Readers Question: How is the market of raw coffee determined on the world commodity markets?
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. Because demand for coffee is inelastic, a small change in supply can lead to a big change in price.
Buffer Stock Schemes
With commodities such as coffee, governments have tried to stabilise 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.
Coffee prices and production
Coffee production and coffee retail prices.
Price received by Colombian growers Cents / per lb.