Coffee Bean Trade - Case Study Example

Introduction

The source of coffee is coffee bean which originates from then Coffee plant. Coffee beans are ranked as the leading market commodities which are highly traded in the market. Arabica and Robusta are the two major types of coffee beans, which are trading at different prices. Research evidence Arabica coffee is traded at a higher price as compared to Robusta beans. Despite the price conscious customers looking for different options, Robusta beans are on the rise. Additionally, there are various factors affecting the overall supply and demand for coffee beans. Some of these factors include; changes in technology, customer's preferences and production levels. The demand for a cheaper coffee has caused the price gap between Arabica and Robusta coffee beans to shrink tremendously. However, the outcome has contributed to increasing barely in the consumption of Arabica coffee beans. The changes in the world economy have contributed to people turning for cheaper coffee leading to increased demand for Robusta coffee. Likewise, suppliers are providing customers with different varieties of coffee that they can use to fill the need for cheaper Robusta and better Arabica Beans. Evidently, the production level of these two varieties of coffee beans has an impact on the supply. Moreover, the weather has shown impact in times of drought or freeze. In addition, due to the limited supply of coffee beans caused by drought, coffee prices were seen to increase. However, Robusta prices are depended on the output evident in the Vietnamese crop on a yearly basis. Also, the majority of Arabica coffee beans comes from Brazil, where a high projection of surplus is expected each year. Additionally, weather, plant disease, insect, and labour have an effect on the overall supply of the coffee beans. Changes in technology have a high impact on supply, making it shift from right to left in the equilibrium curve.

History of Coffee, Coffee Bean

The discovery of coffee was by an Ethiopian Goatherd called Kaldi. Kaldi had realized that goats which eat some beans turned to be very lively. In the 15th century, after coffee was discovered, it was consumed in Yemen. Consequently, coffee had already spread to Turkey and Persia by the 16th century. In England, the founding coffee house started in Oxford by 1651 and by early 17th century, many coffeehouses had been opened. Most professional males and merchants met in those coffee houses to drink cups of coffee chat and read newspapers. On the other side, the founding coffee house was started in 1652 in London, paving the way for more to be opened towards the end of the 17th century. In addition, Lloyd's coffeehouse was started in London in the 18 century a place which soon became the centre of marine insurance. A New Zealander named David Strang invented Instant Coffee in 1889 while freeze-dried coffee was invented in 1938. In addition, the coffee filter was invented in 1908 by Melitta Bentz while the modern espresso was invented by Achille Gaggia in 1946. Moreover, the decaffeinated coffee was invented in 1903 by Ludwig Roselius. Additionally, in 20th-century coffee table became a very popular item of furniture. Currently, Brazil is ranked as the top most World's Coffee, Bean Producer. Also, Brazil is the leading exporter of the models named; ‘Gorgeous Models ‘ranked from a coffee bean producing nation globally. It was in the year 2014 when Brazil recorded the high global production estimated 2,720,520,000 coffee beans in kilograms. Evidently, Brazil is the highest global coffee producer for over many years. Over 27,000 square kilometres of Brazil is covered by Coffee plantations. Most of the coffee plantations in Brazil are located in places where both the temperatures and climate contribute to higher coffee production. Brazil is the leading coffee bean producers as it processes coffee with the dry process (Unwashed Coffee). This type of process ensures that the coffee berries are dried in the sun instead of being washed leading to quality coffee bean production.

Culture of Coffee

The culture of coffee describes the atmosphere which is associated with behaviour that depends vigorously upon espresso. Coffee is viewed as a lucrative social lubricant; thus, all behaviours linked to coffee are classified as its culture. Additionally, the culture of coffee can be used to as a diffusion or adoption of coffee, which is a widely consumed stimulant by its culture. The culture of coffee was formed back in the 14th century back in Turkey. There are various places termed as classical social hubs, artistic places, and enormous intellectual centres. A good example is a place named Les Deux Magots situated in Paris, which acts as a tourists' attraction site. The coffee houses are popular places for artists, writers and socialites as well as political and commercial activities. To date, coffee houses are well decorated, have social outlets such as ‘open mic nights', and slower paced gourmet service. In America, the term society of espresso characterizes the omnipresent nearness of different coffee stands and espresso in the zone named Seattle metropolitan. While walking, one will easily come across espresso shops and stands just a walking distance along the roads in the urban centres. It is in such areas where customers flock in search for coffee. Additionally, the term culture of coffee is used in business media and popular places with the aim of describing the deep impact of the market penetration of many coffees serving establishments taking place there. Frequently coffee culture shows up comic and movies. There are TV shows which present characters with an espresso in his hand or shows people distributing takeout cups to various characters. Evidently, coffee and coffee shops tend to be a compliment. Coffee shops give consumers the environment where they can work or relax just like how coffee calms and de-stresses individuals. Now days, one can see chains like Starbucks at every block. Coffee has become accessible to consumers that it is very convenient for us and is there whenever we want it. There are costs and benefits for coffee being a pop culture. If we value the atmosphere of caffeine, then we wouldn't mind paying $5 for a cup of coffee. However, to others, they may see it as too expensive and not necessary.

