ECONOMICS COURSEWORK I As we all know, coffee is an essential and favourite drink of many people in the world. However, the global coffee market has been facing a difficulty when the coffee price falls steeply in the recent years. According to the article, the low price of coffee is caused by the global coffee glut. There is an imbalance between supply and demand: too much supply and less demand. Basically, the market is oversupplied, particularly with the robusta variety beans. Vietnam's rise to be the world's second-largest coffee exporter is one of the reasons there is a glut of coffee.
Besides, we are aware that many other countries like Brazil-the biggest coffee producer, India, Ivory Coast, etc. are producing and exporting more and more coffee. Brazil expanded its farming area, increasing the number of bags exported to close to 50 million from about 30 million. The diagram below will help explaining how the coffee glut affects this product's price. Price D S P 1 A Excess supply B P 2 D S Q 1 Q 2 Q 3 Quantity demanded At P 1, the quantity demanded is Q 1 while at the same point the quantity supplied is Q 3 much bigger than Q 1. There is huge excess supply Q 1 Q 3 in the market.
The demand is too little in comparison with the supply. There is the huge coffee surplus Q 1 Q 3 produced from this year's bumper crop. The coffee price falling sharply is obviously right with the law of demand and supply. Some traders worry that if Vietnamese selling resumes and Brazil continue expanding the farm areas, the surplus would grow bigger and bigger. As a result, the market could fall steeply. However, the case has changed for the last month.
Despite the global glut, London futures prices have risen more than 20% as mentioned in the article. How could this happen while the supply is much bigger than the demand? These are some main factors that contributed to the rise of London coffee prices. Coffee is a kind of biennial tree. This year it makes the huge coffee productivity, which means the 2003/04 crop is smaller. In addition, the dry weather limiting rain and making the drought in Brazil causes a potential decrease in the next Brazil crop. A delayed Vietnamese harvest happened at the same time.
Price S 2 D S 1 A B D S 2 S 1 Output Reducing the total output launched into the coffee market, we can see that the supply curve shifts to the left: S 1 -> S 2. Therefore the price rises from These factors (except price) make the supply curve shifts to the left. The price rises as the coffee surplus reduces. This is good news for all the countries where coffee revenue takes a big part in the national incomes.
But even a slightly rise in this product's price wouldn't change the fact that the market is still historical low. In my opinion, the Government of each country should find out some solutions for its advantages, for example: buying a certain amount of the surplus to reduce the coffee glut. One other not less important: why don't we try like the case of OPEC, making an agreement between worldwide coffee producers to limit production and create a balance in the demand and supply for coffee. It is not an easy thing to do but once this is achieved, the problem of coffee market will be completely solved.