The Impact of Coffee on the Global Marke - Essay Example

The Impact of Coffee on the Global Market Introduction Coffee is a plant that is grown in different parts of the world. The coffee plant or shrub belongs to the family Rubiaceae. The coffee beans are produced from the plant Coffee. L. There are some 70 species of this plant. Only two species are commercially produced these are the coffee Arabica which has its origins in Ethiopia and the Coffee Robusta (Solange et..al, 2011). Reports indicate that the Coffee Arabica, which is often grown in many parts of Africa, consists of 75% of the World’s production as compared to the Robusta, which consists of 25% of the World production and is mainly grown in Brazil. The Robusta is known to be more resistant requiring less care when compared to the Arabica which is often grown in high altitudes (Solange et..al, 2011). The consumption of coffee is a worldwide phenomenon. Indeed the impact of coffee is immense. Coffee is arguably one of the main beverages if not the main beverage consumed every morning all over the world. In fact, some have argued that coffee is the most important agricultural commodity (Myers, n.d ). The consumption of coffee is not only restricted to a morning breakfast component. Undeniably, in many parts of the world coffee is consumed for different reasons and in different seasons. These include: coffee is often consumed as a stylish drink. This is where the lattes the expressos and the mochas, are involved (Myers, n.d)(Diaz,2009). Consumer demand is on the rise for such coffee and as people continue to drink such coffees the quality of coffee is one issue that will not be overlooked (Myers, n.d). Coffee is also consumed for its value of inhibiting sleep. This usually enables individuals who were involved in an activity to continue even late in the night without the inhibition of sleep. Additionally, Coffee is a source of employment for many people of the world. Coffee is said to be the second most traded product after Oil (Solange et..Al, 2011). This potentially means that it provides employment to many people at different levels. These include the famers who plant the crop, the people who transport the crop to the market, the people involved in the conversion of coffee from berries to the finished product, the individuals providing packaging for the coffee as well as the marketers, distributers, Warehouse operators and also the shipping companies and many more. In addition, the impact of Coffee has many positives about the provision of a beverage and employments at different levels. That said, it cannot be overlooked that there have been certain challenges with regard to employment and the remuneration of people involved globally in the production of Coffee which need to be addressed. These have led to maintaining of the poverty cycle, gender discrimination, as well as enrichment of a few intermediaries at the expense of the majority who are involved in the production cycle. If these issues are not addressed then coffee will be seen to be helping to perpetuate damaging concerns, which would not go well with many of those involved in its production. This ultimately means that if some of these issues are not properly addressed then there is a risk of many individuals who are involved in the Supply chain of Coffee opting out leading a reduction in production. This would lead to the lack of availability of this beverage. Global Coffee production is faced with sustainability challenges from declining prices to endangering forests. There is the issue of contamination of those who are involved in the production process. The other effect is that the production of coffee has effect on biodiversity. Therefore, it is imperative to learn about the impact of Coffee in the market in terms of the benefits and the challenges of Coffee production. Globally agricultural production of which Coffee is a constituent relative to agricultural GDP is 36% but the share varies from country to country. This ratio is much higher in developed countries, which stand at 75%. In Latin America, the ratios rose form 24%in 1960s to 31 % in the early 2000. In Sub Sahara Africa, on the other hand the ratios have fallen from 29 to 13% in the same period (Clapp, 2012). THE HISTORY OF COFFEE Firstly, in examining the history of coffee we look at the present impact of coffee. Coffee has been consumed for over 1,000 years and today it is believed to be the most consumed beverage in the world currently (400 billion cups yearly) (Sobésa Café2008). Coffee as a plant is said to have existed in Ethiopia where it grew naturally. There is a story of an individual named Kaldi or the Legend of Kaldi (National Coffee Association, n.d) who is said to have noticed that his goats once they had eaten the leaves of a certain plant were very active and were able unable to sleep at night. He reported this to the Abbot of the local monastery who made a drink form the berries of the plant and he discovered that it made him alert for long hours of his evening prayer. He shared this information with his fellow monks. Word about the plant soon spread to the Arabian Peninsula where the drink took another status. In the Arabian Peninsula coffee was not only cultivated, it was also traded for the first time. Because Muslims are restricted from consuming alcoholic drinks they quickly took up this beverage and were soon even having places outside of their houses where they met to have coffee. This is often believed to be the precursor of the modern coffee shop (National Coffee Association, n.d). In addition to this, coffee is said to have been consumed for 1,000 years. It has gone through many changes in the way it is been consumed. As mentioned coffee is presently consumed in coffee shops which are spread all over the world. Coffee began to be savored in Europe in 1615. This was imported from Arabia. The Germans, Italians and Frenchmen were looking