Coffee Trade Economies

Coffee is one the most popular beverages in the world. Evidently, millions of small producers make their living from coffee, and 2.25 million cups of coffee are produced across the globe on a daily basis. Research proves that 90 % of the coffee production across the globe takes place in various developed countries while its consumption happens mostly in developing countries in areas like Africa, some parts of Asia, among other places. Again, 25 million small producers of rely on coffee production on a global level. In Brazil, coffee bean production has led to the creation of over 5 million jobs. People are employed to do the harvesting, cultivation and maintain coffee production. Coffee has led to improved trade economies as Brazil economy has tremendously improved. Coffee brings income to various countries across the globe.

Basic Analysis on Development of Coffee Bean Trade

As the largest traded commodity in the world after oil, coffee beans are grown almost exclusively by the very poor people, in the world. The individuals got close to nothing, in pay, for the hard dedicated labour put into caring and harvesting the commodity. During the late 1800s, coffee had already become a product recognised worldwide, and every entrepreneur was looking for any particular way to obtain profits from the new found beverage. It is estimated that coffee consumption is over 2 billion coffee cups a day in the world. The coffee industry is in high demand, and the more people that consume coffee drinks, the more important the quality and value of coffee becomes.

By the late 1800s, coffee was a global commodity. Every entrepreneur was looking for a particular way to profit from the new found beverage. From inventing self-emptying coffee bean roasters, to selling bags of coffee beans to individual buyers, to the beginning of the very first specialty shop, coffee was becoming the way of the world. However, in the world today, there has been a continued growth in the coffee movement with an increased number of small privately-owned cafes coming up on every corner, to expanded selections of the products of coffee on the shelves of local markets, to the addition of specialty coffees in restaurants. Coffee has become a traded commodity that is valued for its flavour. Basically, from the simplest cup of black coffee to the very complex Starbucks order, every coffee drinker employs a particular way of engaging in this wondrous drink. Again, Coffee has become a daily ritual in the lives many across the globe.

Evidently, an important political factor influencing a higher standard relating to coffee producing is the imposed fair trade coffee Act, which guarantees a fair price, for coffee beans, to producers in this particular industry. This has increased the pressure on organizations to trade socially, environmentally, and economically. In addition, these pressures will be reflected in the noticeable industry demands and rising market value for sustainable coffees.

The economic factors of coffee evidence major impacts on how businesses operate and make decisions to better their production. When focusing on the economic side of the coffee industry, an important factor is the local currency exchange rates. Importing and exporting different kinds of coffee between countries is very common, and currency exchange becomes vital. This is to ensure that the producer is maintaining fair trade. This gives the consumer the buying power of the valued commodity.

The coffee industry adapts to any and all changes in consumer attitudes. In 2003, the coffee market had a tremendous decline about 2.3%. Such a decline resulted from the consumers becoming more health conscious a factor which made coffee a less admirable choice. However, the coffee industry responded to the consumer health consciousness by offering now de-caff products, soy or non-fat milk, crisply crushed organic product squeezes, chai lattes and home has grown teas. Additionally, purchasers are less disposed to purchase espresso in stores because of the wide assortment of coffee being accessible in coffee shops. Again, hi-tech equipment is now accessible to coffee shops, which enable the coffee shops to offer a variety of hot/cold coffee beverages; from cappuccinos, ice coffees to blended cold coffees. Therefore, customers are turning out to be more learned of the ranges that particular new coffee beverages can offer whose tastes are changing to accompany this change.

The growing awareness of climate change is affecting how companies produce and operate. The natural effect is constantly positive, and it is essential that espresso generation and handling are considered for the ecological needs to guarantee ideal physical manageability. The monetary environment supports strength and sensible expectations for everyday comforts for the populaces included with espresso production. This is one reason coffee shops are staying away from the use of plastic and Styrofoam and eco-friendly paper cups.

