Market Analysis of Coffee - Essay Example

? Market Analysis of Coffee Introduction Holihan (2008) explains that, in economics, the term commodity specifically entails goods. A commodity is a product is a marketable item that is difficult to differentiate from other products of the same type that are from other manufacturers or producers. According to Holihan (2008), commodity products include both soft and hard primary goods. Soft goods include such agricultural (farm) products as wheat, coffee, and sugar while hard products include oil and petroleum, minerals and mineral ores, and steel among others. The class of commodity goods includes products with high market demand, but that are supplied to the market without qualitative differentiation e.g. from the taste of coffee, one cannot easily differentiate that it is from Brazil or Ethiopian highlands or if the coffee is a product of Nestle or Sara Lee companies without careful study of the brand. However, even though the commodity products are considered equal to one another, they are not exchangeable if they do not meet the market standards. For example, sugar as a commodity product, there is no company that has a higher chance of controlling its market supply or price level than other companies since to a consumer it is difficult to differentiate the taste of sugar (Holihan 2008). Based on the economic perspectives and arguments of commodity markets and commodity products, this research paper aims to analyze the market of coffee (as a commodity product): and the players in the coffee market. The analysis will encompass description of the coffee market structure, companies or players involved, market share, market size, major players, coffee demand and supply, competition and market dominance. Commodity market: Coffee Market The product coffee Often, people depict coffee as a homogenous product. However, this is not right because there are different types and forms of coffee in the market. According to ICO (2002), the two main types of coffee are Robusta and Arabic: Arabica is the largest, covers almost over 70% of the worldwide coffee trade, and exports while Robusta constitutes the remaining percentage of lower than 30% of the world market. ICO (1995) listed 70 coffee producing countries worldwide with Brazil and Colombia leading in coffee production. The Coffee Market Coverage In reference to Fridell (2007), coffee is not just a drink to enjoy; it is a global commodity and influences world economy. The commodity coffee has a global market and occupies a higher position in the world commodity markets. Fridell (2007) explains that the product has been an important international commodity for trade since 1800s. Coffee is the world’s most widely traded agricultural commodity. Research shows that many, including the world’s renowned historian Mark Pendergrast, have describe coffee as the second most legally traded world commodity after oil. Coffee has cemented its position in most world stock and securities exchange as an essential exchange commodity (Kirsten 2009). As a global product, Fridell (2007) notes that coffee follows a long market chain before its final consumption. On one, hand, the market of coffee constitutes net producers and net consumers while, on the other hand; there are net exporters and net importers in the world. Research shows that most producer countries are net exporters and not net consumers (Kirsten 2009). In addition, large multinational corporations that roast and retail the coffee to final consumers dominate the coffee market. Holihan (2008) says that the international trade has essential significance in global marketing and distribution of coffee. In the global market, international dealers, traders or international trade houses purchase coffee from the exporting countries. Roasters in Europe tend to purchase their coffee from international trade houses or specialized import agents with contracts of exporters in producing countries. While large roasters-corporations prefer ex-doxy purchase of coffee, small roasters prefer purchase of small lots in a delivered-in-store basis. World coffee Demand and Consumption The coffee statistics of (ICO 2012) indicate coffee is the highest consumed beverage with high market share among other beverages. The largest world importers of coffee are the European Union and the United States that hold over 50% of the total markets share of coffee. The European Union holds 32% of the total share of the world coffee imports while the United States holds 30% leaving the remaining 38% share for the remaining world countries (Africa, Latin America and Asia). Not all the imports in EU or USA are consumed internally since after processing the country’s export some of coffee to other world markets especially to the developing countries. The global consumption of coffee in the coffee year 2009/2010 summed up to almost 133.9 million bags out of which 72 million bags went to the importing countries (over 60%). The consumption trends of coffee have increased estimated at an average of 1.2% annually, and the increase is tremendous in developing and the producing countries like Brazil, South Africa and Kenya (ICO 2012). Coffee Market Structure and market Players Fridell (2007) explains that the coffee market is always described with the analogy of “coffee paradox”. The paradox outlines a coffee crisis in producing countries whose trend follows a low coffee prices and declining profits while there is a “coffee boom” in consuming countries that follow rising sales and profits for the coffee roasters and retailers. According to Fridell (2007), this paradox represents a coffee widening gap between the consumer and producer prices that the initiative of coffee fair trade is trying offset. This market shows that buyers have power in the market; hence, to some extent the coffee market is a monopsony at the