“To What Extent is the price or Arabica coffee, between the years 2007 and 2012, affected by supply side shock?”

Economy

By Rasmus Harsaae

Copenhagen International School

Candidate #: 000004 -018

Words 3985

(Excluding titles of tables, diagrams and charts)

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Abstract

The coffee trade has been a thriving industry ever since the Dutch first managed to

steal a plant and bring it back to Amsterdam in 1616. Since then the coffee has become a global

market. The aim of this essay is to answer the question “To what extent is the price of Arabica

coffee, between the years 2007 and 2012, affected by supply side shock?”

My review of the laws of supply and demand will determine the theory on the topic. Using the

theory on the data collected will determine what has been the actual cause for the price fluctuation

in the coffee market.

The research question focuses mainly on the market values of the Arabica coffee market, as

registered by the New York Coffee exchange. Therefore the primary sources will consist of the

real market data for the prices of Arabica coffee. Further I have interviewed the biggest coffee

buying company in the Nordic region.

The data collected will then be transformed into graphs, charts and tables. With the research of

actual supply and demand changes and patterns in the charts and primary data, alongside the

secondary information, the essay will conclude, that it was not supply that changed the price of

Arabica coffee. It was in fact the speculators, who especially from 2010 until 2012 have been

manipulating the price of Arabica in order to form maximal profits.

I will conclude that it was the market speculators who drove the market price for Arabica up. Even

though the supply side was the cause of some instability, due to the coffee crop being affected by

weather. The main cause for the price spikes was the speculative buying by investors fleeing the

stock market in search of higher profit.

Words: 289

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Table of Contents

1.0 Introduction…… ...................................................................................................................... 4

2.0 Global Coffee market ............................................................................................................... 5

2.1 Basics of Coffee ................................................................................................................. 5

2.1.1 Suppliers of coffee .................................................................................................... 6

2.1.2 Global Coffee consumption ...................................................................................... 7

3.0 Relevant Theory and Research methodology. ......................................................................... 8

3.1 Theory of Supply and Demand .......................................................................................... 8

3.1.1 Market Equilibrium ................................................................................................... 9

3.1.2 Substitutes ............................................................................................................... 11

3.2 Research methodology ..................................................................................................... 11

3.2.1 Sources .................................................................................................................... 12

3.2.2 Limitations and Validity of data ............................................................................. 12

4.0 Analysis of relevant findings ................................................................................................. 13

4.1 Market in 2007 ................................................................................................................. 13

4.2 Supply Changes ................................................................................................................ 13

4.3 Demand Changes ............................................................................................................. 15

4.4 Market in 2012 ................................................................................................................. 16

5.0 Conclusions ............................................................................................................................ 17

5.1 Unresolved Questions and Additional Thoughs .............................................................. 19

6.0 Evaluation and Personal Reflection ....................................................................................... 19

Bibliography: ............................................................................................................................... 21

Appendixes ................................................................................................................................... 24

1 Coffee production and Consumption totals .............................................................................. 24

2 Brazilian Coffee production…………………………………………………………………..24

3 Columbia Coffee production ..................................................................................................... 25

4 Coffee production Mecron Group ............................................................................................. 25

5 Excel Chart averages of Mecron group data and New York Coffee Market Price ................... 26

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Rasmus Harsaae

2012

1.0 Introduction

The aim of this extended essay is to identify and explore some of the different characteristics

of the Arabica coffee bean market. The essay will go in depth from different sides of the market

dynamics and tries to identify what causes the volatility in the market. The aim is to form an

overview of the market and dissect it from three different angles, supply, demand and speculative

buying.

The topic is chosen for two reasons, self-interest and being able to relate with the subject. Firstly

there is my personal interest is in the stock market. The stock market, however is driven by many

variables depending on the industry, whereas the Arabica coffee market resembles the stock

market with fewer variables. Further I started thinking; why does the coffee in the store suddenly

increase in price and why is coffee in cafés so expensive? The average Dane drinks at least 1 cup

of coffee a day, therefore even a small increase in the price can actually have an impact on the

private household budget. Denmark being one of the highest coffee consumption per capita in the

world, the price of coffee impacts everyday life.

My research question is “To what extent is the price of Arabica coffee, between the years 2007

and 2012, affected by supply side shock?”. This research question illustrates the dynamics of the

coffee market appealing to research. The coffee market is interesting because it provides an

example of theory through practice. The supply and demand theory from most economy books can

be applied to the coffee market. Therefore analysing the commodity market with the knowledge

from the textbook and applying it directly to the subject makes it an attractive subject to write an

extended essay on.

