2007 April 2013. ICO.org. Retrieved from http://www.ico.org/prices/pr.htm International Coffee Organization (2013d). ICO Indicator Prices Annual and Monthly Averages 1998 to 2013. ICO.org. Retrieved from http://www.ico.org/prices/p2.htm Investopedia (2013). Economics Basics: Elasticity. Investopedia.com. 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