How has the Brazilian economy been affected by the decline in wrld coffee prices
Coffee is the world’s second most traded commodity (after oil). The coffee growing industry employs over 100 million people from over 60 developing countries. It best grows in areas like Arabia, India, Africa, the West Indies and South and Central America, with 60% of coffee output deriving from Latin America. Brazil’s relationship with coffee can be traced back to the mid 1800s. In 1930 the Brazilian government first approached Nestle (Nescafe) as they knew that Nestle were looking for a coffee producer to supply them for a new brand of coffee; ‘Nescafe’.
From then until the 1970’s over 50% of Brazil’s foreign trade income came from growing coffee beans. Prior to this they didn’t really have a single major influence on their economy; they were in a colony which prevented it from becoming more developed because Spain used to control its trade. Brazil would be expected to provide raw materials for Spain at little of no cost. Today Brazil makes up 30% of total coffee output and is the world’s largest coffee producer.
Through the coffee industry Brazil would have experienced a number benefits. Firstly their unemployment levels will have dropped. The process of making coffee entails stages which would have required low skilled jobs, for example the farmers. It is usually true that if unemployment decreases then the countries standard of living will increase through an increase in income, this would lead to a more developed, wealthy country. The size of the Brazilian coffee crop is a major talking point for the market.
A forecast for the country’s 1997/98 outturn was at 28 million bags, this was an increase from the previous season’s production of 27. 5 million. If these figures are compared to those of the Hamburg-based trade firm Bernhard Rothfos, you can see that the expectations for Brazil were pleasing. Bernhard Rothfos predicted production was about 25 million bags, down from the previous season’s estimated output of 29 million. None of the other coffee based countries were predicted such agreeable outputs that season.
All of these figures seem to suggest that the wealth of Brazil’s population has witnessed a dramatic increase compared to before they began producing coffee. You wouldn’t necessarily be wrong; many people have become substantially well-off through land ownership, and the average living condition has improved, but only a little. The reasoning behind this is that the Brazilian growers and exporters only receive 10% of the profit, compared to shippers and roasters who get 25% and retailers get 55%, yet they make up a substantial amount of Brazils coffee employment.
These figures can be further backed up when you look at the global situation for producers. 10 yrs ago the world coffee economy was worth $30 billion, of which the producers only received $12 billion. Today the coffee economy had grown to in excess of $50 billion, yet the worrying thing is that the producers receive just $8 billion, a third less then 10 years ago (about 16%). This matter is not helped by the fact that many multinational corporations, for example Nestle, take advantage of Brazil’s low labour costs.
In the long-term, it is far less costly to move your production to a different country as many of the undeveloped countries will be able to provide a high number of unskilled workers. People living in countries such as Brazil are, in the most case living in poverty and will take on this work even though the pay is only a fraction of what it should be (or compared to the UK etc). For them it may be the only means of earning an income. As the above figures show, the retailers, and shippers see the highest level of profit from coffee production.
There could be two possible reasons why Brazilian farmers don’t demand higher prices. Firstly there is much competition for the production of coffee, Brazil is inundated with farmers, and therefore if some of them demanded higher prices it is more than likely that these companies would just go elsewhere in the country. Secondly, there are many countries newly entered in the coffee market, for example Vietnam and Mexico, even if a number of the farmers demanded higher prices Nestle could just change it’s suppliers. For such a large corporation this would not be too costly as their profit is already immense.
This could lead to further financial issues for Brazil as coffee is their single most economic influence. An added battle faced by Brazil is that during June to mid-August occasionally experiences frosts which can devastate the whole harvest. This is a crucial time for the other coffee producers as it means that the demand for their coffee will considerably increase as the world’s largest supplier will be left out of the question. Brazil has become so dependant on the production of coffee as their main economy that they will go to great lengths to maintain the level of return that they have become accustomed to.
