Essay on Coffee Crisis

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Coffee Crisis The Wall Street Journal, Boston Globe , and the Economist as well as many other media outlets of record were all in consensus when they declared the onset of coffee crisis in October 2001; farmgate prices had sharply dropped reaching a thirty-year low of $0.39 per pound in This price was below the cost of coffee production at the time, listed at USD 0.60 per pound.(Economist 2001) Price declines are not such an uncommon occurrence, but what is more troubling is that the cash market for coffee suffers from high price volatility. For a more detailed look please see Appendix 1: Cash Price Variation. Coffee producers , who are mainly located in developing countries , are highly vulnerable to price risk in the cash market ,…show more content…
The main mechanism for price stabilization was an export quota system that was distributed among its members. The results of the ICA can be called mixed at best, at worst unsuccessful according to existing price data. At best, the ICA managed to guarantee a minimum price but because not all coffee producing and coffee consuming countries were members of the regime a dual market developed. Eastern European and Middle Eastern countries were able to import coffee cheaply and under the price floor set by the ICA, especially by importing from newer country producers who were not party to the agreement. In order to maintain the price floor, the ICA managed to recruit the newer producers as members, but it still wanted to maintain the same level of export restraint. So that this aim could be achieved ICA architects proposed a redistribution of the quota among its members. Naturally those producer countries who had been exporting in the international market for a long time objected to sharing their quota with newer members. This issue as well as producer country-consumer country debate strained the agreement and led to its disintegration on July 4th, 1989. As a result producer countries rushed to export all of the stocks they had held for so long so that they could take advantage of the still high cash prices. This rush placed downward pressure on the cash market prices leading to a crash in 1992. Soon after boom- bust cycles prevailed in the market (Appendix 1a:

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