Further the recent fall in the value of the stock market and the incline in the global market have

moved investors to find new ways to make profit. Many of them have moved into the commodity

market. The market is no longer just being controlled by supply and demand, speculators are also

manipulating it systematically. To find the cause I will analyse which of the three main market

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drives has affected the market most. I will do this by using the real market data supported by

interviews. The question arises from the hypothesis that the supply side has been the drive that

most affected the price of Arabica coffee.

2.0 Global Coffee market

2.1 Basics of Coffee

Coffee beans journey from bean to cup, starts with farmers.1 Farmers cultivate their land to grow

coffee, and then the beans are harvested using manual labour.2&3 The raw coffee beans are then

sold to coffee roasters and the price is decided on the New York Coffee exchange. Once bought

the coffee is transported to the nearest port, and shipped to its destination.4 When it reaches the

company it is roasted until it has the desired taste. After roasting it is packaged and sent out to the

stores for the consumers to buy.

The coffee producing market is a relatively complex market with over 80 different types of coffee

beans, but it is divided into two main categories, Robusta and Arabica. The sale of Arabica coffee

makes up 80% of the worlds entire coffee market; Arabica coffee contains less caffeine, and is of

higher quality. Robusta coffee has more caffeine and has a lower quality, and therefore 95% of the

time instant coffee is made using Robusta beans.5

The way which coffee is traded is almost exactly like the stock market. The New York coffee 6market works in two ways, present and futures. The present is what is paid on the spot, using the

exact market price. When buying in futures the supplier looks at the stock and calculates how

many bags are will be produced at that time. From those estimations, futures eventually are sold

like presents.

1 "The History Of Coffee." - National Coffee Association. National Coffee Association of U.S.A., Inc., n.d. Web. 27 Aug. 2012. <http://www.ncausa.org/i4a/pages/index.cfm?pageid=68>. 2 "Coffee Trading." Coffee Market Trading. 2009 Market Technologies, 2009. Web. 27 Aug. 2012. <http://www.tradertech.com/information/coffeetrading.asp>. 3 "JavaScript Detector." JavaScript Detector. Nestlé 2012., n.d. Web. 27 Aug. 2012. <http://www.nestleprofessional.com/uk/en/SiteArticles/Pages/History_of_Coffee.aspx>. 4 "Ten Steps To Coffee." - National Coffee Association. National Coffee Association of U.S.A., Inc., n.d. Web. 27 Aug. 2012. <http://www.ncausa.org/i4a/pages/index.cfm?pageid=69>. 5 Pendergrast, Mark. Uncommon Grounds: The History of Coffee and How It Transformed Our World. New York, NY: Basic, 1999. Print. 6 "Coffee as a Market." Microeconomics. N.p., n.d. Web. 27 Aug. 2012. <http://tutor2u.net/economics/revision-notes/as-markets-coffee.html>.

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2.1.1 Suppliers of coffee

Growing coffee requires a specific climate, found around the equator. Therefore it’s the

developing countries around the equator that can benefit from the coffee production as shown in

diagram 2.

Diagram 1: Where coffee is being produced.7

Table 1: Table of the world’s Largest coffee producing countries years 2010-2011.8 Total Arabica Robusta Brazil 54,500 41,800 12,700 Vietnam 18,725 n/a 18,150 Colombia 9,500 9,500 n/a Indonesia 9,325 n/a 7,950 India 5,100 n/a 3,600 Ethiopia 4,400 4,400 n/a Honduras 4,000 4,000 n/a Peru 4,000 4,000 n/a Guatemala 3,910 3,900 n/a Mexico 3,700 3,500 n/a Measured in thousands of bags, one bad contains 60 Kg bags of coffee.

Table 2: other producers worth mention years 2010-2011.9

Arabica Robusta Nicaragua 2,000 n/a El Salvador 1,700 n/a Costa Rica 1,575 n/a Cote d’Ivoire n/a 2,100 Uganda n/a 1,900 Malaysia n/a 1,000 Thailand n/a 900 Cameroon n/a 525 Togo n/a 525

7 "EXPORTS BY EXPORTING COUNTRIES TO ALL DESTINATIONS." Http://www.ico.org/prices/m1.htm. © International Coffee Organization, June 2012. Web. 27 Aug. 2012. <http://www.ico.org/prices/m1.htm>. 8 Doom, Justin. "World's Top 10 Coffee-Producing Countries in 2010-2011." Bloomberg. Bloomberg, 19 Aug. 2011. Web. 15 Oct. 2012. <http://www.bloomberg.com/news/2011-08-19/world-s-top-10-coffee-producing-countries-in-2010-2011-table-.html>. 9 Doom, Justin. "World's Top 10 Coffee-Producing Countries in 2010-2011." Bloomberg. Bloomberg, 19 Aug. 2011. Web. 15 Oct. 2012. <http://www.bloomberg.com/news/2011-08-19/world-s-top-10-coffee-producing-countries-in-2010-2011-table-.html>.