purchase front. However, as Aksoy & Beghin (2004) explain, due to the different players in the coffee market, there are different market structures at different transaction fronts of coffee. According to Aksoy & Beghin (2004), at the retail front, the retail shops have a monopolistic competition (e.g., Starbucks, Dorman’s, Volcafe): while at the production and export, the produce countries have an oligopoly market. The market for raw coffee beans is near perfect competition since the large multinational companies that dominate that the market has perfect information about the market. In reference to Kirsten (2009), the structure of coffee markets is difficult to define either in local or international front. Coffee beans can be exported as green coffee or roasted before export: in either way, there are buyers. Trading of coffee can take a national form or cooperation form. Nationally, coffee trading encompasses the total country production of coffee producing countries worldwide (e.g., Brazil, Colombia and Vietnam are the current world leaders in coffee production and export). These producing countries export their coffee to the international markets (coffee exporter’s guide 2011). Based on cooperation, coffee purchasing cooperates compete in the market especially for green coffee (Aksoy & Beghin, 2004). The world coffee trade involves international trade houses, intermediaries, traders, large corporations and roasters. The current trend in coffee is increasingly concentrating on the roasting end of the industry. The leading worldwide coffee trading houses include Neumann, Ecom, Olam, Volcafe, LouisDreyfus, Noble, Sucafina, Armajoro and Mercon coffee companies. The coffee trade can follow a channel of growers selling to an agent who sells to an intermediary. The intermediary may sell directly to a roast house or sell to a trade house before the trade house sells to the roast house or company, which then sells to the final consumer after processing (coffee exporter’s guide 2011). Therefore, this indicates different and overlapping markets of coffee in both the corporate world and state (country division): since on one front, the cooperation still buy coffee from the producing and exporting countries (Fridell 2007) while, on the other front, the growers can sell directly to rosters through agents and intermediaries. For example, the coffee trading can take production form of the share producing countries in the market or purchasing power of multinational companies, coffee trading houses, roasters or intermediaries. The roasters can then sell to coffee shops (like Starbucks, Ambrosia or Dan Bross coffee shops) or retail the coffee locally to household consumers through their local stores (Adams 1982). Coffee Market Share: by Country and Company and Competition Coffee has become an important commodity in the world economy for a long time. In 2010, the coffee trade accounted for USD16.5 billion when 97 million bags were shipped (USDA Foreign agricultural service secular series December 2013). The coffee that is consumed in the world comes from different global regions mainly from the Latin America, equatorial African countries and the Far East countries (Fridell 2007). Multibillion companies and stock exchange floors in the world shape the pricing and futures decision of coffee. The world's four multinational companies, dominate the market for raw coffee beans as the main buyers: Procter and Gamble, Nestle, Kraft General Foods and Sara Lee (Aksoy & Beghin, 2004). Competition in the coffee market is fierce especially with the leading retailer shops (Starbucks, McDonalds and Dorman’s) and multinational coffee companies (Nestle, P&G, Mendelez and Sara Lee). These companies compete for the global market consumers. The competition is heating up such that the companies employ different mechanisms in the bid to capture and control the market. Nestle; for example, came up with instant coffee-Nescafe- is a preference for most consumers who do not want to brew their own coffee (Aksoy & Beghin, 2004). Other companies then followed suit for instant coffee. Such competitions can result into activities that harm the coffee industry. Nestle has been the leading world coffee producing company accounting for 30% of the USA market and controlling 28% of the European market. Nestle dominates the Europe market through its Nepresso franchise. The major Nepresso markets in Europe include France, England, Germany, Netherlands and Switzerland. The US based Mendelez is the world number two controllers in the market with its main market also in the United States and EU. Other multinational companies like Sara Lee, Procter & Gamble and Kraft General Foods share the remaining coffee market. The multinational companies monitor the growers market and ensure hefty purchase when the prices are low (Fridell 2007). They can sometimes use brokers to purchase coffee at lower prices from the farmers. They thus force the growers to sell their production at lower prices that cannot compensate for their production costs hence decline in production. The companies also study the consumer market in a bid to gain some competitive advantage over others. This is confirmed by the analogy of the “coffee paradox”. The paradox outlines that, while there are low prices for farmers that leads to low incomes, there are booms for traders who receive high profits leading to the presence of a wide market margin in the coffee industry. The USDA Foreign agricultural service secular series (December 2013) outlines the top five world producers of coffee as Brazil, Vietnam, Indonesia, Colombia and Ethiopia. The North America, Middle East and most parts of Europe act as mass importers and consumers of coffee. In 2011, Brazil was the leader in world coffee production and increased consumption. Statistics also show that there is increasing competition in the