The price of raw Coffee is determined by the basic principles of supply and demand.

Demand for coffee beans will be largely determined by the large coffee firms such as nestle and Kenco. In turn their demand depends on the consumer demand for drinking coffee.

In recent years the demand for coffee has been increasing because:

• Coffee has become a more fashionable drink with an explosion in the number of specialist coffee houses, such as Starbucks and Cafe Nero.
• Coffee is increasingly seen as an alternative to alcohol, as drinking during lunch becomes less common.
• Rising incomes, is increasing demand for specialist coffees.

However, rising demand is not guaranteed to increase price because it also depends on supply.

Supply depends on :

• Number of firms / countries producing coffee
• Productivity of coffee growers. e.g. improved planting techniques can increase yields.

Short Term Fluctuations

In the short term the price of coffee can fluctuate due to changes in the weather and disease. Coffee is quite a volatile commodity

Buffer Stock Schemes.

With commodities such as coffee, governments have tried to stablisie the price of coffee with schemes such as buffer stocks. This involves setting supply quotas and purchasing excess supply to prevent prices falling. However, with so many countries producing coffee, buffer stocks are difficult to implement. This is because smaller producers may take advantage of the restriction in supply to increase their supply.

• Buffer Stocks
• The economics of Coffee
• Is the price of Starbucks a rip off?
• Coffee prices reach 7 year high – BBC News

Basically, economists face a choice between advocating a free market solution and advocating government intervention to overcome market failure in agriculture.

Agriculture is a notoriously difficult market to leave to market forces. Because supply and demand are inelastic, weather conditions can cause big changes in prices.

There is also a difference between the response in the short run and in the long run.

If people are starving it is no comfort to say, in the long term the shortage will encourage extra supply. Next year is too late. At the same time, there is a danger that the wrong kind of government intervention can further distort the market and undermine market based initiatives to overcome shortages.

The price of wheat and food prices is being driven higher by various factors

1. Increased Use of Biofuels. Food such as mazie, grown to provide renewable energy and an alternative to oil. However, these crops reduce the supply of food for the market. Many governments especially in America are committed to increasing the amount of bio fuels and so this could contribute to rising prices.
2. Rising World Population. The global population is expected to rise from 6 billion in 2000 to 9 billion by 2050. This will place increasing strain on the land.
3. Desertification. Global warming and other environmental shifts is decreasing the quantity of available farmland, especially on the African continent. If global warming continues water supplies could be disrupted leading to falling food production. This will only place further strain on food prices in future.

I think there is a good chance that food prices will continue to increase in the long term. This is not such a problem for western economies – food is a small % of our total bill. But, it is bad news for developing countries where food consumption is a much bigger % of income.

It is estimated that the Queen, (who is hardly on the breadline herself) receives approximately £404,000 a year in European subsidies for her Sandringham estate and at least £140,000 for Windsor Castle. Some of the richest British aristocrats, such as the Duke of Westminster, the Duke of Marlborough and the Earl of Leicester, are also known to receive hundreds of thousands of pounds each year. The reason is that the CAP gives subsidies depending on agricultural output. It is estimated that 80% of the CAP budget goes to the richest 20% of farmers.

The EU is now thinking of reforming this and placing a symbolic cut on the amount of subsidies that the richest farmers get. Subsidies over £100,000 will be reduced by 10%. The Queen may find herself losing upto £148,000 a year (perhaps we should pass a hat around)

Whilst large scale farmers get generous subsidies (basically for being … er rich and big) small farmers often struggle due to squeezed profit margins and declining markets.

• 3 of the Worst Economic Polcies (CAP is one)
• Costs of CAP
• Reforms of CAP

• Off with their subsidies at Independent

Should Govt intervene with minimum prices for goods like olive oil.

Reasons for minimum Price

• A minimum price ensures a minimum income for farmers. For example, if supply increased prices would fall significantly.
• Demand for agricultural goods is inelastic, therefore this makes prices more volatile
• Supply can vary due to weather conditions.
• i.e. agricultural markets are more prone to market failure than other markets.

This is a diagram for a buffer stock. This shows how a minimum price can prevent prices falling below the market equilibrium. At the target Price (effectively a min price) The government have to buy surplus of Q2 – Q1

Problems of Minimum Prices

• There will be a surplus, because supply is greater than demand.
• The government need to buy the surplus to maintain the minimum price. This is expensive and requires higher taxes.
• A minimum price may encourage to supply more than necessary, it can lead to extensive use of chemicals to maximise the crops. Therefore, it distorts the market and encourages inefficiency.
• Government may have poor information about what the price should be.

How might a fall in production of olive oil affect Spanish economy. (8)

Olive oil is an important commodity, therefore farmers are likely to see a fall in revenue because they have less to sell. Therefore, this also results in lower exports and less export revenue for the economy.

However, the fall in production has increased price. Because demand is inelastic, this could actually increase the incomes of farmers, even though they have less to sell. (the % increase in price is bigger than than the % fall in quantity – therefore revenue increases)

It is unclear how significant olive oil production is for the Spanish economy. It is likely to be quite a small sector and therefore the fall in output maybe insignificant.

Farmers also get subsidies from the European Union. This may protect them from falling production, especially now subsidies are not targetted to production.

See also: Common Agricultural Policy of EU