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From tables 1 and 2 (see appendix 1), it is evident the key country is Brazil which produces double

the amount of coffee than any other country. Further it shows how climate dependant coffee

growing is. Brazil capitalized on its perfect climate and has in a sense become one of the super

powers of the Arabica coffee market. The trend seems to be that the more developed the supplier

are more likely to produce Arabica rather than Robusta. The exception to the more developed

countries producing Arabica is Ethiopia reason being Ethiopia is the birthplace of coffee.

2.1.2 Global Coffee consumption Global coffee consumption in 2011 was 8.27 million tons of coffee or 137.9 million bags, which is

an increase form 2010 by 0.6% (8.23 million). It has been rising ever since 2009 where the biggest

increase of 3.5% happened despite the global recession.10 A recession is a period of economic

contraction over a period of two quarters or more. 11 A boom is the opposite, a booming economy

is an expanding one, for example the years 96-06.

Diagram 2: map of coffee consumption kg per capita.12

Diagram 2 shows how the western world, and Australia, consumes large amounts coffee. Coffee

being a ‘luxury’ product its usage is limited to higher income markets. These were some of the

first “developed” countries and have been drinking coffee ever since it first started being traded.

10 ICO (international Coffee Organization). "High Retail Prices Affect Coffee Consumption in 2011: ICO." High Retail Prices Affect Coffee Consumption in 2011: ICO. N.p., 11 July 2012. Web. 15 Oct. 2012. <http://www.business-standard.com/india/news/high-retail-prices-affect-coffee-consumption-in-2011-ico/178224/on>. 11 Moffatt, Mike. "Recession? Depression? What's The Difference?" About.com Economics. N.p., 2010. Web. 23 Oct. 2012. <http://economics.about.com/cs/businesscycles/a/depressions.htm>. 12 "Current Worldwide Annual Coffee Consumption per Capita." ChartsBin. N.p., n.d. Web. 27 Aug. 2012. <http://chartsbin.com/view/581>.

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Table 3: Top 5 Coffee drinkers Per capita.13&14 Country Metric Tons Kg Per Capita Finland 63,414 12 Norway 46,285 9.9 Iceland 2,679 9 Denmark 47,592 8.7 Netherlands 137,525 8.4

As can be seen in table 3 all top 5 coffee drinking countries are in the Europe. Demand is driven

by the change in coffee consumption. Either by people drinking more coffee, or the type of coffee

drank (i.e move to speciality coffees like espresso or lattes). Coffee consumption is also

increasing, because people drink more out of home/office, more ”on the go” coffee. This is

evident by expansion of global coffee chains such as Starbucks.

3.0 Relevant Theory and Research methodology.

3.1 Theory of Supply and Demand Supply and demand is the idea that there is market equilibrium where supply is equal to demand,

and the equilibrium can shift depending on the supply and demand. The law of demand states, “as

the price of a product falls, the quantity demanded of the product will usually increase, ceteris

paribus”. Ceteris paribus means “all other things equal”.15 If no outside forces apply to the

market, the rule will be true, however if outside market forces do apply the law becomes

theoretical. In the coffee market, forces such as time, higher or lower crop production, higher or

lower demand, apply meaning that Ceteris paribus, is purely theoretical.16

13 O'Hanlon, Ryan. "A World of Coffee." The Good Men Project. N.p., 17 Feb. 2011. Web. 15 Oct. 2012. <http://goodmenproject.com/newsroom/a-world-of-coffee/>. 14 Drinking Patterns in Selected Importing Countries ." International Coffee Council, n.d. Web. <http://dev.ico.org/documents/icc-108-1e-drinking-patterns.pdf>. 15 Blink, Jocelyn, and Ian Dorton. Economics Course Companion. Second ed. Oxford: Oxford UP, 2011. Print. 16 Galbraith, John K. "5 The Economic Scene Then: A Digression." A Journey Through Economic Time. Boston: Houghton Mifflin, 1994. 43-47. Print.

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Chart 1: Supply, demand curve, where Ceteris paribus applies.

(Made Using the Program OmniGraphSketcher for Mac)

Chart 1 shows supply and demand perfect equilibrium, with a supply of 5 and demand of 5. The

law of demand states, if demand goes up, supply will follow and visa versa. Supply and demand

are reliant on each other, if either react the other will have to adapt and form a new market

equilibrium.

