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Coffee Trends: Go Ask Smith

Go Ask Smith


June 16, 2008
By Brian Martell

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Analysts in Brazil expect the demand for coffee worldwide to grow to
145 million bags from current levels of about 100 million by 2015. The
increase in volume, and the inherent ramping-up of production to meet
that demand, will have profound ramifications for the coffee industry
globally – if the oracles from Brazil are correct in their assessments.

Analysts in Brazil expect the demand for coffee worldwide to grow to 145 million bags from current levels of about 100 million by 2015. The increase in volume, and the inherent ramping-up of production to meet that demand, will have profound ramifications for the coffee industry globally – if the oracles from Brazil are correct in their assessments.
 
What is at play here is the choreography of Adam Smith’s (the father of classical economic theory) supply and demand that may change the way we in North America perceive coffee. A pronounced demand curve shift to the right with lagging supply could spell temporary price increases while producer nations scramble to drag the supply curve into line.
 
World demand has been steadily growing at a glacial pace of one per cent per annum, with North America just ahead of that rate. What the Brazilians are anticipating is the large-scale shift in demand from two emerging economic giants: China and India.
 
The emerging middle class in these two nations are defining their new found wealth by acting as “American” as possible, adopting certain cultural aspects that are not too offensive in their respective countries. One of these cultural norms is the fashion of drinking coffee instead of the traditional tea favoured by these, the most prolific of tea growing nations. With a combined population of almost three billion people, it would only take a small percentage of converted coffee drinkers to built forward market inertia.
 
As with many trends, those who are first to identify and capitalize on the movement are usually the largest benefactors. With that in mind, the Brazilians are looking to increase their production to 60 million bags per year (132 lb/60 kg bags, for a mind boggling 7.9 billion pounds). Interesting enough, their agricultural strategy is not to employ more land use, but to use science to improve yields within existing plantations.
 
Getting the timing right for such a massive influx of either demand or supply is highly unlikely and, therefore, the market will experience price fluctuations. If the Brazilians are ahead of the trend, the market could reach levels rivaling the lows of two years ago; if they are behind, look out for $3.00/lb coffee on the exchange. Fortunately, any shift will find equilibrium – providing the market is allowed to work unfettered by government caprice.
 
Indeed, most of the enduring radical shifts in coffee prices over the last 50 years that were not caused by natural disaster (frost or drought) have been due to government meddling in the market. The American involvement in the ICO’s strategy to control the supply of coffee by forcing domestic roasters to buy from ICO sanctioned producers caused the market to artificially rise to the point where the collapse became inevitable.
 
The ensuing low prices caused by the artificially created glut translated into hardship for producers. Government encouragement in Communist Vietnam (with the help of the World Bank) to shift agricultural production to coffee also brought long lasting price depressions. Ironically, the low prices caused by the Socialist Republic of Vietnam spawned a socialist movement half a world away to bolster prices through an organization known as Fair Trade.

In the end, the impact on North America for coffee prices will largely be dictated by how sanguine governments will be resisting the temptation to influence Smith’s “Invisible Hand.”

Questions or comments?  Reach Brian at Brian@heritage-coffee.com

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