Coffee Crisis Essay

4150 words - 17 pages

Coffee Crisis

The Wall Street Journal, Boston Globe , and the Economist as well as many other media outlets of record were all in consensus when they declared the onset of coffee crisis in October 2001; farmgate prices had sharply dropped reaching a thirty-year low of $0.39 per pound in This price was below the cost of coffee production at the time, listed at USD 0.60 per pound.(Economist 2001) Price declines are not such an uncommon occurrence, but what is more troubling is that the cash market for coffee suffers from high price volatility. For a more detailed look please see Appendix 1: Cash Price Variation. Coffee producers , who are mainly located in developing countries , are highly vulnerable to price risk in the cash market , yet their profits in relation to their risk exposure has been steadily declining. In a 2001 study conducted by the European Fair Trade Association (EFTA)- an organization that promotes the sale of products that ensure price security for marginalized commodity producers- the general finding was a declining share of trade revenues from coffee remained in the coffee producing countries. Although the international coffee market has grown from $30 billion annually in the 1980s to $55 billion in 2001, in aggregate coffee producers have seen their share drop from $10 billion to $7 billion in 2001 (Renkema 59).

From the perspective of the small producer, their received cash prices have not always been this volatile and had been stable up until 1989 ;although the data does not fully support this. Please see Appendix 2) Measures of Volatility. A price regime devised in 1962 by the International Coffee Association setup an agreement between coffee producing countries and coffee consuming countries. Its aims were to stabilize the market and provide a minimum price of coffee to cover the cost of production. The main mechanism for price stabilization was an export quota system that was distributed among its members. The results of the ICA can be called mixed at best, at worst unsuccessful according to existing price data. At best, the ICA managed to guarantee a minimum price but because not all coffee producing and coffee consuming countries were members of the regime a dual market developed. Eastern European and Middle Eastern countries were able to import coffee cheaply and under the price floor set by the ICA, especially by importing from newer country producers who were not party to the agreement.

In order to maintain the price floor, the ICA managed to recruit the newer producers as members, but it still wanted to maintain the same level of export restraint. So that this aim could be achieved ICA architects proposed a redistribution of the quota among its members. Naturally those producer countries who had been exporting in the international market for a long time objected to sharing their quota with newer members. This issue as well as producer country-consumer country debate strained the agreement and...

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