for a way to plant the crop in their colonies yet the Dutchmen were the first to find out how (Solange et..Al, 2011). The Dutch were able to start growing Coffee in the Island of Java in what is now the country called Indonesia. Furthermore, the different Colonial States where it thrived and soon was a very important product also transported coffee to The Americas. Due to the fluctuations in coffee prices, the coffee producing countries came together and formed an agreement. This agreement was named the International Coffee Agreement (ICA). This took place in 1959. This agreement was amended in 1962 to include consumers. The issues agreed upon included: To stabilize prices by increasing coffee consumption, to achieve a long-term equilibrium between production and consumption, and assure adequate supply to consumers and markets to producers at equitable prices. Members had intended to keep the world supply as small as possible while trying to make the most of their own share, without any effort to restrain production. Presently, coffee is majorly grown in Africa and Latin America. Altogether 90% of the coffee is produced in developing countries (Milford, 2004). This has brought a lot of issues to the fore with regard to remuneration, the impact on the environment and gender issues. These issues involve the Supply Chain, Global Commodity Chains, and Global Production Networks. This is as because while coffee is largely grown in developing countries, the main consumption of coffee is in the developed world. At the same time many organizations that are involved in the transportation of Coffee are western owned. These organizations have led to many of the owners of these organizations enriching themselves while the same cannot be said of those who are involved in the growing of the crop. Discussion: Supply Chain Management, Global Commodity Chains and Global Production Networks. PRODUCTION OF COFFEE Global Production Networks As concerns the production networks most of the coffee is grown in the developing countries. Producers, policy makers, intermediaries, and sometimes-even consumers are frequently confronted with irregular data on the actions of other participants within the coffee market. In order for producers to effectively reap the benefits of the international market, it is crucial that they have trustworthy, comprehensible and the latest market info as well as information on efficient approaches for adjusting to changing market conditions. To a certain extent, global oversupply and the current coffee crisis can be traced to production decisions based on inadequate market information. Similarly, consumers under normal circumstances have very little access to information on market practices beyond the store shelf (Potts, 2004). These two examples represent extremes of a persistent context of imperfect information within the coffee sector—a context which frequently leads individual actors to adopt unsustainable strategies in their decision-making. As mentioned earlier, coffee is mainly grown in developing countries. These countries are mainly located in Africa and Latin America. There is also an increase in the production of coffee in Asian Countries like Indonesia (Milford, 2004). Of the world’s coffee production, 15% of Coffee is grown on coffee estates of more than 50 hectares. More commonly, 70% is grown on farms less than 10 hectares (Fitter and Kaplinsky 2001). In such cases, production requires little technology or other long-term outlay, however, a great deal of labor is required, not only for the harvest but also for planting the trees, for the elimination of weeds and for fertilizing. Although average costs can be reduced by expanded land use and a combination of vehicles and laborers, there is generally less scope for economies of scale in coffee production when compared with products like potatoes and wheat, where technologies can take over much of the process. This may be an explanation as to why so many production units are still very small in size (Milford, 2004). It usually takes two years from the planting of a coffee tree until the time of harvest of the berries can start. The optimal yield is reached after 5 years. Afterwards, the production of high quality beans will go on for 20 years, this is then followed by another 20 years of declining production. The only way to increase the produce in the short term is by using more inputs like hired workers, fertilisers and pesticides. Consequently, the supply elasticity of coffee with respect to price is relatively low. Price elasticity of demand for coffee is often low, with coffee demand dropping only when coffee prices increase significantly (Ponte 2001). As a result, prices on the world coffee market are highly variable. Unexpected frosts or diseases are quite common, especially in Brazil, and can destroy large amounts of coffee. Supply shortage then leads to high coffee prices without a significant reduction in consumption (Milford, 2004). The response on the supply side is usually higher than necessary, as more farmers than before decide to plant new coffee trees. Two years later, when the new trees mature, there will be an oversupply of coffee leading to lowering of prices. This will in turn prompt many coffee farmers to leave the business or start growing something else. Consequently, the world supply of coffee falls, driving prices up again. Higher prices will again lead to a surplus, and so the cycle continues. These constantly changing prices mean that coffee farmers all over the world live in a situation of uncertainty in which it is difficult to make plans for the future (Milford, 2004). Producer autonomy, which is a requirement for any proper production sustainability, is perhaps nowhere more evidently constrained than in the contract of sale. The vast disparity in market power between small producers and major industry players within the coffee sector is well