Brazilian Drought and Coffee Harvest - Essay Example

Brazilian Drought and Coffee Harvest: A Review Coffee is considered to be easily one of the major products in the world, and since it is favored by people all over the world, it has become the major source of foreign exchange across the world. Coffee gives a very big impact on the world economy, because of the fact that it is one of the most important primary products in world trade. Brazil is the number one producer and exporter of coffee, and therefore a smaller harvest from them most often equals higher prices for coffee drinks at cafes and supermarkets around the world. On October 10, 2000, a drought destroyed the coffee harvest in Brazil. This occurrence immediately became major news to the market economy and the consumers, because of the change that would occur in the marketing system. What actually occurred during this circumstance was a surge of heavy rains which lashed Brazil for several days, causing a major drought, and isolating hundreds of people and destroying crops. "Farmers reported that 40 percent of their tobacco, bean and corn crops had been destroyed by the floodwaters that inundated fields in the western half of the state." (Associated Press, 2000). The October 2000 drought was an incredibly serious and devastating event in many different ways for Brazil. In order to understand these reasons and to come to a clearer and more knowledgeable viewpoint on the subject matter, certain matters in regards to the drought itself, how it affected Brazil, and what plans are for the future must all be thoroughly discussed. The aim of this paper is to focus on all of these elements, while answering questions such as why, how, when, and will come in the future due to this situation. This is what will be dissertated in the following. Coffee is the second most commonly traded commodity in the world, trailing second only to petroleum. The first coffee plantation in the world was in fact established in Brazil in 1727, and Brazil cultivates coffee as a commercial commodity. They relied heavily on slave labor from Africa for its viability until abolition in 1888. For many decades in the 19th and 20th centuries, Brazil was the biggest producer and virtual monopolist in the coffee trade, and remained that way, until a policy of maintaining high prices soon opened opportunities to other growers, like Colombia, Guatemala and Indonesia. Brazil is located in East Central North America and occupies approximately 50% of the South American continent. Brazil is bound by Venezuela, Guyana, Suriname and French Guiana to the north, Colombia to the northwest, Peru, Bolivia, and Paraguay to the west, Argentina to the southwest, Uruguay to the south and the Atlantic Ocean to the east. Brazil has a tropical and subtropical climate characterized by high temperatures and anywhere from moderate to heavy rainfall. Rainfall is usually evenly distributed throughout the year, and the nationwide average annual precipitation varies between 1,010 mm (40 inches) and 2,030 mm (80 inches). There is an interior of Brazil's northeastern region which is known as the 'Drought Polygon'. It is "an irregular shaped region where people live under recurring threat of severe drought." ("Brazil", n.d.). This drought polygon is the driest part of the country, and it encompasses roughly 10 percent of the entire country's territory. "In this region, rainfall is undependable and the evaporation rate is very high, making it difficult to raise crops." ("Land", n.d.). Brazil is the world's biggest producer of green coffee beans with an approximate market share of 30 percent. Depending highly on weather conditions, Brazil produces and exports about 30 million bags of coffee beans annually. Approximately 85% of Brazilian coffee exports are Arabica coffee, which is also considered to be one of the highest quality; even more so than Robusta coffee - which demands higher prices. Brazilian coffee is characterized by the diversity in tastes depending upon geographic regions of the coffee's origin. The United States and Germany are the world's largest coffee consuming industries while Brazil sits in third place. However in the United States the average coffee beverage market has been declining steadily. However, demand for more organic coffee (which is coffee that is produced without the use of insecticides, herbicides, fertilizers, cleaners, etc.) has been steadily increasing since 1991 at roughly 10-15 percent annually. In Brazil there is a positive elasticity of demand for coffee. According to Nathan Herszkowicz of the Trade Union of Coffee Industry of Sao Paulo, since the Real Plan was implemented in Brazil in 1994 the result was a boosted purchasing power of the average Brazilian consumer, and thirteen million new consumers entered the market increasing the domestic consumption from 3.2 to a whopping 8.2 million bags in 1997. Coffee exports are financially significant for the Brazilian economy, especially since they represent Brazil's third largest group of exporting products. Also in relation to this is the employee ratios which the coffee exports provide. The coffee industry is labor intense and employs approximately six million workers at the present time. Due to the drought, Brazil's coffee harvest is expected to drop to 32.46 million bags, said the Agriculture Ministry, which blames the significant decline on the drought and a harvest cycle that reduces the crop in alternate years as coffee bushes recover. It was on October 10, 2000, that a severe drought destroyed the coffee harvest in Brazil. This immediately became major news to