control of the world market share in the top three producer countries that are Brazil, Colombia and Vietnam. The three world leading coffee producers share a 55% production of the total world coffee production (Brazil 34%, Vietnam 13% and Colombia 9%) leaving the remaining percentage for other world producers. While coffee supply is defined as the sum coffee product plus stocks carried forward, exportable supply is defined as the supply minus the domestic consumption. The world coffee supply has been increasing with the intervention of the improved production technologies especially in Latin America and Africa (USDA, Foreign agricultural secular service December 2013). Coffee Trends According to the United States Department of Agriculture-foreign agricultural services (December 2013), the 2013 ending stocks indicate that world coffee production will continue rising especially in the leading countries of Brazil and Vietnam. However, the same report shows that major consumer countries (especially the European Union) are likely to remain flat. In the report, the current world coffee production per year stands at 126.2 million bags. The producing countries’ exports stand at 93.4 million bags an estimation that is valued at USD 15.44 billion. The report forecasts global coffee production at 150.5 million bags annually and notes that there is likely increased in world exports from Vietnam and Colombia in 2014 (USDA, Foreign agricultural secular service December 2013). Coffee prices Kirsten (2009) explains that overall commodity prices have risen by about 192% since 1950 and that some commodities (oil and gas) have risen much more. However, still other commodity prices have continuously faced price declines (soft commodities). Coffee prices are an example of the soft commodity prices that have been facing decline. By 2001, the declining coffee prices had fallen to their lowest price levels ever (Fridell 2007). The decline in coffee prices could be a result of several factors such as fluctuating market, rapid supplier growth without the rise of demand and the death of the international coffee agreement’s price regulation. In addition, the exploitation of the market by the large multinational retail and roasting companies could have resulted to decline of the coffee prices (Fridell 2007). Research and Markets (November 12, 2013) explain that to date, even though there are prospects of rising coffee prices the increments are still very low. The solution to the declining coffee prices can be increased price regulations, fair trade and supply control initiatives. Fair trade guarantees growers a fixed minimum price for their coffee, which can be double or triple the unsubsidized coffee market price (Research and Markets November 12, 2013). The fair trade initiative can also, emanate broker-exporters in the coffee trade who often purchase from farmers are prices lower than the market rates then sell at the stock exchange prices making huge profits. Conclusion Coffee is widely consumed across nations accounting for over 50% of the world beverage consumption. Contrary the common belief, coffee is not a homogenous product as there are different types and characteristics of coffee. Coffee has a global market and is the second most traded commodity after oil in the global market. It is also the highly traded agricultural commodity superseding tea, cocoa, cereals and other agricultural products. Many players at both the country dominion and the multinational companies characterize the coffee market. The key players of the coffee industry include the coffee producing countries, the multinational companies, roasting and trading houses, retail shops, and importer countries. In addition, the retail market of coffee faces high competition among the producing, roasting and retailing firms. The largest coffee markets are in the European Union and the United States that occupy almost 60% of the total coffee imports. Coffee trade faces a coffee paradox, which indicates that while the producers face low prices hence low profits and incomes, the traders experience price boom with high profits and hence high incomes. There is an increasing trend in coffee consumption especially in the producing and developing countries. References Adams, F.G. & J.R. Behrman (1982). Commodity exports and economic development, D.C. Heath and Company, Lexington, Massachusetts. Aksoy, M. A., & Beghin, J. C. (2004). Global Agricultural Trade and Developing Countries. Washington: World Bank. Food and Agriculture Organization of the United Nations. (2003). World agriculture: Towards 2015/2030 : an FAO perspective. Rome: Food and Agriculture Organization of the United Nations. Fridell, G. (2007). Fair trade coffee: The prospects and pitfalls of market-driven social justice. Toronto: University of Toronto Press. Holihan, M. B. (2008). The complete guide to investing in commodity trading and futures: How to earn high rates of returns safely. Ocala, Fla: Atlantic Pub. Group. International Coffee Oorganization, (2012). Coffee statistics, January-December, 2008 to 2012, ICO, London. Kirsten, J. (2009). Institutional economics perspectives on African agricultural development. Washington, D.C: International Food Policy Research Institute. Research and Markets (DUBLIN, November 12, 2013 /PRNewswire/). Global Coffee Market to 2017 - Market Size, Growth, and Forecasts in Over 70 Countries http://www.researchandmarkets.com/reports/2517089/ Talbot, J. M. (2004). Grounds for agreement: The political economy of the coffee commodity chain. Lanham, Md. Rowman & Littlefield. The Coffee Exporters Guide, third edition (2011). International Trade center, world trade organization. Geneva United States Department of Agriculture, Foreign Agricultural Service Circular Series (December 2013). Coffee: World Markets and Trade. 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