documented. Moreover, there is considerable evidence that such inequities are becoming deeper as global integration progresses. The existence of such disparities effectively reduces the ability of producers to negotiate terms that effectively serve their long-term interests (Potts, 2004). Due to the magnitude of the coffee industry in many of the producing countries, it is able to improve those economies through its use of labor, attraction of foreign investment, improvement of infrastructure, and encouragement of general industrial growth (Shannon, 2009). Coffee and colonialism In the history of Coffee production, a lot has to be said about the part played by coffee in colonial times. Coffee was produced a lot in Colonies of different countries. Coffee though did not begin as a colonial commodity; the Sufi Muslims were more worried about escaping secularism and not profiting from it. The Prophet Mohammed’s requirements were the only concerns that interested them. Although Yemenis did quickly turn to exports, they did not trade with Western Europe for at least a century and a half. Closely tied to Islam, coffee was disseminated by Hajj pilgrims to Mecca. From there it traveled to Java, India, Persia, Turkey, Morocco, and Western Africa. As mentioned earlier, the Dutch were the first European colonial power to enjoy considerable success in planting coffee in their colonies when they brought it to Java in the 1690s though undoubtedly Muslim pilgrims had earlier introduced some coffee into Indonesia. With Islam strongly entrenched in Java, there is evidence of a considerable coffee drinking culture there (Topik, 2004). The Dutch were able to overtake Mocha and Mediterranean ports to transform Amsterdam into the world's leading coffee entry port for over a century. By 1730 Amsterdam was trading in coffee from three continents: Asian Java and Reunion, Middle Eastern Yemen, and American Dutch Guyana, St. Domingue and Martinique. The British may perhaps have been the first Europeans to bring coffee to the Americas. The British though were not very much interested in Coffee as an export crop. They were the only Western European power to reduce Per Capita coffee consumption rather than exploiting the coffee-growing potential of colonial Jamaica, Ceylon, or India (Topik, 2004). The British would profit immensely in the nineteenth century indirectly from coffee first from the slave trade, then the carrying, re-export, insurance, and finance trades. Nevertheless, coffee growing was left to others. British absentee property owners who, according to Hill “don’t pay attention since they no longer have great returns of the plantation system” owned Jamaica’s coffee fields. Hence, the coffee was sold at local markets mostly for domestic consumption at the end of the nineteenth century. Only the best coffee, Blue Mountain, was "compulsorily exported to England" with a bit of the poorer grades to the United States (Topik, 2004). In the America, coffee was first grown in the Caribbean islands for a long time before it was grown in the mainland. The Spanish and Portuguese preferred cacao or tea, which means that Latin Americans had to wait for independence to become significant coffee producers. Coffee because of its low technological demands allowed a country recently independent but richly endowed with the factors of production like Brazil to begin producing on an unprecedented scale. Cheap fertile land and slave labor allowed coffee prices to plummet after 1820 and remain low until the last quarter of the century creating supply-induced demand. Brazil’s exports jumped 75 fold between independence in 1822 and 1899. World consumption grew more than 15 fold in the nineteenth century. By 1850, Brazil was producing half of the world’s Coffee. This was in part aided by reduced transport cost especially with the introduction of the Railway and Steamships. Coffee's swift growth of the nineteenth century was due to uncharacteristic demand circumstances as well as Brazil's and later other Latin American countries’ ability to meet that demand cheaply. Demand in the nineteenth century, in both the US and Europe, was initially both income-elastic and price-elastic. Amazingly, this was not the case in the twentieth century, despite better quality and coffee that is more available as well as quickly expanding discretionary incomes. The reason for the change was cultural. Coffee was one of the few major internationally traded commodities in the nineteenth century to enjoy a real price increase in the second half of the century and yet still experience a per capita consumption upsurge. Once its status declined in the early twentieth century, its income elasticity did also though it continued to be a necessity for many. We still presently find that Coffee is grown more in developing countries that were former colonies of Britain, France, Portugal, and Spain. Coffee is still been exported to the former colonizers as raw or semi processed before it is sent back as a fully processed good. As concerns Global Commodity Chains (GCCs) Gereffi (1995) classifies four dimensions of GCCs: the input–output structure, the geographical coverage, the governance structure, and the institutional framework through which national and international conditions and policies shape the globalization process at each stage in the chain (Gereffi, 1995, p.104). Agricultural commodities tend to fall into the category of buyer-driven chains, in which large retailers in industrialized countries, brand name merchandisers, and international trading companies are the key actors in setting up decentralized networks of trade in developing countries (Gereffi,1999a). Because of the changes in distribution and retailing in industrialized countries since the 1980s, agricultural production and trade have involved an increasingly heterogeneous combination of firms, types of ownership, size, and relative access to markets (Ponte, 