The World Coffee Market in 2011-2012: What Forces Drive World Coffee Prices?

Technical Summary

Coffee is traded internationally on mass level because it is an important source of export for a large number of developing countries; apart from that almost some 20 million families in some 50 countries are directly involved in the cultivation of coffee. The ICO composite indicator price is the main determinant for determining the coffee prices in various markets. A look at the wider picture shows that coffee prices, as represented by the ICO composite indicator price, fell considerably during 2011/12 After reaching 231.24 US cents/lb in April 2011, its highest level since 1977, the composite indicator fell steadily, before settling into a range between 145 and 160 US cents/lb from April 2012 onwards. Price elasticity of demand is determined by the change in the quantity demanded of a particular good and a change in its price. Price elasticity of demand is affected a degree of necessity or luxury, substitute availability and temporary or permanent price change. Price Elasticity of supply determines the responsiveness of quantity supplied to a change in price. The factors that affect the price elasticity of supply are time, availability of resources, number of producers, ease of storing, increase in cost of production as compared to output and improvement in technology along with stock of finished goods. The world demand of coffee increased in 2011-2012 due to increasing appeal of coffee as a luxury product. The factors that affected the supply of coffee in 2011-2012 include adverse weather conditions in few coffee producing countries, the long time taken by coffee plants to mature and speculative trading in coffee futures. The major importers of the coffee like US will gain from the falling prices of coffee in the world.

Research Report

Section 1: The world coffee Market in 2011-2012: structure and composition.

According to the annual review of 2011-2012 of the International Coffee Organization (ICO) among the largest coffee producing and exporting countries are Brazil, Vietnam Colombia, Indonesia, India, Ethiopia, Honduras, Peru, Guatemala and Mexico. Similarly, according to ICO's annual review of 2011-2012 among the largest coffee importers are USA, Germany, Japan, Italy, Sweden and Canada. Furthermore, the annual review of the ICO reveals that the world production of coffee in 2011-2012 was 134.4 million 60-kg bags and the consumption of coffee in 2011-2012 was 137.9 million bags. US are the leading importer of coffee in the world. Coffee is traded internationally on mass level because it is an important source of export for a large number of developing countries; apart from that almost some 20 million families in some 50 countries are directly involved in the cultivation of coffee. The market structure of the world coffee market is very competitive as many developing and developed countries are part of it.

Section 2: The dynamics of world coffee prices in 2011-2012.

The calculation of the ICO composite indicator price for green coffee is weighted as follows:

Other Milds: 23 %

Colombian Milds: 12%

Robustas: 34%

Brazilian Naturals: 31%

The ICO ...