see also GloboTrends:  commodity

Coffee

Cotton and coffee will outperform industrial metals after U.S. farmers switched from cotton to corn for ethanol production following a surge in energy prices in the middle of last year and as Brazilian coffee growers enter a lean year,

"off-year" in Brazil

Supply of coffee from Brazil, the world’s biggest grower, will decline during the current crop year because of the “off- year” effect, said Eibl. Trees that produce arabica need to rest every other year. “This goes in line with low stocks globally and makes coffee interesting,” Eibl said

Case study - coffee crisis

Coffee producers in Latin America face global competition from Vietnam, price pressures from global companies such as Starbucks, and a lack of control over the marketing of their final products.  What can / should be done?

Liberal position:

The liberal would think that the coffee market during the cold war was unsustainable and was interfered by an economic-support program which controlled exports. Export quotas were interference in the ordinary mechanisms of the market, and they were not sustainable. The result of those market interferences is that growers were not facing true international competition, and were not forced to develop new and more efficient growing techniques. Also, because the distribution was all controlled by export government buying programs, the distribution was not facing competition, again adding levels of complacency and false security. Once the global political IPE environment changed, however, those market interferences were removed, and the coffee market was introduced to competition for the very first time.

This is similar to what happed when the cold war ended, and Russia made the abrupt transition to a capitalist system. It was rough and difficult, and the individuals that had been shielded from competition for so long found themselves unable to compete in the new world order.

In the coffee industry, when the barriers to trade came down, the inefficient producers and distributors found themselves in a similar position.

Over time, the liberals believe that the market will correct for itself, and supply and demand will eventually correct themselves. Some producers will have to stop producing for this to happen, and the liberals would object to any interference from governments around the world propping up their local producers. If the buyers want to buy coffee made in Vietnam, and if Vietnam has a comparative advantage, then that’s where it should be produced. International regulations should be put in place to facilitate that trade (no subsidies, no trade barriers). If, on the other hand, buyers prefer the taste of Columbian coffee, then that market will take off, and coffee should be produced there.

The liberal believes that over time, the market will self correct, and eventually the farmers will make a living at an acceptable profit. If not, they will close their business, and do something else. As some companies go out of business, that will cut supply and eventually prices will rise until equilibrium is reached. But, on a human side, upon reflection many liberals would agree that the transition could have been managed better, offering better support, and training for those involved.

The liberals would believe that in the end, the system of free and open trade will benefit everyone. There will be some companies in certain industries that will struggle, but that if the system is allowed to operate without interference, the there will be a net gain to society as a whole (including coffee producers). If the industry was protected for so long by tariff and other barriers, then liberals would believe that over time, there will be larger industrial efforts made to make the industry more efficient, and that those more efficient producers will survive this period of change. This is what we see in places like Sao Paulo, Brazil for example, where there are massive industrial sized coffee producers today. They have a clear efficiency advantage and will likely make the transition.

The liberals would see no problem with TNC’s making profits. If the profits were excessive, then over time there would be other competitors that would enter the distribution market, and that would drive profits back to a normal level.

The liberals would be against subsidies in the US (even if the liberals were from the US.). The liberals would also be against the subsidizing of coffee production in Vietnam. Anything that interfered with the market they would be against.

Structuralist:

The structuralist would focus on the hardships endured by the growers of the coffee beans. With falling prices for their beans, but record profits by the international coffee distributes (TNC’s), the structuralists would claim that the workers were being unfairly exploited by powerful international companies. They would see the moves by the US government in working to undermine the collective subsidized programs as evidence that the powerful nations were looking to subjugate the weaker ones, and to keep them from receiving their share of the profits from their work.

They would claim that the interests of the US were with the international companies and that the rich nations were more interested in padding the profits of their companies than in improving the living conditions of the worlds poor. They would claim that the international system of trade is unfairly set up to extract profits from the poor and to repatriate those profits back to the developed nations. This would include the use of both natural resources (land, coffee,etc), the labor (sweatshop labor conditions, under pad) and the profits (which are extracted from the country).

The structuralist would see the US subsidies of their own industries as further evidence that the powerful nations were not interested in helping the poor.

They would be in favor of groups such as Oxfam and their initiatives to promote “Fair trade” coffee which attempts to ensure that farmers receive a decent wage to compensate them and make sure that they can support their families. But they would be critical of the international system that made groups like this necessary. The structuralist would be skeptical of companies such as Starbucks that carry “fair trade” coffee, however, and would think that these are just superficial attempts to cover up an underlying exploitation of worlds workers. They would see this as a marketing and advertising campaign that just gives cover their true activities.

Structuralists would be in favor of export subsidies to help the farmers, as well as any protection that can be offered to protect the sustainable development of the rural communities.

Economic Nationalist (developing nation) :

The economic nationalists would object to the elimination of the export programs that were in place during the cold war. They would object to the removal of programs that assisted developing nations to compete on the world markets. They believe that trade should be managed and that local growers should be protected by their governments from the potential dangers of the international market (the two faces of development).

These mercantilists would want the benefits of foreign trade, but they would claim that the idea of “free trade” is just a tool of the powerful to remain powerful, and to keep the less developed nations from closing the income gap. These economic nationals would read this coffee article with suspicion of the US actions after the cold war. By making moves to open up trade, and to expose the local producers to international competition, they would argue that the powerful nations were just trying to exploit their advantage.

Trade is a zero sum game to mercantilists, and they would argue that the benefits that the buyers receive in the US will automatically translate to a loss for the developing nations.

The developing nation mercantilists would see the US subsidies of their own farmers as further evidence that the playing field is not level, and that the powerful nations were using their power to their advantage to create trading rules hat favored their industries over those of the developing nations. They would appreciate the efforts of groups to help diversify crops into other products (any FDI would be accepted), but they would be critical that these small efforts do not compensate them adequately for the loss of power that resulted when the powerful nations changed the rules of trade.

The economic nationalist in Vietnam would appreciate the efforts of the World Bank to help them develop their coffee industry.

Economic Nationalist (from the US) :

In many respects, these people are similar to the economic nationalists described above, with the following differences:

These economic nationalists will also believe that trade that is free is only going to benefit the powerful country at the expense of the less powerful. But in this case, since they were the mercantilists on the side of the buying nation (US), they would see the situation as positive, in that it is adding power to their side. In general, they would be in favor of any free trade accords if their industries are the ones that are more powerful. IN this case, there are US company interests such as Proctor & Gamble, Kraft and so on that will clearly benefit from more competition in the coffee bean market. If the additional profits of the market can be brought back to their own country, then the mercantilists will be in favor of the arrangement. They will also see international trade as a win-lose, or a “zero sum” game, but as long as they are on the positive side, they will be ok. The economic nationals from the US would think it increases their power in the world.