Coffee is one of the widely enjoyed beverages globally, and its prices have gone through significant fluctuations in recent years. To understand these changes, one must look at the basic concepts of supply and demand economics. In this specific post, we shall discuss how market demand has led to increase in price of coffee and this will serve as a practical case study for the scholars in economics. With the help of certain examples, data we will analyze this phenomenon comprehensively.
The fundamental concepts of economics start with understanding demand and supply. Demand is the quantity which consumers are willing to purchase at a given price while supply is the quantity that the producers are willing to sell at various prices. The level of demand and availability of goods in the market define the price at which these goods are sold.
In the later part of the 20th century food prices such as coffee were comparatively low because of a glut in the market. South American countries like Brazil and some south East Asian countries like Vietnam increased their production hence flooding the market. This led to the oversupply which significantly reduced coffee prices and had a huge impact on the earning of coffee farmers.
Coffee prices started increasing again at the start of the 21st century. This was due to many aspects such as change in consumer tastes and preferences, weather conditions, as well as the economic policies. Let us discuss these factors and examining them more thoroughly.
Change in consumer preferences was the the primary factor that has played a considerable role in altering the demand of coffee. With the growth of specialty coffee shops as well as a penetration of premium coffee products into markets, it gained some popularity among consumers which led to the increase in demand.
Example: Starbucks is serving millions and billions of customers and is changing the view for high quality coffee and the kind of coffee experience they offer to their customers around the world. Due to their success, people have developed a crave for specialty coffee and consumption of coffee has increased.
Climatic factors play a very important role in the production of coffee. Climatic factors like droughts and frosts can affect the production of the crop hence a shortage will lead to an increase in prices for the commodity.
Case Study: Brazil’s Coffee Productio: The largest coffee producer in the world is Brazil and both in 2014 and 2021 its coffee farms suffered from droughts. It severely affected the yields of coffee hence creating a supply scarcity that led to a increase in price. The effect of climate change on the yield of coffee beans has been a major concern for farmers.
Another determinant of coffee prices is the economic policies and trade regulations that exist from one region to another. Barriers such as tariffs, trade agreements and subsidies affect the costs of production and foreign trade within a global supply system.
Example on the Impact of US Tariff: Currently, tariffs on coffee imports particularly by USA have caused an impact on the prices of coffee. These tariffs raised the cost of imported coffee which in turn affected the local consumer.
From the ICO records, it is evident that coffee consumption globally has been on the rise for some time now. According to the global coffee consumption statistics of 2020, people consumed 167 million cups of coffee each day approximately.
The ICO Composite Indicator Price, which tracks the global price of coffee, experienced notable fluctuations. As an example, back in 2011, the ICO price reached its highest point at 231.24 US cents per pound. This was primarily driven by limited supply and strong demand. Nevertheless, in 2019, the price experienced a significant decline to 100.64 US cents per pound as a result of oversupply and market adjustments.
Several demand-side factors contribute to the rise in coffee prices:
On the supply side, the following factors are crucial:
Technology has played a crucial role in driving the coffee business in various ways. From the use of precision farming in growing coffee plants to the application of blockchain into the supply chain mechanism, technology has refined production and distribution processes.
There has been a rise in demand for the ethical-sourced and fair-trade certified coffee. There has been emergence of consumer awareness and sensitivity to the environmental and social impact of their purchases. This has incurred an increased costs of the fair-trade coffee exhibiting the real cost of sustainable and ethical production.
Ethiopia, which is globally acclaimed to be the birth place of coffee presents an interesting analysis. The country is well-known for its several types of coffee beans and traditional production methods that have received international acclaim. However, there are challenges that affect coffee farmers such as climate change and market fluctuations. It is thus important to focus on fair trade and sustainable farming methods to support the continued growth of the industry.
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This case aims at examining the factors that have led to an increase in the coffee prices. Consumer preferences, climate, and politics are some of the causes that have led to changes in prices of goods. By exploring these factors further, students of economics can discover new insights about the changing trends in coffee market and the reasons for fluctuations in the. Start making economics learning a fun by engaging yourself with our professional economics expert assistance service today.
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