Consumer goods / Staple beverages / Coffee industry dynamics 0 comments

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Coffee is the second most important (ie. heavily traded) agricultural commodity in the world, and forms part of the lifestyle of many consumers across the world. Like all commodities, its prices are determined by the market forces of demand and supply.

Types of coffee
There are two main groups of coffee:

Arabica: Grown in Latin America, in Central and East Africa, in India and to some extent in Indonesia; considered to yield more desirable taste and the beans cost >50% more than robusta. Forms ~2/3 of total world production.
Robusta: Grown in West and Central Africa, throughout South-East Asia (in particular Vietnam) and to some extent in Brazil. Forms ~1/3 of total world production.

Demand for coffee
There is a coffee-drinking culture in many countries, and this is so established that it is considered an inelastic good --- volume does not fluctuate greatly despite price changes. In most traditional coffee-drinking countries consumption seems to have reached saturation point.

The various segments of the retail coffee market are as follows: canned ground coffee, instant and freeze-dried(soluble) coffee, whole bean coffee, specialty coffee. The last, typically distributed through cafe chains like Starbucks, are the fastest growing segment, given that they cleverly market themselves as a lifestyle good.

Supply of coffee
Given that consumption demand is relatively stable, coffee prices are driven strongly by supply. There are a few supply-side factors that have been important, either perpetually or in recent years:

Weather: Arabica coffee is an especially fragile crop, such that it can be hit by frosts and drought. In particular, supply crunches, and consequently leading to high coffee prices, have occurred when coffee-growing regions in Brazil, the leading coffee planter, were hit by droughts or frosts.

Alternative producers: The rise of Vietnam through its success with robusta production in recent years has led to a "coffee crisis" (ironically triggered by good crops) and causing coffee prices in general to halve in 2002, compared with levels just five years earlier.

Stock levels: The influence of stocks on prices is equally
dependent on the balance between world production and consumption. In recent years, the market has become much more sensitive to stock movements in importing countries; quite obvious because if stock levels are high, it is possible to draw on it rather than bid higher prices for additional supplies from exporters. Also, the stock levels in exporting countries plays a part. When there is a shortfall in production relative to market requirements, stock levels in exporting countries are a determining factor in price formation (supply crunch situation). But when there is excess production, accumulation of stocks in exporting countries has no influence on prices. The mechanics are similar to that of the oil market, where countries also maintain stockpiles.

References:
(1) Packaged Facts: Coffee and Tea Market
(2) ICO Annual Review 2003-04
(3) J.Ganes Consulting: Coffee In-depth report
(4) ICO report: The Global Coffee Crisis: A Threat to Sustainable Development