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The Changes in the International Coffee Market Since 1995

Essay by   •  August 30, 2011  •  Case Study  •  1,443 Words (6 Pages)  •  1,930 Views

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The changes in the international coffee market since 1995

Name: Xi Chen

Student Number: 42122322

Coffee is always regarded as the most popular beverage in the world, millions tons of coffee beans are processing and billions of dollars are created and flowing into and out in the huge market. Therefore, this drink plays a pivotal role in the international trade. Nowadays, the production and consumption of coffee has a big stake to some extent in many aspects of some countries and international market. The price change in the market will lead to a fluctuation of price of coffee bean, thereby triggering a series of affect on individual, enterprises and countries. The essay will show what factors result in the different trend in the coffee market and analysis of the characteristic of the structure of this market and how to affect a country in terms of income and employment and also highlight the strategies of typical several larger firms to control cost and make profits.

The price change in international coffee market is mainly caused by demand and supply. When the price of a commodity rises, the quantity supplied will also rise (principles of economics). In this case, the price went up tremendously to $180 in 1997. Therefore, more and more companies expanded the supply of coffee, and maybe some new suppliers also entered into the market, for instance, the new factories from Vietnam and Brazil jumped into it, and growth in supply raised by 3.6 % per year overtook the demand with 1.5% ( textbook ) In the next five years there was a dramatically decline in coffee price, however, the main reason is that supply overtake the demand. According to the graph 1 below, as the supply increased, whole supply curve will shift to right. Although the quantity increased, the price went down. After that, due to the higher the price of substitute goods, the people will produce other substitute goods with higher value. (textbook) That is, more and more coffee grower transferred to other substitute goods, for example, many growers in Vietnam made a living out of Coca. (textbook ). Later on, for many farmers cultivated other crops as well as China and Russia as two new coffees consumption markets, the coffee price have recovered since 2004 based on information. Therefore, once the growth of demand in coffee market is greater than the supply, the price of coffee will go up. From the second graph 2, the demand will shift to right; the P 1 will reach the P 2. Consequently, the fluctuation of the price in international coffee market is mainly dominated by the relationship between demand and supply in the past decade.

Graph 1 Graph 2

Coffee market structure tends to be an oligopoly. In oligopoly market, a few enterprises can account for a higher percentage of the industry. Likewise, about half of the world production is purchased by four larger firms, such as, Kraft, Nestlé, Procter and Gamble, and Sara Lee. ( textbook ). Apparently, many coffee products are more likely to be labeled by the four brands in market. Moreover, in the coffee market, the larger companies can take a considerable advantage of utilizing the technology and investing more funds into new products. More and more consumers can have access to differentiated products. Additionally, under the market of oligopoly, barriers to entry are one of the significant features. Although the coffee market is one of most popular drink around the world and many new enterers are interested in it, entering into this market is not likely to succeed. The difficulties tend to focus on be affected of larger companies and the condition of growing coffee beans. Another feather is interdependence of the firms. As only a small amount of larger firms in this industry, each one should take account into others. If one will change the price, its rivals would respond to change relatively. To illustrate, the four companies were not changing price a lot, when they encountered with price

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