3.1.1 Market Equilibrium

Equilibrium is the point when the demand is equal to the supply, and without a shift in supply/

demand equilibrium will remain the same. A shift in supply / demand is when an outside force

affects the market and forces a change. For example a shift in the demand could be, if more people

want to buy coffee and the supply remains the same. Example below illustrates the theoretical

coffee market.

Chart 2: Demand Shift

(Made Using the Program OmniGraphSketcher for Mac)

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In chart 2, a shift in demand occurs the green line represents the new demand. However the supply

hasn’t changed, the price increases in order to eliminate the excess demand. The pink lines

represent the new equilibrium, now 6 people want coffee, but supply is 5, so the price increases

until supply side can create more products.

A demand shift can occur both in increasing demand, but also decreasing, for example during the

recession. In this case it could be that there is surplus supply. The suppliers do not want surplus

supply so in order to get rid of the product; they must sell at a decreased price, which in turn

creates new market equilibrium.

Chart 3: Supply Shift

(Made Using the Program OmniGraphSketcher for Mac)

Chart 3 shows a supply side shift, where the supply is decreased. This means that there is less

coffee than fits the demand. The green line represents the new market equilibrium, the price

increases, like a demand shift, there is more demand for too little product. Now only the

consumers who need the product will buy the coffee.

Like demand shifts, supply can go both ways. It is irregular for supply to be higher than demand,

unless a demand shift occurs. What could happen is that the predicted crop harvest is better than

first estimated, which is good for the consumers, because there is more product and the price falls.

This is bad for the farmers who have to sell more products for less, making less total profit.

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3.1.2 Substitutes If the price of coffee gets too high consumers can either, buy less coffee, move to a lower quality

coffee, or buy a substitute for coffee. For example a coffee drinker could move from Arabica

coffee to Robusta or another source of caffeine. Even though the two types of coffee can be

grown in the same climates Robusta beans are less sensitive to the weather and is less quality

dependent, which is less likely to have a sudden increase in price.

3.2 Research methodology

Diagram 4: Thought process

The table above shows illustrates evidence of good planning. Importantly the arrows show the

learning process, where deeper analysis made me return to phase 1&2 to find more information.

After going back and doing the extra research, I found new data that was useful and made it

possible to plot approximate charts and graphs to analyse the market. On top of the statistical data

on the coffee market, the key input came from interviewing the buyer for Paulig in Finland,

Katariina Aho. Utilizing the information from both the interview and my primary sources, I

calculated and made charts using the data in order to back up my analysis.

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3.2.1 Sources My primary sources were the official numbers from the Arabica coffee market, and interviews.

My secondary sources were, books, newspaper articles, and websites. All the data used come from

past and finished markets, even though the numbers could be as recent as 24 hours; they were still

be dated in the fast paced coffee market.

3.2.2 Limitations and Validity of data The main limitation I made, was to exclude the futures from the research. Futures are predictions

of how the market will look like, so that the buyers know when to purchase and when to sell.

Instead I have focused on the actual coffee prices provided by the New York commodity

exchange. Another limitation was that it was not possible to uncover who or why companies

speculatively invest in commodities.

The data is valid, because of the consistency of the findings throughout both primary sources and

secondary sources. The primary sources using the actual market data, is then supported by the

secondary sources. With the constant updates occurring in the market I was able to stay right in

the action of the coffee market, and learn directly from the source.

Primary Sources: 1. Interviews 2. New York Market Data 3. Extrapolated data 4. Professionally analyzed market data

Secondary Sources: 1. Articles 2. News 3. Market data from websites 4. Websites 5. Books

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4.0 Analysis of relevant findings

4.1 Market in 2007 In 2007 the global coffee (all types) consumption was 127,73117 thousand 60 kg coffee bags, and

the global production was 123,948 (all types) thousand bags. The numbers reveal that in 2007

there was a slight market supply deficit. The way that the consumption can be over the production

is because the previous year had market surplus. The way the coffee harvest works, is like a wave

every other year has a higher yield, where 2007 the market demand was slightly higher than the

supply.

4.2 Supply Changes In 2007 84.1 million18 bags of Arabica were produced where as in 201219 a total of only 80.6

millions bags of Arabica is a total decrease of -5.13%. Meanwhile the demand has increased by

7.05% over the past years as shown in 4.3.

