Supply and demand Essay Example for Free

Supply and demand Essay Coffee is the world’s second largest traded commodity it is used not only for drinking but for soft drinks and cosmetics as well, it is second only to oil according to all imports and exports from all countries. They are two main types Arabica coffee (most people are used to this and are more popular) and there is Robusta coffee. In the last two years the prices of coffee have been gradually falling (Ycharts. (2013). Coffee Arabica Price) alongside this, the supply of coffee has also been falling. Although there have been some price fluctuations at times and this could end up really affecting an economy that depends on coffee. The reason that this is such a big deal is because the countries that heavily depend on coffee exports are usually developing countries and with the price of coffee falls, so does their rate of development, these countries involve countries such as Vietnam, Ethiopia, Peru and Guatemala who are all within the world’s top ten coffee producers (Justin Doom. (2011). World’s Top 10 Coffee-Producing Countries in 2010-2011). When these economies are weakened, they face to their governments, who need to somehow intervene in the coffee market and try to stabilise the prices so that they can reach their ultimate goal to continue to develop. Price stability in the coffee market is an ideal scenario in a market where the prices for coffee do not alter drastically. They may raise a little or fall, but never by a noticeable amount, and are easy to predict, which can help coffee producers plan for the far future. It is not only important to coffee producers, but to the economy as whole, if the prices for coffee are unstable, for some countries this could have a huge impact on the inflation levels. The diagram below describes how an unstable price for coffee can increase and affect the short run aggregate supply and cause the general price level for the economy to rise and therefore causing inflation as they did in July 2012 (Ycharts. (2013). There are several reasons why the prices of coffee have been fluctuating, but still gradually falling. The first reason is that coffee or coffee beans are extracted from plants. These plants must first be grown, then harvested. There is only so much mankind can do to ensure that there is always excess coffee however sometimes natural disasters can occur, and there is nothing that farmers can do to prevent this, when natural disasters occurs it means that farmers will have small yields and supply for coffee will be low, for example Colombia, one of the world’s leading coffee producers and exporters, in recent years have been experiencing poor weather conditions which have led to production falling by 12% to 7. 809 million bags in 2011 which is a record low that hasn’t been seen since 1976. This can cause the price to increase seeing as coffee is the world’s second most demanded commodity. These poor conditions consisted of excessive heavy rainfall, disease, pest and limited sunlight (Zacks Equity Research. 2 (2012)). The graph below shows how the supply for coffee has decrease leading to a rise in price On the other hand this is just an example for Colombia and for the rest of the world the prices for coffee have been falling for the last four years, this is due to wealthy individuals and companies use their money to invest in the global coffee suppliers, and other large coffee producers such as Brazil (the world number three) has been turning out high yield and is expected to do so in following years. Fain Shaffer, president of infinity trading crop expects coffee to be traded by one dollar to a pound of coffee, figures which have not been seen since September 2006. (Alexandra Wexler. (09/17/2013)) Coffee prices may currently be relatively stable at the moment however according to research conducted by the Royal Botanical Edinburgh along with Ethiopian scientists and London’s Botanical Garden, Kew, have predicted that wild Arabica coffee will be extinct by the year 2080. If the prices begin to fall, all of a sudden the prices for coffee will no longer be stable. No country operates on a 100% free market. All economies are mixed, some tend to be freer than others, however should a country find that prices are volatile or unfair, they can always rely on the government to intervene, aka government intervention. One way a government could help stabilise the price of coffee is through buffer stock schemes, these schemes focus on the prices of coffee and try to stabilize the price, they do this by first establishing the intervention price, this is a price the government thinks is most suitable for coffee. Once this has been established the government will then buy up a lot of coffee when the price is at its lowest, they continue to do this until prices for 3 coffee begin to rise again, and to balance out the price to make sure it is at the intervention price. They are constantly buying coffee to balance out the price. This is an effective method in theory however in real life they do not work out as planned because the people in charge of the buffer stock tend to get greedy and try to maximise profits rather than help the economy as a whole and end up just constantly buying till they go bust. A good example of a successful buffer stock scheme is in Brazil, for years Conab, Brazil’s official crop bureau has been buying coffee at low prices and uses it to help local producers when the selling price for coffee is too low. Between 2003-2004 Conab had just under four million KGs accumulated. (Geoff Riley. (2012)) Another issue with this is that it is very difficult for a government to raise enough money to buy up enough coffee to influence the natural supply and demand. It is also expensive to store large amounts of coffee and because it is an agricultural good it has a shelf life. Another method the government could intervene is through Subsidies. A subsidy is a grant given by the government in order to increase production, this would help producers who have produce low yields due to high taxation and or high costs If the government could make coffee more attractive this could help stabilise the price if supply started to fall. This however is not a very effective method because it can only help bring the supply of coffee back up, and it may be able to work to well, if producers begin to produce excess supply the prices of coffee could start to increase sharply leaving the prices unstable yet again. Buffer stock schemes are the most ideal way for a government to ensure price stability, and the success of the scheme depends heavily on whether or not the Government can provide proper facilities to accommodate huge quantities of coffee and are able to afford to buy enough Coffee to be able to alter the market forces so that if prices go to high they can bring them down and if they go to low that they can bring them back up again, if not it could result in huge losses for the economy and even end up setting the country back. The supply and demand of coffee can and always will be prone to quick sudden changes due to circumstances that are unavoidable.