the market economy and consumers, because of the change that was undoubtedly going to occur in the marketing system. As a result, this is a shift factor in supply because in the end it raises the cost of supplying remaining coffee. The drought actually shifted the supply curve for Brazilian coffee in towards the axis. In order to truly understand the dramatic effect this drought had on Brazil's coffee harvest, we must first take a closer look at what the price of the coffee was in the past, and compare that to the price of coffee now. The price of coffee before the drought was $2.00 per bag. Now the price of coffee has skyrocketed from $2.00 to $4.00 per bag due to the shortage of demand. Now, since the quantity demanded exceeded the quantity supplied, the 'invisible hand of the market' has pressured the price to rise to $4.00 so that the quantity demanded equaled quantity supplied, rather than the other way around. Because of all of this, consumers are buying much less coffee than before. This is because prices send specific signals to economic actors encouraging them to respond in certain ways in order to adapt properly to changing market conditions. In this case of Brazil and their coffee harvest, the supply shifted inwards while there was no change in the demand. What this meant was that the price went up, therefore the demand went down. The global coffee harvest is likely to shrink a total of approximately 5 percent to 105 60-kg bags during this season, said the International Coffee Organization in 2005. According to the president of the CNA Coffee Commission, Joao Roberto Puliti, coffee growers do not have working capital because of the fact that their income has fallen sharply over the last three years (not only due to drought) but due to a drop in international prices. This factor forces them to sell their goods at times when prices are not necessarily advantageous because they cannot stockpile their goods and wait for more favorable prices. As an end result, this means that coffee harvesters - Brazil in particular - have been pulling in a much lower profit, and not only that, but that they have been forced to sell their usually prospective crops at times when they normally would not have done so. It was in 1998 that Brazil collected the biggest coffee harvest ever. This coffee harvest consisted of 36 million bags. The reasons behind such an enormous crop collection are primarily due to favorable weather conditions, and also partly due to the new plantations that were replaced after the frost of 1994. However there is current speculation that the government of Brazil will impose even more exporting taxes on coffee, and that this will reduce even more the purchasing power of local farmers. This is an especially big deal considering that the majority of these local farmers are small operators, and that their position is highly necessary in the production of the overall coffee harvest. An investigation into the history of Brazil's drought agencies uncovers two persistent themes: government incompetence and corruption. "While other nations around the world - from Israel to Iraq, China to South Africa - used irrigation to get through dry spells and droughts, Brazil was never able to solve its drought problems." (Arons, n.d.). Brazilian well construction, reservoir projects and agricultural irrigation schemes have always been capital-intensive, but "locally ineffective and often counter-productive." (Arons, n.d.). Also, the Brazilian government relies on huge projects at the expenses of local needs. It is easy to see just how much Brazil relies on elements such as favorable weather conditions and good plantations in order for them to receive a good profit margin. Brazil is more than the world's largest coffee producer; it is also the most complex. "It turns out everything from mass produced coffees that rank among the worlds cheapest to elegant coffees prized as the world's finest origins for espresso brewing." ("Coffee", 2001). With coffee remaining as one of their number one exports, it is crucial that the government of Brazil contemplate and figure out new solutions so that they do not go through another experience as in October 2000. Although it is rather obvious that droughts cannot be prevented, there must be a solution so that the price of coffee does not have to be raised after a situation like that. Being more prepared and expectant for things such as this in the future will be purely beneficial to Brazil, not only in the short-term but in the long-term as well. Works Cited Arons, Nicholas Gabriel. "A Political History of Drought in Northeast Brazil." NACLA. 11 April 2006 http://www.nacla.org/bodies/body78.php "Floods Destroy Crops and Isolate Towns in Southern Brazil." Editorial. Associated Press. 16 Sept. 2000. "Brazil." "Brazil's Drought Polygon." NASM. 11 April 2006 http://www.nasm.si.edu/ceps/drylands/brazil.html Cavalcanti, Iracema F. A. & Kousky, Vernon E. "Drought in Brazil During Summer and Fall 2001 and Associated Atmospheric Circulation Features." 11 April 2006 http://72.14.207.104/searchq=cache:kr3wmiS1ISkJ:www.cptec.inpe.br/products/climanalise/artigos/criseing.PDF+2000+brazilian+drought&hl=en&gl=ca&ct=clnk&cd=8 "Coffee." "Coffees From the Americas: Brazil." Coffee Review. 11 April 2006 http://www.coffeereview.com/reference.cfmID=62 "Land." "The Land." Embassy of Brazil. 11 April 2006 http://www.brasembottawa.org/en/brazil_in_brief/the_land.html U.S. Water News Online. "Drought Withers Brazil's Coffee Harvest." U.S. Water News Online. 11 April 2006 http://www.uswaternews.com/archives/arcglobal/tdrowit2.html Read More