Chart 4: Supply Shift 2007 vs. 201220

17 United States Department of Agriculture. "Coffee World Markets and Trade." USDA Foreign Agricultural Service, June 2012. Web. <http://www.fas.usda.gov/psdonline/circulars/coffee.pdf>. 18 Alexander Nicolau. "Coffee." Commodity:. N.p., n.d. Web. 27 Aug. 2012. <http://www.wikinvest.com/commodity/Coffee>. 19 "EXPORTS BY EXPORTING COUNTRIES TO ALL DESTINATIONS." Http://www.ico.org/prices/m1.htm. © International Coffee Organization, June 2012. Web. 27 Aug. 2012. <http://www.ico.org/prices/m1.htm>. 20 By Rasmus Harsaae, using data from the Mercon Coffee Group, from Paulig.

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Chart 4 shows the difference in supply between 2007 and 2012, as the supply has decreased the

price has increased to try and balance the demand. The demand curve is the averages of 2007-

2012. As it looks the supply has decreased pushing price up. In 2008 there was a general lack of

supply on the market, which drove the price up. Below are the estimations for Brazils coffee

production.

Charts: 5 & 6 Brazil and Columbian coffee supply21

Brazil22 and Columbia are two of the world’s biggest coffee suppliers (see appendix 1,2, and 3).

However bad weather in 2008 meant that the production of coffee decreased and was below the

demand. Since then Brazil has somewhat returned, where as Colombia still hasn’t recovered. In

08-09 Columbia’s production decreased by 3million 60 kg coffee bags, and 07-08 Brazils

production decreased by about 7million bags, approximately 10million bags in a two year period.

This deficit changed the price of Arabica and the market hasn’t been able to make a full recovery

since.

21 United States Department of Agriculture. "Coffee World Markets and Trade." USDA Foreign Agricultural Service, June 2012. Web. <http://www.fas.usda.gov/psdonline/circulars/coffee.pdf>. 22 North & South America CEIC Database Team. "Brazil�s Coffee Exports High Despite Decline in Production." ISI Emerging Markets Blog. N.p., 14 Feb. 2012. Web. 18 Oct. 2012. <http://blog.securities.com/2012/02/brazils-coffee-exports-high-despite-decline-in-production/>.

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4.3 Demand Changes In 2007 79 million bags of coffee, in 2012 the number had increased to 85 million bags, a

difference of 6 million bags of coffee a 7.05% increase in the global Arabica coffee consumption.

Chart 7: Demand for Coffee 2007 Vs. 201223

Chart 7 shows the difference in demand in 2007 and 2012. Chart 7 is not accurate but portrays the

demand increase over the past five years. The chart has been made using the official market data

that has then been simplified and translated into a supply and demand chart. What has happened in

the chart is the average supply of the 5 years of 81.18 million bags, and then plotted the starting

demand and the “end” demand.

The purpose is to illustrate that demand has been increasing the past years even after the global

economic recession. A 7.05% increase over 5 years during economic down turn, means that the

consumers are still willing to buy even though that the price is higher. Usually during a recession

people save more of their money, but when it comes to coffee people seem unaffected. Stock

market however has been decreasing since the first signs of 2007-08 where the recession hit

hardest. This has driven investors to new markets such as coffee, especially because coffee is

growing in value.

23 By Rasmus Harsaae, using data from the Mercon Coffee Group, from Paulig.

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Chart 8: The Demand for coffee 2007-2012 + Speculators24

Chart 8 illustrates the demand shifts from 2007-2012, and speculator25 demand added in red, on

the demand line labelled “Demand 2012 + Theoretical demand”.26 The reason it is labelled

theoretical demand is because there is no way of knowing exactly how much speculator demand

that there is at a given point in time. In 2007 there is no speculative demand, because the stock

market had not yet been affected by the recession.

4.4 Market in 2012

The market demand is 85million bags of Arabica, and the supply is 80.6million bags, which again

like 2007 is at a deficit, however in 2012 speculators27 were affecting the market. So the demand

will be higher than supply because the demand is actually 85million minus speculatory demand.28

24 By Rasmus Harsaae, using data from the Mercon Coffee Group, from Paulig. 25 Cafe, Jo. "Brazil's Powerful Influence On Coffee Prices - Seeking Alpha." Brazil's Powerful Influence On Coffee Prices - Seeking Alpha. Seeking Alpha, 22 Aug. 2011. Web. 18 Oct. 2012. <http://seekingalpha.com/article/288997-brazil-s-powerful-influence-on-coffee-prices>. 26 Jaime Macrea. "Speculation in the Coffee Market - Seeking Alpha." Speculation in the Coffee Market - Seeking Alpha. N.p., n.d. Web. 27 Aug. 2012. <http://seekingalpha.com/article/263493-speculation-in-the-coffee-market>. 27Phyllis Robinson. "Small Farmers. Big Change." Small Farmers. Big Change. N.p., n.d. Web. 27 Aug. 2012. <http://smallfarmersbigchange.coop/2011/04/06/speculate-this-commodity-markets-vs-fair-trade/>. 28 Cafe, Jo. "Brazil's Powerful Influence On Coffee Prices - Seeking Alpha." Brazil's Powerful Influence On Coffee Prices - Seeking Alpha. Seeking Alpha, 22 Aug. 2011. Web. 18 Oct. 2012. <http://seekingalpha.com/article/288997-brazil-s-powerful-influence-on-coffee-prices>.

