THE GLOBAL COFFEE TRADE

Submitted by:

Group number: 2

SUBMITTED TO:

Dr. Monika Jain

Group Members: 14IB308 AKSHAY KR. GHOSH14IB367 VIKASH KUMAR14IB335 LAVI VARSHNEY14IB34014IB32214IB302

MOHIT GEHANIDIPTI SONIAADYANT VASHISHTH

BirlaInstitute of Management Technology 5, Knowledge Park- II Greater Noida, National Capital Region, UP- 201 306, INDIA

INTRODUCTION

The case is about the global coffee trade and a brief description of factors which affect import

and export of coffee between producing and consuming countries.

After late 1997, there was a drastic fall in the prices of coffee after the entry of Vietnam in the

coffee market by making a huge supply.

FALL IN COFFEE PRICE

Brazil’s production also increased due to some factors like improvements in mechanical

harvesting and increased irrigation. As the supply of coffee in global market increased and its

elasticity being low, the increase in demand was very low as compared to increase in supply, so

the prices fall down up to 25%.

This was a very tough time for the farmers as they were not getting a proper market share and

now fall in the prices made the conditions even worse. Now growing coffee was not giving them

proper earning and switching crops was not easy as there are very few alternatives that could be

grown on a coffee land.

World Bank and ICO organized a round table in May 2003 and called in the rich countries to

reduce the agricultural subsidies in order to allow potential diversification in coffee producing

countries. There were times when coffee prices were high die to some natural factors like frosts,

pests, diseases and by effective planning but it did not last long.

In 1959, Brazil and Columbia made sincere efforts to improve coffee market conditions. It

withheld its coffee production from market. Also an agreement was signed by which other

countries could not export more than some fixed quota.

Efforts made by NGOs:

A floor price for farmers was set up.

Farmers’ cooperatives had to be transparent and democratically controlled by farmers.

Traders to buy directly from farmers.

Upfront financing by importers to farmers.

Implementation of planting of crops by farmers.

Many corporates followed fair trade conditions like Starbucks bought coffee through fair

trade, Sara Lee tried to buy at least 10% coffee from small farmers. P&G firstly resisted but

finally it also bought coffee under fair trade. Nestley bought 13% coffee under fair trade.

Kraft bought 5% under fair trade.

COFFEE PRICES,EXPORTS AND PRODUCTION

Question 1.Why does the price of coffee fluctuate so widely?

Ans: The basic reasons for the fluctuation of coffee prices:-

The Supply is more than the demand: The logic of supply and demand states that as the supply increases, price falls down. The additional supply caused by the entry of Vietnam in the coffee market and increased production by brazil increased the coffee production to 113 million bags. At that moment, i.e. in 2001-2002, the consumption was just 106 million. Hence, Fluctuations in Prices.

EXPORT FROM VIETNAM AND BRAZIL

The Variation in Income Worldwide: With the increase in income, the demand for goods with higher qualities increased leading to decrease in the demand of coffee. This also led to the fluctuation in price.

America Withdrawal from ICA: The price was under control until it was under International Coffee Agreement (ICA) but when United States withdraw its support from ICA, which led to certain fall in price.

Entry of NGO: NGO entry caused to control the coffee prices to some extent by restricting the supply of raw coffee which again led the coffee prices to rise to some extent.

THIS ALL ENTRY AND EXIT CAUSED BY VARIOUS COUNTRIES AND ORGANISATION LED TO COFFEE PRICE FLUCTUATION SO WIDELY.

Question 2. How can farmers respond to a chronic oversupply problem? How do policies of consuming nations impact the potential exporting-country responses?

Ans :

The farmers should not only rely only on coffee production for their Livelihood but

they should also look for other alternatives which could help them earn more money.

They should also be aware of the retail coffee prices and their share in it. They should stand for their rights and demand for fare prices.

Policies of consuming nations that impact exporting countries:

-Number of consumer countries is importing from: more the number of exporters than bargaining power of importer will increase and also the amount imported will also be less.-Total coffee consumption: if the total coffee consumption is low than less import and vice versa.-Excise duty: policies like excise duty imposed on quantity imported also effects the export.

- Taxes levied: various taxes levied on retailers by the government impacts total

import.

Question 3. Can supply and demand be overruled by a suitably designed international organization, or is an organization like the International Coffee Organization doomed to failure?

Ans

Yes International organization like ICO can overrule supply and demand by:

1. By levying strict policies for the producers and exporters to produce and export only best quality of crops, which could ultimately restrict the oversupply of coffee crops caused by supply of bad quality of crops

.2. Similarly by including every coffee exporting and importing countries under ICO

norms and regulation and levying quota restriction on export and import from different countries. Which could regulate the supply

3. By forming strict policies for those countries who restrict to come under ICO norms by restricting them from exporting to and importing from those ICO registered countries.This can also lead to regulation in supply.

Yes organization like ICO can be doomed to failure as:1. If countries do not follow its policy and back out irrespective of norms and condition just because of there higher percentage of share in ICO.

2. If ICO lacks in formulation of new policies with changing market condition.

3. Lack of flexibility in adding new countries under the organization

Question 4. Evaluate the NGO’s proposals for improving the market. Are they

workable?

Ans:

The main problem of the market was supply was more than demand. Main focus of any organization is to reduce supply and improve the demand. On the other hand the Main focus of NGO was to improving the condition of farmer than the market. In case of NGO proposal regarding stable price

1) Farmers growing other product would shift to growing Coffee product because of the fixed price that coffee growing farmers would get. Which would ultimately result in increase in more supply of coffee product, and would further result in even more deterioration of coffee market

2) since there was a need for reducing the supply of coffee product by shifting farmers towards growing substitute products but certainty of price for the coffee product would stop Farmers from shifting to grow substitute product because ultimately farmers wants to earn profit so they will try to be in same field.

In case of Access to credit :

Because of increased relationship between farmers and corporate farmers could easily avail loan and even at lower interest so the farmers growing other product would shift towards coffee producing because of availability of credit and thus would result in over supply of coffee.

According to me the NGO proposal was not workable the were only for the benefit for farmers and not for the market.

Question 5. Viewing yourself as a technocrat whose job is to revamp the global green-coffee market so that it operates more in the growers’ favor, what changes to the rules of the marketplace and/or national policies would you recommend?

Ans. The Policies Changes Which I Would Have Suggested as a Technocrat would

Have Been:-

1. Since The Prices of Coffee Was Regularly Falling Because Of increase in Supply leading to

Increase in Competition Which was forcing The Seller of The Crop To sell it at lower cost

Which Could Have Lead To Market Crash. So as a Technocrat I Would Have Recommended

For Levying Higher Tax on Selling of Coffee Produce so That The Falling Coffee Prices in

Market Would have been Controlled.

2. Apart From This I Would Have Also Suggested To withdraw Excess Supply of

The Coffee Beans From The market by Government Officials.

The Benefit Of Levying This Two Policies Would Have Been:-

a) By Levying Higher Taxes It Would Have Forced Small Players Of The Market to Leave The Market Who Were Creating Excess Competition In The Market .

b) The Money Generated From Levying This Tax Would Have Been Used For

Making Fund For Providing Subsidy and Giving financial Support to Coffee

Producing Farmers in Shifting towards Growing Of Other Crops.