Country various legal factors affect how a company operates in terms of coffee production, its costs, and the fluctuating demand for its products. Sometimes this leads to tougher customs, trade, and licensing regulations. There are industry-specific rules and regulations that the coffee industry must abide by. Also, the level of relationships between the U.S. and the countries that produce coffee beans is important. There must be a certain level of political and legal stability within each country. This again is where Fair Trade plays its part. Fair trade is an alternative trade that improves the position of disempowered makers by guaranteeing they are paid reasonable costs for the merchandise (espresso) and that money related advantages are utilized to advance the manageable improvement of their groups.

Coffee drinkers have remained stable even through the past recession. Over the next five years, the growth of the coffee industry will prevail. Moreover, with documented health benefits, more coffee shop being built, innovations in technology and the fact that the consumer will continue to search for and consume the greatest cup of coffee, coffee is here to stay. Like an economic recession in which would decrease consumers' consumption, the coffee industry will continue to burst towards the future. Coffee consumers see coffee as an important part of everyday life and are willing to spend money to have the drink.

Global Coffee Bean Market

The coffee bean market is still booming, and over 70 billion dollars are generated from the sale of coffee globally. The Roasters who are the intermediaries best in turning raw green coffee beans to shades of brown are the biggest beneficiaries from the sale of coffee bean. More than 25 million people around the world have their primary source of income tied to the volatile prices of coffee beans. Historically, coffee farmers have had the strength to support their families as they get money from the sale of coffee leaving many farmers impoverished. However, many people argued that coffee farmers ought to receive a portion of the profits currently enjoyed by the roasters. It is not a matter of sharing profits, but it's a matter of providing coffee farmers with a livable wage and better working conditions to better the global coffee bean market. By doing this, the roasters are provided with incentives to act as buyers of the coffee bean. In addition, such act prevents coffee farmers from being exploited by providing the right incentives for all roasters in ensuring that they participate in Fair Trade to better the coffee bean market. Limiting the supply of coffee coming from a specific market will contribute to increasing in the world market price leading to higher profits for all coffee farmers. In addition, the global coffee bean market will be better if governments and NGOs take action against exploitation of coffee farmers. Once the roasters feel sufficient pressure from the NGOs, they will tend to conform to the idea of paying a non-exploitative price for coffee beans. Evidently, large roasters have adopted a responsibility for Fair Trade policy leading to a better global coffee trade.

Competitor or Substitute Goods of Coffee Bean

The biggest competitors of coffee are energy drinks like Red Bull and 5 Hour Energy which also contain caffeine. Most energy drinks are categorised to be more just than caffeine, but a mixture of caffeine, vitamins, amino acids and sometimes herbs. When we drink coffee, we can control the amount of sugar that we put in it, but with energy drinks, there is no control. For example, a big energy drink has 57 grams of sucrose, which equals to 15.5 teaspoons. Espresso is characteristic refreshment while caffeinated beverages are frequently weighed down with counterfeit additives, flavours, and colours. According to an article in caffeine informers, energy drink has produced a perpetually developing rundown of overdose cases prompting hospitalization and even a few deaths. Espresso, which has been used for centuries, has very few of those occurrences.

There are other competitors like an energy drink that also contains caffeine, but have artificial flavours, unlike coffee which is more natural. When it comes to finances, it can make up to $13 million a day in just the United States. The main goal of coffee bean industry is to expand coffee as much as possible around the world, make people aware of its health benefits and work together with the competitor or match their prices without damaging the quality.

Coffee already has many big partnerships with grocery stores, coffee shops and other company who help grow the beans. If coffee becomes a partner with its competitor, it could grow even more. The competition will stop, and they can both promote their product together because; they both contain caffeine and could share their health benefits. This means we won't need resources because; most of them will come from partners. In addition, the international coffee market has a goal of educating its target market about the many health benefits of drinking coffee and how much cheaper and efficient can be compared to its competitors.

Strengths

Coffee can be found anywhere we go like coffee shops and groceries store.

Opportunities

International market is a great opportunity for coffee to expand

Weakness

• Competitors
• Expensive depending where people buy them.
• Some people have concerns about health problem with consuming too much caffeine.

Threats

Some countries have cultural and a political issue because of child labor is still being use for the production of coffee.