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Chart 9: Demand vs. Supply vs. Price29

Chart 9 shows the coffee price development compared to supply and demand (see appendix 4 &

5). The simplest way to explain is to split the chart up into two periods, Period 1 from 2007-09

and period 2 from 10-12. In Period 1 the supply falls, but enough to sustain the market, and the

price increases only a little. Between the years 09 -10 the price increases because there is too little

supply. Period 2 the market price jumps dramatically even after supply increased. This matches

the time speculators moved from stock market to commodities. In 2011 the price continues to rise

even though. This clearly illustrates the effect of speculators on the Arabica coffee market. 30

5.0 Conclusions

From the analysis, it seems that the market was mainly driven by supply and demand up until

2010. In 2010 the speculators entry to the market radically changed the balance of the market.

Even when the supply was at the lowest between the years 2008-2009 the price did not shoot up as

much as they did after 2010. Although there was increased supply of coffee in 2011, which was

above the actual market demand. With observations like these I have concluded that speculators

are the main cause for the spikes in price. 29 By Rasmus Harsaae, using data from the Mercon Coffee Group, from Paulig. 30 Ponte, Stephano. "The ‘Latte Revolution’? Regulation, Markets and Consumption in the Global Coffee Chain." Elsevier Science, 2002. Web. 16 Oct. 2012. <http://my.ewb.ca/site_media/static/attachments/threadedcomments_threadedcomment/42867/The%20Latte%20Revolution%20-%20Regulation%20markets%20and%20consumption%20in%20the%20global%20coffee%20chain.pdf>.

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Even though the supply has decreased by 5.13% over the past 5 years, as a result of the drop in

2008-2009, it did not cause the massive spike in price. Demand hasn’t been more aggressive, with

a modest 7.05% increase over 5 years, about 1.41% average increase per year. That doesn’t

explain the price difference between 2007 and 2012.

In 2007 the price for 1 60 kg bag of coffee was 272.37$31 cents, in 2012 the price was

429.08$32&33 cents, an increase of 36.52%. This price increase is not explained by a 7.05%

demand increase over 5 years. The average price for the years was 392$ cents (See appendix 5).

The only reason evident from the analysis is that speculators caused the increase.

Coffee as a commodity has always been a strong market, however recently it has become more

than a commodity. Coffee has become an investment, which has become quite popular for

investors to dabble in. This shift, from commodity to investment is an example of market failure.

Market failure being an outside force that affects the market, by manipulating the supply and

demand.

Therefore to answer the research question “To what extent is the price of Arabica coffee, between

the years 2007 and 2012, caused by supply side shock?” The answer would be that the price of

Arabica coffee is at this point in time mostly affected by speculators, manipulating the coffee

market and taking advantage of the supply deficits. The supply decrease in 2008, is therefore only

a less significant reason for the price increase. As speculators drive the demand, the suppy has no

interest in increasing supplies. If the demand were driven by real coffee consumption increase, we

would see, that slowly supply would increase. This is not happening, therefore no real supply side

shock occurred.

31 World Bank. "Coffee Arabica Price:." Coffee Arabica Price. World Bank, n.d. Web. 23 Oct. 2012. <http://ycharts.com/indicators/world_coffee_arabica_price>. 32 Calder, Kathrine. "Commodity Price Hits 12 Year High." Mercanta. Mercanta The Coffee Hunters 2012, n.d. Web. 27 Aug. 2012. <http://www.coffeehunter.com/articles/commodity_price_hits_12_year_high>. 33 "Coffee, Arabica Price Chart." Coffee, Arabica Price Chart. Copyright Mongabay 2009, n.d. Web. 27 Aug. 2012. <http://www.mongabay.com/images/commodities/charts/chart-coffee_arabica.html>.

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5.1 Unresolved Questions and Additional Thoughts

When researching the Coffee market, I made a peculiar observation, that unlike oil and other

commodities, Coffee does not have any cartels or collusion. The countries do not work together in

order to make the maximal profit, but equally in quality and quantity of coffee. Why are there no

coffee cartels or are there any farmer cartels?

The environmental aspect is also interesting, what are the different environmental effects of

coffee, considering Brazils large rain forests what kind of impact does the coffee market have on

the nature. Also what are the environmental consequences for example CO2 release, of sending all

the coffee to Europe and American two of the worlds largest consumers?

