Coffee Crisis

1164 Words May 16th, 2013 5 Pages
Unit 4 Assignment 1

“The Coffee Crisis”
By Stephen Quinlan & Jose Gomez-Ibanez
Case Analysis

Michael G. Castro

Capella University
MBA6008 – Global Economic Environment
Professor Hadsell
February 13, 2013

Introduction

Stephen Quinlan and Jose Gomez-Ibanez describes, in “The Coffee Crisis”, that in 2004 the governments of coffee producing countries were considering how to respond to rapid decline to coffee prices. In 2001, coffee prices hit a forty-year low, which resulted in extreme hardships for the local farming communities. On that note, this decline in coffee prices was considered “the coffee crisis.” The coffee crisis came to be thanks in part to coffees: overproduction, under-consumption and oligopoly market structure.
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3, 2004).

Market Structure

The overall coffee market resembled that of an oligopoly, which is defined as “a market dominated by a few large producers of homogeneous or differentiated product. Because of how few exist, oligopolies had considerable control over their prices, but each must consider the possible reaction of rivals to its own pricing, output, and advertising decisions” (McConnell, Brue & Flynn, 2012, p.223). Oligopolies are also characterized by barriers to market entry (McConnell, Brue & Flynn, 2012). Although there were many countries producing and exporting coffee, the market was largely dominated by a few countries (i.e., Brazil, Colombia, and later on, Vietnam). Oligopoly, by its very nature, limits transparency in the market place. Within ten years this country grew from a relatively insignificant producer to the world second largest – ahead of Colombia (producing ~11 million bags accounting for 10% world export) but behind Brazil (producing ~35 million bags accounting for 35% world export) – producing well over 11 million bags annually and accounting for approximately 12% of world exports (CRB, 2006).

Factor Markets

From the ICA collapse bringing forth Vietnam’s entrance into the coffee market to the quality degradation, the coffee crisis affected more than just the market. With a drop in coffee prices, the farmers not being able to cover all of their costs

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