In Economics, demand and supply are the key words. ‘Demand’ may be defined as the consumer’s willingness for a particular product backed by the purchasing power. The demand of a good changes as a result of changes its own price, while the other factors are kept same which is known as ceteris paribus. The inverse relationship between price and quantity demanded can be shown with the help of the demand curve. On the other hand, ‘supply’ is defined as the total amount of a particular product or service that is provided to buyers at each own prices. Supply is considered as the mirror representation of demand. The positive relationship of price and quantity supplied can be described by using a supply curve. This means that when price of a good rises, producers also increase the production of that product (Kariuki, 2014).
lign: justify;">The price of coffee is determined from the intersection point of the demand and supply curve. The figure 1 represents the equilibrium price and quantity of coffee.
Figure 1: Demand-supply of coffee
(Source: created by author)
Over the years, coffee is considered as the second highest traded good next to oil globally. Growth rate in coffee industry is expected to continue at a high pace in near future. Coffee is grown in almost 50 countries around the equator and generates income to almost 20 million cultivators. About 100 million farmers are engaged in cultivating, developing and dealing of the product globally.
Demand and supply side aspects of coffee in Australian market:
In this assignment, the article ‘Mainstreaming Sustainable Coffee’ has been chosen for further analysis. In this article, the various dimensions of coffee and also the roles of different economic agents such as policy-makers, directors and managers are discussed. The article also focuses on various types of coffee available in the market and their different aspects regarding the production and supply side (Kolk, 2013).
According to the article, the main standard for sustainable coffee production depends on the basic four parameters: fair-trade, organic, Rainforest Alliances (RA) and Utz Certified (Utz). The other market determined standards do not pay a guaranteed premium while the price of coffee is determined by the bargaining between the consumers and producers. This is related to the price factor effect which is discussed below.
According to Lanfranchi, Giannetto, & Zirilli, (2014), there are some factors which influence the price of coffee either to rise or to fall. Let us consider an example. People prefer to have more coffee during the winter season than the summer due to some reasons like low temperature, smaller days. Therefore, the demand for coffee is higher in winter than summer and price should rise in winter. This fact is explained with figure 2. Due to higher demand, the demand curve shifts rightward. As a result, price goes up from P1 to P2 level.
Figure 2: Shift in demand
(Source: created by author)
The factors affecting demand and supply of coffee are described below:
Price factor: Price is the major factor that determines the demand and supply of coffee. If the price of coffee rises, then people would switch over to tea which is a substitute of coffee. Then the demand for coffee will fall and that of tea will rise.
Political factor: According to Ansari, & Farooq, (2012), the demand and supply of coffee may be influenced due to some political factors. There was a potential drop in the supply of coffee in Brazil and Vietnam in 2001 as a result of some political instability. That had a massive impact on coffee price in world market since they comprise jointly almost 50% of the world’s production.
Climatic factor: Coffee is very much sensitive to weather conditions. It does not grow in certain weather conditions. For the proper growth of the coffee plants, it requires rain and sun at correct time. If it does not happen properly then the quality of the product becomes lower and hence it affects price.
Speculator effect: The trading activities of entrepreneurs show significant impact on coffee prices since coffee is a highly traded commodity. Market activities for other associated commodities like oil may have severe impact on green coffee prices.
Tax effect: Another important factor that affects the coffee price is the taxes and tariffs Increase in taxes may have significant effect on the price of coffee.
Enterprise trading: According to International Coffee Organization, big four coffee producing companies are Kraft, Nestle, P & G and Sara Lee; they buy 50% of the coffee produced worldwide. Arabica coffee is cheaper than Robusta coffee since these companies purchase more of Robusta coffee. If they make a decision to purchase more of Arabica coffee, then one can expect higher price for Arabica coffee (Bolaños et. al.,2013)..
Global demand outlook: Now-a-days the demand for coffee is on rise as more countries are moving into the developing world. For example, though Brazil is the world’s largest producer of coffee, it does not even belong to the list of top ten consumers of coffee. Also, none of the top twenty coffee producing countries belong to the list of the top ten consumers that is a surprising issue (Boadi, 2016).
According to Garrett, Lambin, & Naylor, (2013), these are the factors that determine the demand and supply of coffee. Apart from these factors, there are some general factors which also affect the demand and supply of coffee. The factors affecting demand are tastes, preferences and income of a consumer, price of other goods (substitute and complementary goods), future expectation etc. and the factors affecting supply are price of the given commodity and price of factor of production (input).
RA and Utz coffee created a 3%-5% premium over the market price for encouraging farmers. This is also associated with the reduction in costs and higher efficiencies. Sometimes 20% premium above the market price is received by the organic coffee farmers in order to compensate them for high cost of production (Raj et. al., 2014).
This section of the assignment sums up the entire thing. The first part of the essay introduces the basic microeconomic concepts, demand and supply. Then the main determinants of demand and supply of coffee are explained. Also the major factors such as the price factor, political factor, climatic factor, speculator effect, tax effect, enterprise trading and lastly the global demand outlook are mentioned and how they determines the demand and supply of coffee are discussed here. Then the basic parameters of the sustainable coffee production are illustrated. In the last few years, there were many changes occurred in the International coffee market. These changes may be associated with the demand and supply side aspects of coffee.
Ansari, S., & Farooq, M. (2012, March). The Demand Determinants of Takaful (Islamic Insurance) By Conventional and Islamic Banks in Pakistan. In rd International Conference on Business and Economic Research (3 rd ICBER 2012), Golden Flower Hotel, Bandung, Indonesia (pp. 12-13).
Boadi, I. (2016). Determinants of Ghanaian banks’ credit to the" missing middle”. A supply side approach. International Journal of Bank Marketing,34(6).
Bolaños, R. L., Partanen, T., Berrocal, M., Alvárez, B., & Córdoba, L. (2013). Determinants of health in seasonal migrants: Coffee harvesters in Los Santos, Costa Rica. International journal of occupational and environmental health.
Garrett, R. D., Lambin, E. F., & Naylor, R. L. (2013). Land institutions and supply chain configurations as determinants of soybean planted area and yields in Brazil. Land Use Policy, 31, 385-396.
Kariuki, G. J. (2014). The Determinants of Coffee Supply in Gichugu Division in Kirinyaga District: Kenya (Doctoral dissertation).
Kolk, A. (2013). Mainstreaming sustainable coffee. Sustainable Development, 21(5), 324-337.
Lanfranchi, M., Giannetto, C., & Zirilli, A. (2014). Analysis of demand determinants of high quality food products through the application of the cumulative proportional odds model. Applied mathematical sciences, 8(65-68), 3297-3305.
Raj, S. V., Narmadha, N., Alagumani, T., Chinnaduri, M., & Ashok, K. R. (2014). ESTIMATION OF DEMAND AND SUPPLY OF PULPWOOD BY ARTIFICIAL NEURAL NETWORK: A CASE STUDY IN TAMIL NADU.SLJER, 2(1), 81.
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