Part 2

Trade

Largest Coffee delivering nations are Brazil, Vietnam, Colombia, Indonesia, and Ethiopia. After producing coffee, these countries trade it to other nations to get money. The supply chain of coffee is made up of farmers, government agencies that regulate the trade and the traders or certification organizations. The International Coffee Organization assessed roughly 1.4 some coffee was exchanged every day in the globe in 2008. Furthermore, Germany is the second largest shipper of coffee, trailed by Italy in the second position, Japan third, and France. From production stage, coffee bean proceeds to the manufacturers and roasters' stage, to suppliers and wholesalers or shops and restaurants where finally the coffee consumer can enjoy the product. The industry is vertical as shown by the supply chain. The multinational industries considered to be the largest in the coffee industry include the Proctor & Gamble, Kraft Foods, J.M Smucker, and Nestle. Procter & Gamble have dominated the global coffee market with 47 and 37% market share recorded in 2008. One major coffee roasters in the world is the Starbucks that runs more than 8000 stores. This is equivalent to 32 percent of the total market share as per the 2007 statistics, showing how dominant they are in the market in terms of coffee trade.

Countries Where Need Coffee, Countries Where Produce Coffee Bean

America is one of the countries where coffee is needed. About 54% (150 million) of Americans over the age of 18 needs to drink coffee every day, and they usually consume 3 cups of coffee daily according to research was done recently. A cup of coffee can cost differently depending on where it's purchased, but the average price is around $3. If one pound of the ground bean is purchased ($8.99) instead at least 32 cups of coffee can be made which means each cup will cost around 28 cents (Jeszka-skowron et al., 2015). Most Americans purchase the drink from coffee shops.

Brazil is the world's top country regarding producing coffee across the globe. The European Union nations did their best to import 5.5 million bags of coffee in the year 2009.it is very obviously that person would choose beans from Brazil as it is the world best country in terms of producing coffee bean. Brazil has held its position of being the best world coffee bean producer for over 150 years. In Brazil, coffee plantations cover almost 11,000 square meters of land. Germany is the second biggest merchant of espresso, trailed by Italy, France, and Japan. In Brazil, most of the harvests are done in the southern part of the country where there is a more reliable climate for coffee bean production. It was back in the 18th century when Brazil started growing coffee beans and had grown the beans up to date. Coffee bean production in Brazil is very high. It is prudent that Brazil Espresso merchants must deliver espresso beans to be sold in America. Evidently, the Brazilians grow coffee without using harmful chemical, thus the reason as to why it sells very much across the globe. The production is recorded to be 80 percent of the world production. Additionally, the economic advantage of working with an espresso organization in Brazil is that the whole item handled is without obligation in America. Such a condition guarantees, to the point that coffee beans cost is brought down as espresso is the second imported merchandise behind oil in the United States.

There will be a market advantage through the use of the Brazilians coffee beans; since most Citizens they plant the most coffee for them not to run out of a supplier. One might pay more for the beans, but their coffee may in the long-run taste better than that of a supplier from small operations. Brazil as a coffee producing country, gives backs up to its farmers, so dealers would be sure of the quality of coffee they deal in.

To purchase from this supplier affects the Bottom-line. The effect is in a positive way through an increase in the net earnings. Once the product to supply the client is quality, there will be a willingness to purchase more of the product.

Fair Trade and Direct Trade

Fair trade started in the year 1988 when the world coffee prices had greatly declined. The fair trade movement worked to ensure a reduction in the environmental degradation that occurred in most coffee bean producing countries, along with giving a better quality of life to the farmer. The main obstacles for a coffee farmer are lower wages and bad working conditions along with a lack of better infrastructure and services. Also, the Fair Trade Labeling Organization (FLO) was created in 1997 to act as an umbrella organization representing more than twenty different certification initiatives around the world. Fair trade typically means that farmers are organized into local cooperatives and receive a "fair price" for their products. In addition, CSR in the form of Fair-trade in the coffee industry is vital and beneficial.

Fair trade is important in the coffee industry because coffee farmers are very subject to price instability. The 1999 coffee crisis negatively impacted many coffee farmers and raised awareness of the importance of price stability. There is also the sustainable coffee growing methods that have been supported by the fair trade. Such methods include the shade-grown coffee. This is better for the environment and is sold at a higher rate because of its environmentally friendly label. The intermediaries of supply chain contain the main issues. Author, Alice McDonald writes, "In ‘conventional' chains of intermediaries throughout the worldwide espresso exchange, and purchasers are isolated from makers using the frequently protracted, middle of the road exchanging chains through which makers offer to exporters—either specifically or indirectly via additional intermediaries." Furthermore, most little ranchers offer to agents, exporters who are nicknamed coyotes. These go between are known the not point of interest of little agriculturists, paying them underneath the market cost for their collects and keeping a high rate for themselves (global exchange). These statements show the fact that coffee industry is very vertical and most of the coffee problems lie within the supply chain.