If it hadn’t been a recession would the coffee market have looked any differently? The information

from 2007-2009 suggests a relatively stable period in the coffee market when the recession first

hit. Was the coffee market also like that during the boom in the 2000’s?

Finally it would be interesting to be able to better understand which major companies or investors

speculate on the coffee market. Why they do it and how do they know when to buy coffee and

when to sell? How much demand does it actually create, and what would be the true demand of

the market without speculators.

6.0 Evaluation and Personal Reflection

Some of the main strengths of this extended essay were the amount of information available to me.

The information made it possible to analyze the reason why the coffee market has been fluctuating

trough the recent years. Although at times it the data amount was overwhelming, it really helps

create an overview of the topic and form a conclusion based on the findings.

Going in to specifics was occasionally difficult, because all the data was bunched together in

countries and regions. Hence it helped focusing on Brazil34, which is such a huge part of the

34 Cafe, Jo. "Brazil's Powerful Influence On Coffee Prices - Seeking Alpha." Brazil's Powerful Influence On Coffee Prices - Seeking Alpha. Seeking Alpha, 22 Aug. 2011. Web. 18 Oct. 2012. <http://seekingalpha.com/article/288997-brazil-s-powerful-influence-on-coffee-prices>.

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market in the supply side. To make sense of the massive amounts of data, the interview with the

main Coffee buyer of Paulig, Katariina Aho, helped a great deal. She gave me insights that further

helped me go into depth on the spikes, and also she could confirm spikes I had already understood.

It was reassuring to know that the information was valid, and that the analysis of the market had

been “true”.

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Bibliography: With Special thanks to; My Mom and Dad. My Advisor Katariina Aho chief coffee buyer at Paulig Mecron Coffee Group. Market statistics. Alexander Nicolau. "Coffee." Commodity:. N.p., n.d. Web. 27 Aug. 2012. <http://www.wikinvest.com/commodity/Coffee>. Blink, Jocelyn, and Ian Dorton. Economics Course Companion. Second ed. Oxford: Oxford UP, 2011. Print. Cafe, Jo. "Brazil's Powerful Influence On Coffee Prices - Seeking Alpha." Brazil's Powerful Influence On Coffee Prices - Seeking Alpha. Seeking Alpha, 22 Aug. 2011. Web. 18 Oct. 2012. <http://seekingalpha.com/article/288997-brazil-s-powerful-influence-on-coffee-prices>. Calder, Kathrine. "Commodity Price Hits 12 Year High." Mercanta. Mercanta The Coffee Hunters 2012, n.d. Web. 27 Jun. 2012. <http://www.coffeehunter.com/articles/commodity_price_hits_12_year_high>. "Coffee, Arabica Price Chart." Coffee, Arabica Price Chart. Copyright Mongabay 2009, n.d. Web. 27 Aug. 2012. <http://www.mongabay.com/images/commodities/charts/chart-coffee_arabica.html>. "Coffee as a Market." Microeconomics. N.p., n.d. Web. 27 Jul. 2012. <http://tutor2u.net/economics/revision-notes/as-markets-coffee.html>. "Coffee Trading." Coffee Market Trading. 2009 Market Technologies, 2009. Web. 27 Aug. 2012. <http://www.tradertech.com/information/coffeetrading.asp>. "Current Worldwide Annual Coffee Consumption per Capita." ChartsBin. N.p., n.d. Web. 27 Aug. 2012. <http://chartsbin.com/view/581 >. Doom, Justin. "World's Top 10 Coffee-Producing Countries in 2010-2011." Bloomberg. Bloomberg, 19 Aug. 2011. Web. 15 Mar. 2012. <http://www.bloomberg.com/news/2011-08-19/world-s-top-10-coffee-producing-countries-in-2010-2011-table-.html>. "Drinking Patterns in Selected Importing Countries ." International Coffee Council, n.d. Web. Web. 21 Jun <http://dev.ico.org/documents/icc-108-1e-drinking-patterns.pdf>. "EXPORTS BY EXPORTING COUNTRIES TO ALL DESTINATIONS." Http://www.ico.org/prices/m1.htm. © International Coffee Organization, June 2012. Web. 27 Aug. 2012. <http://www.ico.org/prices/m1.htm>.