2001). Several authors have analyzed the intergovernmental commodity agreements either from the standpoint of their impact on government policies or their closeness to cartel theory (Ponte, 2001). These studies have been dedicated to the evaluation of its impact on trade and export revenue stability for the member countries. They have studied the effect of ICA on prices, price stability, volume traded, and revenue. However, none of them have considered the formation and the evolution of ICA in the light of the coalitional game theory (Ponte, S., 2002, p.1102) Coffee Supply Chain The function of any supply chain is to successfully and efficiently manage the steps in production process as raw materials are turned into a finished product, and ultimately sold to consumers. The supply chain within the coffee industry can be very complex and difficult to manage. These supply chains are often global and interlinked with other supply chains, which affect the costs as well as efficiency. The main links within the coffee supply chain include Growers, Intermediaries, Processors, Government agencies, Exporters, Dealers/Brokers, Roasters, Retailers (Myers, n.d).All these individuals gain from the production of coffee in one way or another. Many reports show that the intermediaries are the main benefactors. On the other hand, other factors affect the supply of coffee in the world market. This majorly relates to the environment and climate change. In a warmer world, the hydrological cycle is expected to become more intense, likely to result in ‘very wet’ and ‘very dry’ areas compared to past measurements. Globally, the number of people exposed to extreme droughts at any one time is also expected to increase because of climate change (climate Change and the Coffee industry, 2010). The effects of the changes on coffee production cannot yet be quantified but it is expected that the changes might affect production leading to lower supplies in the market. For a proper supply chain management, the coffee Industry should focus on these issues and provide forecasting models that would work out for them. as observed over and over again there are many occasions that have had individuals getting involved when prices go up and absconding when prices go down to focus on other things. This would lead to stability in pricing and in the end would ensure that the farmers benefit from the farming much more than they do now. It is more difficult to forecast when changes are sometimes irregular, differing and cannot be planned for. At the same time though issues like higher wages, working with farmers to encourage them to improve farming methods and generally having more control in the pricing would lead to benefiting both suppliers and consumers. Additionally, supply chain management involves the control in the flow of goods, services, and information in an efficient manner. In many cases, the flow of info is very crucial. Just as there is great diversity in the level and degree of information available to players along the supply chain, so too, there is great diversity in the flexibility and power to affect market outcomes particularly those related to personal or contractual relations (Potts, 2004). The coffee sector, like other commodities sectors, is marked by high degrees of concentration at differing stages along the supply chain. Moreover, a growth in the concentration of decision -making authority along the supply chain has been observed over the past two decades particularly since the disintegration of economic clauses within the International Coffee Agreement and the corresponding dismantling of national coffee authorities. This context has aggravated a long-standing imbalance in bargaining power between small producers and other actors along the coffee supply chain. Due to their isolation and lack of resources, the farmers have little awareness of how much of the coffee they grow is eventually sold for and are therefore at the mercy of the intermediaries (Shannon, 2009). Conclusion The history of coffee has shown many issues that are of interest and has shown much development. This is from the time it was discovered in Ethiopia and sent to the Arabian Peninsula before finding its way to Europe. With the fluctuation of coffee prices, the need for an agreement between the coffee producers as well as the consumers has really enabled the stability in the prices of coffee (Balassa, 1971, p.180). However, although the steps taken have really benefited the coffee production as a whole, there is still a lot to be done in order to help deal with certain challenges that have been mentioned. These include gender issues, environmental issues and issues of remuneration (Newbery, 1984, p.568). Moreover, also, the supply chain of coffee is significant and is very complex. There are lots of players involved and at the end of the day there is a need for steps to be taken to ensure that the all the people who are involved in the supply chain benefit. This is especially as concerns the producers who do not really benefit as much as they should from its production. As Concerns the Global Production Networks, it would serve the producing countries a lot better if their production of coffee would be value added. This means that these countries need to find ways of improving the products before distributing them. This will serve in helping to improve the situations of their producers and could even lead to an increase in employment within these nations. List of References Bain, C., 2010. Structuring the Flexible and Feminized Labor Market: GlobalGAP Standards for Agricultural Labor in Chile. Signs, 35(2), pp. 343-370. Balassa, B., 1971. Trade policies in developing countries. American Economic Review, 61(2), pp.178-187. Barrientos, S., Dolan, C. and Tallontire, A., 2003. A Gendered Value Chain Approach to Codes of Conduct in African Horticulture. 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