Coffee Supply and Demand

The marketplace tends to respond continuously to various changing tastes that affect quantities and prices of Coffee and various events linked to the event. Evidently, the demand for coffee is bound to increase and decrease from time to time. Also, the supply of coffee will rise and fall depending on various demand and supply factors. Whenever all these changes are taking place, the market will be kept in balance through adjustments made in coffee bean price.

Figure 1: Quantity (Millions of Pounds of Coffee per Month). Source: Andriani, & Herrmann-pillath, 2015)

The above graph shows quantities of coffee, demanded on a monthly basis in the United States. There is an interest for 40 million pounds of espresso at a cost of$6 per pound. People might be enticed to drink more tea endless coffee when price coffee prices have reduced. Consequently, the quantity of coffee, demanded could increase due to the rise in the cost of tea, prompting more individuals to drink more espresso. 26 million pounds of espresso are requested on a month to month premises at a cost of $6 per pound at point A shown in the curve.

Figure 2: Quantity (Millions Of Pounds of Coffee per Month. Source: (Andriani, & Herrmann-pillath, 2015)

The demand curve D2 is evident whereby the quantity required takes place at 37 million pounds of coffee bean on a monthly basis (Point A). A drought is an event that reduces quantity supply mostly at the begging of the growing season leading to shifts to the left side of the demand curve.

The coffee bean market is not in equilibrium because the two coffee beans are constantly changing demands and price. With one type of coffee beans supply rising and another declining, the market is changing. One way for the market to reach equilibrium is to have suppliers offer both types of beans. If the consumers are given the options of the less expensive and higher-end coffee, the market could reach equilibrium in the long-run. If places like Starbucks continue to offer different flavours and new options like K-cups to brew at home, the demand may increase. As newer generations age the consumption of coffee is also increasing, and places like Starbucks give them a quick and trendy option.

The government can play a role in the market equilibrium as well. With taxes and tariffs, the government has an impact on supply and demand. They could lower or raise the taxes to help put the market in equilibrium. If coffee is heavily taxed and consumers are buying less than needed for equilibrium than the government could help with a reduction in taxes. With fewer government taxes and changes in technology, the supply and demand can have a better chance of reaching long run equilibrium.

International Coffee Market and us coffee market

As one of the most popular worlds' drinks, coffee; it contains a high content of caffeine which gives people energy at the time they need it. It contains many health benefits like reducing the risk of diabetes, burning fat and it's loaded with nutrients and antioxidants. However, coffee doesn't have a specific customer target, and rather the industry wants to target anyone who needs an energy boost or is looking for the health benefits. Basically, to build larger customer relationship the company that sells coffees will create loyalty programs to keep their customer informed and close.

International Pricing Scene

There are numerous factors that come into play with pricing coffee due to it being a homogenous product. Here are some factors for international coffee prices; green or processed coffee, market indicators (quality and origin), the future projection of prices, lastly the supply, and demand. Each coffee is unique in regards to its flavour and quality which set different prices. A unique coffee bean called Luwak sells for over $300 per pound due to the bean being naturally fermented as it passes through a weasel or also known as a Luwak on the Indonesian island

Conclusion

In conclusion, the coffee industry has a very sustainable place in the world today. With the establishment of fair trade, protection through local currency exchange rates, trends in social factors, Hi-tech equipment being accessible and the awareness to climate change, the coffee industry is in high demand, and the more people that consume coffee products, the more the quality and value of coffee become more important to the consumer. Evidently, coffee is a native to subtropical African and another Island in Southern Asia. There are many varieties of coffee, which include; coffee pods, coffee Beans, Ground Coffee, Coffee Roasts, and Coffee Capsules. Farmers are still being paid a very small percentage of what a cup of coffee sells for. The coffee movement has continued to grow with an increasing number of small independently-owned cafes, to expanded selections of coffee products at local markets, to the addition of specialty coffees in restaurants. Coffee has become a traded commodity, valued for its flavour and is here to stay. The price of coffee is higher than its competitor in certain locations. It would be a good idea to match the price of their competitor without damaging the quality. Also, we should stop doing business with a company that grows bean that uses child labour.