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An exploration of commodity income stabilization options for coffee farmers - page 15 / 47

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January April July October January April July October January April July October January

cts/lb

In the eyes of many people, coffee is primarily an export crop—so the price should be the world market price minus transport and other transaction costs. However, the role of national and, in some cases, sub-regional markets has increased in recent years. While in the 10 years from 1997 to 2006, coffee production increased by 22 per cent, local consumption in the producing countries increased by 28 per cent. Almost a quarter of coffee is now consumed in the country where it is grown. Brazil, where home consumption now accounts for almost 40 per cent of total production, has become not only the world’s largest coffee producer, but also its second largest coffee consumer.10 Furthermore, and further weakening the importance of the traditional coffee consumers in Europe and Northern America, in some cases, sub- regional demand has come to dominate price behaviour—for example, in recent years Sudanese buyers have at times driven coffee prices in Uganda. This trend is influencing the way that traders operate (for example, they will leave more stocks in the producing country so that they have greater flexibility in allocating coffee to one market or the other). It is also influencing the behaviour of the “basis” between local and international prices—in a way, rather than having a relatively stable basis determined by the costs of bringing the coffee from the national to the international market, one will have a “maximum” basis. where bringing coffee to the international market becomes a decision of last resort, as traders often can do better locally.

Growing national and sub-regional markets are just part of a shift in trade flows away from the traditional buyers in the U.S. and Western Europe. The two traditionally dominant coffee futures markets—for Arabica in New York and for Robusta in London—reflected the position of Latin America as a major Arabica producer and Africa as a major Robusta producer, with most coffee flowing across the Atlantic Ocean. Now, Vietnam has become the world’s dominating Robusta producer, and much of the production remains within Asia. Robusta prices in Asia have increasingly become dissociated from London, resulting in, among other things, efforts to create new futures markets in the region. For the time being, however,

11

2007

Chart 2: Coffee prices, 2004–2007, as compared to World Bank forecasts

160.00

2006

140.00

mild arabicas

robustas

World Bank forecasts

arabicas robustas

2005

120.00

10

Calculated from ICO statistical data.

2004

100.00

80.00

60.00

40.00

20.00

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