Economics (AS & A Level) · Oct / Nov 2024 · Paper 23 · Question 1

Global coffee bean prices reach a new high Coffee is big business, especially in the United States (US). The global market was worth nearly US$110 bn in 2020, with production around 10 m tonnes of coffee beans. 95% of this production came from thousands of small-scale producers in South America, Central America, Asia and Africa. If present trends continue, production is forecast to triple by 2050. The Arabica coffee bean price was at a 10-year high in January 2022, having more than doubled in 2021. Fig. 1.1 shows the world price of coffee in United States dollars (US$) per pound (lb) weight. A pound is 454 grammes. 2002 2010 2014 2018 2006 2022 0.5 1.0 1.5 2.0 US$ per lb 2.5 3.0 Source: tradingeconomics.com, 18 February 2022 Fig. 1.1: Arabica coffee bean price, 2002 to 2022 So how can this huge price increase be explained? The main cause was a series of weather events affecting Brazil, the world’s largest producer of high quality Arabica coffee beans. Its market share is 35% of total global supply. There was severe drought in early 2021 that reduced the number of ‘cherries’, which contain the beans on coffee bushes. The crop yield was further damaged by frosts that followed the drought. As a result of these weather events, Brazil produced its smallest volume of quality coffee beans for ten years. In addition, the production of cheaper low-quality Robusta coffee beans in Vietnam was badly affected by storms which stripped the bushes of their ‘cherries’. Overall, there was a very large decrease in the global supply of all coffee beans. Supply issues affecting major producing countries like Brazil and Vietnam mean that the volume of coffee beans produced regularly fluctuates between ‘high’ years and ‘low’ years. Producers try to reduce their risks through buffer stock schemes in order to maintain a regular income stream. This type of scheme is particularly important for the many small-scale subsistence producers who have no other source of income. The dramatic weather events of 2021 have been exceptional, although a few large-scale producers in Brazil who survived the immediate impact of drought and frost should gain from the huge rise in the price of coffee beans. But what about the thousands of other producers elsewhere who lack power in the market? The most likely outcome is that they will once again become victims of the unpredictable global market for coffee beans.

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