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Galbraith, John K. "5 The Economic Scene Then: A Digression." A Journey Through Economic Time. Boston: Houghton Mifflin, 1994. 43-47. Print. "The History Of Coffee." - National Coffee Association. National Coffee Association of U.S.A., Inc., n.d. Web. 27 Aug. 2012. <http://www.ncausa.org/i4a/pages/index.cfm?pageid=68>. ICO (international Coffee Organization). "High Retail Prices Affect Coffee Consumption in 2011: ICO." High Retail Prices Affect Coffee Consumption in 2011: ICO. N.p., 11 July 2012. Web. 15 Aug. 2012. <http://www.business-standard.com/india/news/high-retail-prices-affect-coffee-consumption-in-2011-ico/178224/on>. Jaime Macrea. "Speculation in the Coffee Market - Seeking Alpha." Speculation in the Coffee Market - Seeking Alpha. N.p., n.d. Web. 27 Aug. 2012. <http://seekingalpha.com/article/263493-speculation-in-the-coffee-market>. "JavaScript Detector." JavaScript Detector. Nestlé 2012., n.d. Web. 27 Aug. 2012. <http://www.nestleprofessional.com/uk/en/SiteArticles/Pages/History_of_Coffee.aspx>. Moffatt, Mike. "Recession? Depression? What's The Difference?" About.com Economics. N.p., 2010. Web. 23 Apr. 2012. <http://economics.about.com/cs/businesscycles/a/depressions.htm>. New York Coffee Exchange Official Data. "Coffee Arabica Price:." Coffee Arabica Price. N.p., n.d. Web. 18 Jul. 2012. <http://ycharts.com/indicators/world_coffee_arabica_price>. \ North & South America CEIC Database Team. "Brazilâ��s Coffee Exports High Despite Decline in Production." ISI Emerging Markets Blog. N.p., 14 Feb. 2012. Web. 18 Jun. 2012. <http://blog.securities.com/2012/02/brazils-coffee-exports-high-despite-decline-in-production/>. O'Hanlon, Ryan. "A World of Coffee." The Good Men Project. N.p., 17 Feb. 2011. Web. 15 Apr. 2012. <http://goodmenproject.com/newsroom/a-world-of-coffee/>. Pendergrast, Mark. Uncommon Grounds: The History of Coffee and How It Transformed Our World. New York, NY: Basic, 1999. Print. Phyllis Robinson. "Small Farmers. Big Change." Small Farmers. Big Change. N.p., n.d. Web. 27 Mar. 2012. <http://smallfarmersbigchange.coop/2011/04/06/speculate-this-commodity-markets-vs-fair-trade/>. Ponte, Stephano. "The ‘Latte Revolution’? Regulation, Markets and Consumption in the Global Coffee Chain." Elsevier Science, 2002. Web. 16 Jun. 2012. <http://my.ewb.ca/site_media/static/attachments/threadedcomments_threadedcomment/42867/The%20Latte%20Revolution%20-%20Regulation%20markets%20and%20consumption%20in%20the%20global%20coffee%20chain.pdf>. "Ten Steps To Coffee." - National Coffee Association. National Coffee Association of U.S.A., Inc., n.d. Web. 27 Jun. 2012. <http://www.ncausa.org/i4a/pages/index.cfm?pageid=69>.

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United States Department of Agriculture. "Coffee World Markets and Trade." USDA Foreign Agricultural Service, June 2012. Web. 17 Mar. 2012 http://www.fas.usda.gov/psdonline/circulars/coffee.pdf. World Bank. "Coffee Arabica Price:." Coffee Arabica Price. World Bank, n.d. Web. 23 Oct. 2012. <http://ycharts.com/indicators/world_coffee_arabica_price>.

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Appendixes

1 Coffee production and Consumption totals

United States Department of Agriculture. "Coffee World Markets and Trade." USDA Foreign Agricultural Service, June 2012. Web. <http://www.fas.usda.gov/psdonline/circulars/coffee.pdf>. 2 Coffee production In Brazil

United States Department of Agriculture. "Coffee World Markets and Trade." USDA Foreign Agricultural Service, June 2012. Web. <http://www.fas.usda.gov/psdonline/circulars/coffee.pdf>.

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3 Columbia Coffee production

United States Department of Agriculture. "Coffee World Markets and Trade." USDA Foreign Agricultural Service, June 2012. Web. <http://www.fas.usda.gov/psdonline/circulars/coffee.pdf>.

4 Coffee production Mecron Group

Supply and Demand from the Mercron Coffee group.

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5 Excel Chart averages of Mecron group data and New York Coffee Market Price

Data from the Mecron group, then compared to the numbers of the New York stock market in order to create an overview of the entire market, from all sides. New York Coffee Exchange Official Data. "Coffee Arabica Price:." Coffee Arabica Price. N.p., n.d. Web. 18 Oct. 2012. <http://ycharts.com/indicators/world_coffee_arabica_price>. \