Good Essay About Coffee
There are many causes that affect market instability in coffee markets. Free trade involves the removal of protectionism and external liberation in developing countries which has adverse effects on their economies (Collier, 2010, p.281). Developed countries will face costly expenditures to subsidise the coffee farmers and implementing buffer schemes that will cost the governments. On the other hand, the consumers will spend small amounts of cash to buy raw coffee due to fierce competition and the consumer welfare choice will increase. Conversely, in developing countries many coffee farmers suffer significant losses due to competition from the developed nations' raw coffee sold into their countries. The impact of these will be farmers selling their coffee below their production costs resulting in absolute poverty.
Modern and sophisticated technology has increased the total coffee yields immensely. This can only be achieved through the use of chemical fertilisers that are hazardous to the environment. Coffee farmers expose themselves to use of these chemicals despite the awareness of the effects associated with it. Continued use of these chemicals has diminishing marginal returns on total coffee output yields. The adoption of modern farming methods has led to deforestation. The aftermath of this is susceptibility to flooding due to global warming. In the long run, the demerits are more than merits that involve a decline in total coffee yields. The decline in total yields will reduce the global coffee yields, increasing the demand for coffee.
Farmers do not feel the long run benefits associated with economic growth. As the economy grows, companies don't see a similar increase in income. Often, food has a tendency to have a low-income elasticity. The average propensity to consume is realised because people don't spend more of their salaries on food despite the increase in their incomes. Additionally, advances in technology can result in prices falling instead of rising incomes. Many developed nations find it appropriate to subsidise farmers to protect their hard-earned incomes. The comparative advantage of a developing country may only be the production of primary products like coffee. With the robust global growth, the demand for coffee products does not increase at the same rate as manufacturing. The overreliance on agriculture can result in lower rates of economic growth.
The markets for coffee have been controlled by monopoly markets that have deteriorated the coffee prices for a long time. The monopolists have a tendency to stop buying coffee from farmers when there is a speculation that the coffee prices might go down. The buying decisions of the monopolists might be determined by demand and supply of coffee yields. Sometimes, monopolists might also buy the raw coffee at a low price despite its high quality. Therefore, the presence of monopolists has reduced the supply of these products because of lower income returns, and this has increased the demand for the raw coffee.
The volatility price rate in coffee is higher than any other industry (International Organization of Coffee, 2013, p.1).
According to the diagram above, the supply of coffee is price inelastic in the short term. This is because, coffee takes years to grow, and it is also seasonal. On the other hand, the demand for the coffee is price inelastic implying the change in the price of the coffee does not have a significant in the change of the quantity demanded. As the result the price volatility occurs. For instance, when the price falls from P1 to P2, many farmers are discouraged and may exit the coffee market. As a result, the supply falls in the next season from S2 to S1 and causes the price to increase to the original level. In the next season, farmers join the business, and this decreases the supply again, and the cycle goes on.
The difference between market structures between the developing and developed world places a problem in the coffee market. These market structures are a difference because of several factors such as barrier to entry, the degree of concentration, and degree of market information due to transparency. In the developing countries, the primary market for coffees is dominated by concentrated buyers. This implies that the market is characterised by many suppliers from different parts of the country, whereby each supplier does not have an impact on the function of another. As a result, the supplier lack market power and hence, they do not have the power over the market price. The coffee collectors who has oligopolistic or monopolistic market structure controls the price of the coffee. On the other hand, the coffee market in the developed world is characterised by the concentrated suppliers who have suppliers’ bargaining power (Gillespie, 2014, p.248-256).
Another, the problem of the coffee production in the developing market is the market barriers. In the coffee market, the traders are adversely affected by the inadequate capital and managerial now how in the developing countries contrary to the developed countries. The inadequate capital and managerial and technical know-how limits the traders’ ability to achieve greater inefficiency, expand their operations, and meet the long-run storage objectives. However, the coffee suppliers have requires minimum or on licensing to start farming. (Norton & Alwang, 1993, p.147). In addition, unrestricted coffee traders and supplier contributes to the poor quality of coffee and illegal traders in the market and hence enhance inefficiency. In most of the developed countries, the entry to the coffee industry is highly restricted by the elite who restricts illegal traders in the market.
Lack of market information is another problem that the coffee producers faces in the developing countries. According to Gachena (2014, p.158), the developing countries, the suppliers lack the required information about the recent prices of the coffee in the global and action market. The farmers in the developing countries usually check in the market place there they ask the fellow farmers or the coffee collectors. This is contrary to the developed countries where the concentrated supplies have significant information about the market price of the coffee. The suppliers in the developed countries have suppliers’ power over the price of the coffee. Therefore, when the coffee prices change, they must have to be involved in one way or another.
Policies, which can be implemented by the government to solve the market instability of coffee markets
The government should also ensure there is a restriction on the provision of the licenses in order to reduce the number of the illegal traders and also enhance the concentration of the supplies.
The marketing infrastructures should be improved through the intervention of the government in order to improve the performance of the coffee marketing (Lunogelo & Baregu, 104). Similarly, the improved marketing infrastructures should be enhanced to provide the marketing information to the suppliers, particularly on price (World Bank, 2007. p14).
The financial institutions in the developing countries should be encouraged in order to provide financial incentives to the traders so that they can help to overcome the problem of monopolistic buyers. In addition, the presence of the financial institutions supports the coffee market through reducing unnecessary weaknesses such as long procedure and higher collateral on acquiring essential loans.
Additionally the government can control competition by imposing quotas on imports to make these imports expensive than exports. The government also reduces the rate of environmental pollution by levying heavy taxes on those caught in pollution offence (Lewin & Varangis, 2004, p.15)
Collier P (2010). The Political Economy of Natural Resources, Social Research, Vol 77 No 4: Winter (2010b) The Plundered Planet, New York: OUP
Gachena1, D., & Kebebew, S. (2014). Evaluating Coffee Market Structure and Conduct in Bench – Maji Zone, South West Ethiopia. Journal of Agricultural Economics, Extension and Rural Development, 2(5), 156-163. Retrieved from http://www.springjournals.net/full-articles/springjournals.netjaeerdarticlesindex=3.pdf?view=inline
Gillespie, A. (2014). Foundations of Economics. London: Oxford University Press.
International Organization of Coffee. (2013). Monthly Coffee Report. Retrieved from International Organization of Coffee website: http://www.ico.org/documents/cy2012-13/cmr-0313-e.pdf
Lewin, B., Giovannucci, D., & Varangis, P. (2004). Coffee markets: new paradigms in global supply and demand. World Bank Agriculture and Rural Development Discussion Paper, (3).
Lunogelo, H. B., & Baregu, S. (2014). Agriculture and Rural Development Status in LDCs. Istanbul Programme of Action for the LDCs, 167.
Norton, G. W., & Alwang, J. R. (1993). Introduction to economics of agricultural development. London: McGraw-Hill.
World Bank. (2007). Agriculture for development (978-0-8213-7297-5). Retrieved from The International Bank for Reconstruction and Development / The World Bank website: http://siteresources.worldbank.org/INTWDRS/Resources/477365-1327599046334/8394679-1327614067045/WDROver2008-ENG.pdf