Economic supply essay

Economics Essay – Supply

Introduction
Coffee beans are mainly used for the production of coffee. As coffee is one of the world’s most widely consumed beverages, coffee beans are a major cash crop and are an important export of many developing countries. Most of the world’s coffee beans are produced by small suppliers in third world developing countries, whose livelihood depends on their production of coffee beans. Many factors can affect the supply of coffee beans:

Expansion of the Coffee Industry
The expansion of the coffee industry has brought both positive and negative effects on the supply for coffee beans. On the one hand, the increase in the distribution of coffee products (such as instant coffee in supermarkets and the growing variations of coffee) has increased demand for coffee beans; making coffee beans more valuable and so increasing the price of them. This has caused an extension in supply for coffee beans. On the other hand, this increase in the price of coffee beans has attracted more suppliers to enter the coffee bean market and which has increased competitiveness in the coffee industry as a whole.

This increase in the number of coffee bean producers has increased supply for coffee beans and so producers must try to reduce their prices in order to compete with rival producers. Coffee companies, such as Nescafe™, have begun to exploit producers of coffee beans in order to lower their costs and so stay competitive with other coffee companies. Most of the world’s coffee beans are produced in third world developing countries and so the exploitation by these big coffee companies has left many producers in these third world countries unable to make enough money, off of producing coffee beans, to support their families. This has led to many of these producers closing down and so the supply for coffee beans in these countries decreasing in past years.

Fair Trade
One way in which producers have tried to tackle this exploitation by big coffee companies is by the creation of Fair Trade. This provides assurance for many vulnerable producers in third world developing countries they will not be exploited by coffee companies. Many big coffee companies now trade through the fair trade system, most notably Starbucks™, the largest coffee company in the world, who fully joined the Fair Trade movement in 2009. This has led to the return of previous coffee bean producers, who were made insolvent because of exploitation, now resuming producing coffee beans and so the Fair Trade movement has increased the supply of coffee beans in the world as a whole.

Uses for Coffee Beans
Coffee has been the number one use of the coffee bean for centuries, however, other uses of coffee beans have begun to emerge. Other uses of the coffee bean include coffee flavoured chocolates such as Revels™ and other coffee flavoured treats such as coffee cake. This expansion in the uses for coffee beans increases the demand for them, thereby making them a more valuable commodity. This increases the price of coffee beans and so more suppliers want to supply coffee beans in order to increase their profits. On a supply schedule, this is represented by an extension in supply.

Harvest & Weather
Bad harvests have devastating effects on the supply of coffee beans. Bad weather causes plants to yield less fruit and start to wilt. This means suppliers can’t produce as much coffee beans and so supply decreases .This is exemplified by Brazil’s bad harvest in 2011 which cause a drastic decrease in the supply of coffee beans, as Brazil is the biggest producer of coffee beans in the world, producing over one third of the world’s coffee beans. However, a decrease in supply, which is not accompanied by a decrease in demand, causes world coffee bean prices to rise. In 2011, this lead to supply from other countries apart from Brazil, such as Columbia and Vietnam, who didn’t experience bad harvests, to rise in order to compensate for the decrease in supply from Brazil and to cash in on the increased profit gained from the rise in the price of coffee beans. This is represented by an extension in supply on a supply curve diagram.

Economic Factors
Like petrol and cigarettes, coffee is seen as somewhat a necessity in developed countries and so remains relatively unaffected by economic factors such as recessions. However, the price of coffee does tend to adapt to the economic climate. For example, in a recession people in general have less disposable income and so coffee companies tend to decrease their prices in order to prevent demand for their coffee from falling, as whilst people in general don’t consume less coffee in a recession, they may migrate to cheaper brands of coffee. Coffee companies therefore try to reduce their costs in order to compensate the reduction in their price.

This causes coffee companies to haggle with producers for lower coffee bean prices in order to reduce their costs thereby causing the same effect as exploitation on the producers. This means that during a recession, supply for coffee beans tends to decrease. American companies such as Costa’s Coffee reported increases in profits during the 2011 fiscal year despite the American economy being in a recession. This is as a result of employing the methods stated above.

Technology
Technological advances have also contributed to the change in supply for coffee beans. The availability of machines for producers has led to increased efficiency and productivity for producers as well as a reduction in costs. Machines, such as wet processors, replace the job of workers and so reduce costs for producers. This has led to an increase in potential profit margins for coffee bean suppliers and so more suppliers have entered the coffee bean market thereby causing an increase in the supply of coffee beans. However, these technological advances only really benefit big producers as small producers, such as family businesses in developing countries, can’t afford these machines and so must carry on doing the coffee bean processing by hand. This means that their methods are less efficient and productive than producers using machines and so they often find it difficult to compete in price. In the past this has led to a decrease in supply from producers in third world developing countries, however, due to Fair Trade, many small producers no longer have to compete in price.

Conclusion
As coffee beans are primarily used for coffee, I think the factor which has the largest impact on the supply of coffee beans is the expansion of the coffee industry. This has caused large increases in the supply of coffee in the past and will continue to do so in the future as coffee remains an important part of many people’s daily routine, especially in America, and so the coffee industry will continue to grow. Though the coffee industry in China is relatively new and unexplored, Starbucks already has 500 stores in China and plans to add a further 1,000 by 2015. This is a classic example of the growing coffee industry. However, environmental factors such as the weather can have larger impacts on the supply of coffee beans in certain countries but this factor can changes frequently every year and so the impact that it has is not constant, unlike the expansion of the coffee industry, which is.