In 1999 a $400m (£254. 5m) attempt to rig the London coffee market went before the court of appeal. Brazil attempted to prop up international coffee prices; they purchased large amounts of coffee on the London terminal market. The problems began when two companies stated that Brazil were in debt to them to over £40m. These actions are a result from the mid-1980s when commodities of all types had seen inflation from the 70’s suddenly crashed. As coffee prices disintegrated in 1986, from a peak of nearly 240 US cents a pound to well below 100 cents, the Institution of Brazilian Coffee came up with a way to help them.
They decided to take vast amounts off the London terminal market to boost the price. In the 1930’s the International Coffee Organization (ICO) was set up. It is an intergovernmental body whose members are coffee exporting and importing countries. It’s aim was, and is to improve conditions in the world coffee economy through international cooperation, helping price equilibrium by developing demand for coffee in emerging markets and through projects to reduce damage from pests and improve marketing and quality, enhancing coffee growers’ long-term competitiveness and contributing to the fight against poverty.
However, as we can see from above, many of these aims have not been fulfilled in respect of Brazil. The paying condition of the farmers is not Brazils only worry, more recently the coffee industry has begun to see the beginnings of a crisis. They have witnessed a sharp increase in global production. The basic concept of demand and supply is that changes in market demand for a good will lead to a change in equilibrium market price. This means that for a given level of demand, there is a downward pressure created on supply (as explained by the graph)
Over the last 2 years a significant rise in market supply has caused a sharp fall in market prices, coffee prices are now less than a 1/4 of 1970 levels and producer prices have plummeted to an all-time low, while prices on the retail end are mostly at an all-time high. Some factors that could be driving prices down is the abandonment of export controls (retention scheme, see below). Also countries are forced to increase supply to protect export earnings. An added factor is that Vietnam has seen an increase in out in the last 4 years, probably due to improvements in growing techniques.
This is probably resulting from technology transfers, whereby large corporations set themselves up in under developed countries to take advantage of low labour costs. With them they bring new technology i. e. machinery to help increase output. This problem is further fuelled by the slow growth of demand: around 1. 6% per year. The percentage increase in supply has become considerably higher than that of demand, meaning that the equilibrium price drifts lower. (P2) What this imbalance between demand and supply has resulted in is saturation of the coffee market and collapsed prices.
The current imbalance between supply and demand for coffee is due to the saturation of the coffee market. Total production in the year 2001/02 (October-September) is estimated that around 113 million bags (60-kg bags) would have been produced, whereas world consumption will be just over 106 million bags. Coffee production has been rising at an average annual rate of 3. 6%, but demand has been increasing by only 1. 6%. At the origin of this coffee glut lies the rapid expansion of production in Vietnam and new plantations in Brazil, which is harvesting a record crop in the current season.
Yet all of this can only pose a very real and wide ranging threat to sustainable development. A statement from the World Bank Chief Economist Nicholas Stem is further proof of Brazil’s ever-worrying crisis: “Many poor countries have improved their policies, institutions and performance in the past decade. Because aid increasingly is channelled to these countries, aid is more effective today than ever before. But even successful poor countries are being hurt by lower global growth, adverse trends in commodity prices, and declining aid.
The global economic slowdown is extremely profound and wide-ranging, and countries such as Brazil who are dependent coffee exports have been hit especially hard. The farmers of Brazil are responsible for the continued growth in the coffee economy: they grow and harvest the coffee beans. Yet they continue to face many challenges, none as influential as the price collapse currently being witnesses throughout the coffee industry: they are set to face substantial losses. The price of a coffee been has significantly decreased, so much so that in some cases farmers are finding that it is cheaper to abandon the crops than to actually pick them.
What makes the situation worse is that it is often incredibly difficult for the smaller farms to change their crop, meaning they are often left destitute. Some of their financial problems could be helped but they do not have access to credit facilities for when there is a drop in income. The result is large scale unemployment and poverty in the agriculture areas. Although this is a very worrying prospect, it does lend room for other crops to yield a higher return, the downside is that for Brazil this will include heroin and other drugs.