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AS Markets & Market Systems

Market for Coffee

Each day nearly 2.5 billion cups of coffee are consumed. It is the 5th most widely traded commodity in the world and millions of people depend directly or indirectly on the production and sale of coffee for their livelihoods. The global market for coffee is characterised by volatile prices and production levels which impacts directly on the incomes of producers and prices facing consumers.

The World Coffee Market

Experts on the world coffee market often make reference to the “coffee paradox”.
A coffee crisis in producing countries with a trend towards lower prices, declining producer incomes and profits with important consequences for the export revenues of leading coffee exporting countries and the living standards of millions of people in developing nations
A coffee ‘boom’ in consuming countries with rising retail sales and profits for coffee retailers
A widening gap between producer and consumer prices

Coffee production and developing countries

The World Bank estimates that out of the total 141 developing countries, 95 depend on exports of commodities for at least 50 percent of their total export earnings. Coffee is a very good example of such “commodity-dependency” representing, for example, 75% of the total exports of Burundi and 54% in Uganda, and about 22% in the case of Honduras. About 20 to 25 million families produce and sell coffee for their livelihood and most of them are small-scale farmers with limited financial resources and scope to diversify out of coffee production.

Globally, coffee sales each year exceed $70 billion, but coffee producing countries only capture $5 billion of this value, with the bulk of revenues from the coffee trade retained by developed countries. Coffee farmers in producing countries only obtain a fraction of the final retail price of coffee. A recent Oxfam research report showed that Ugandan coffee farmers only get about 2.5 percent of the final retail price of their coffee in the UK market. One strongly positive sign has been the surge in demand for FairTrade coffee in the UK and other countries. The FairTrade organisation claimed in July 2006 that one in five cups of filter coffee drunk in the UK are now being supplied from a "fair" source. Sales of Fairtrade coffee in the UK totalled £65.8m on 2005, up from £34.3m in 2003 (5 % of the UK market) although FairTrade coffee sales account for only 0.5% of the global market

Coffee prices

There have been no price controls in the global coffee trade since 1989, when the buffer-stock system run by the International Coffee Agreement broke down.

The main reason for the decline in prices in the early years of the current decade was a gradual and continuous increase in coffee production throughout the world, particularly the new coffee exporting countries entering the international market, a good example being Vietnam. Global coffee production grew faster than demand leading to large surpluses of production. Our chart below shows the average monthly price for coffee in the world markets. The price chart shows a composite price for the different grades of coffee such as Robusta and Arabica beans. From the second half of 1997 through to the trough of prices in 2001, the average price of coffee collapsed from $180 per lb to less than $40 per lb. Prices remained very low until 2004 since when there has been some recovery in prices, but they remain well below the levels witnessed in the mid 1990s.

Consumption of coffee and price elasticity of demand

World coffee consumption is estimated at 114.7 million bags in 2005. Domestic consumption in exporting countries in 2005 was just over 30 million bags and in importing countries consumption was estimated at just fewer than 85 million bags. The main buyers of raw coffee beans are the largest multinational buyers, dominated by four firms: Nestlé, Kraft, Procter & Gamble and Sara Lee.

A coffee roasting plant

According to recent Cecafé estimates, the value of retail sales of processed coffee (roasted and soluble) is in the order of US$35 billion, while the retail value of coffee sold by the cup in places such as Costa Coffee and Starbucks (accounting for 20% to 30% of world coffee consumption outside the home) is estimated at over US$120 billion.

Coffee consumption has been growing at a steady rate of between 1 and 1.5 % per year; a growth rate is well below that for food products as a whole which is closer to 4% per annum. Changes in eating habits and increased demand for alternative drinks to coffee are largely behind this relatively slow growth of global market demand. Even the sharp fall in coffee prices during 2000 - 2004 seemed to have little impact on world demand, suggesting that coffee has a very low price elasticity of demand.

Employment in coffee producing countries

Coffee production employs a labour force estimated at around 25 million families by the ICO and accounts for more than 50% of export earnings in many countries, an increase in consumption favouring a gradual rise in world prices would be a positive factor for economic growth and increased per capita incomes in these countries. In Brazil alone more than a million jobs are generated by the coffee industry.

The International Coffee Organisation (ICO)

The International Coffee Organization (ICO) is the main intergovernmental organization for coffee, bringing together 74 producing and consuming countries to tackle the challenges facing the world coffee sector through international cooperation. It makes a practical contribution to the world coffee economy and to improving standards of living in developing countries by helping to increase world coffee consumption through innovative market development activities and improving coffee quality through the Coffee Quality-Improvement Programme.

Leading coffee producers and exporters in 2005

The main coffee producers and exporters are shown in the table below. The data comes from the annual reports on the world coffee industry produced by the International Coffee Organisation. Brazil is far and away the biggest supplier of coffee beans in the global economy although nations such as Vietnam, India and Mexico have been gaining ground in recent years.

Brazil is effectively the “swing producer” for the global coffee markets, in other words, since Brazil is the largest coffee producer, changes in Brazil's supplies of coffee account for a large portion of the change in the world total supplies of coffee which then directly affects the prevailing international price. Brazilian coffee production peaked at 3.75 million tons in the year 2000 but fell into a steep recession from 2001 onwards as producers cut back supply in the wake of the collapse in coffee prices. Supply has stabilised in 2004 and 2005 with prices recovering ground. 

As we can see there is a direct relationship between the current world price and the value of exports of coffee from nations such as Brazil. Factors such as changes in the exchange rate can influence the income that coffee exporting countries will generate from their overseas sales. But for Brazil, the recovery in prices since 2004 has been important in boosting for their export incomes.