Capitalism at work - Coffee prices stay high, but farmers going broke

[a_unique_person]

Coffee crisis tops summit agenda


The plight of the world's coffee farmers topped the agenda at a specially-convened meeting in London on Monday.
Many coffee farmers are on the brink of starvation after prices plummeted to their lowest level for 30 years.

Over-production and an increase in poor quality coffee - particularly since Vietnam joined traditional coffee growing countries in Africa and Latin America - are to blame, analysts say.

But there is widespread disagreement on the best solution.

'Good intentions'

Oxfam is calling on the four main coffee roasting companies to give a fair price to farmers and end what it calls exploitation.

How can the coffee market be so rigged against the poor that they lose money for growing coffee, while the coffee giants' profits soar?

Phil Bloomer, Oxfam

Oxfam's head of advocacy Phil Bloomer said: "This opportunity to help the 25 million people who depend on coffee must not be missed.



I can still remember when coffee prices soared years ago, due to a shortage. Well, the shortage is over, but the prices are still high, and the farmers are heading for disaster.

This is due to various factors, but the power of the multinational companies to control the market ensures they are the ones who are doing very well out of it.

[Reaver]

Maybe the producing countries can start a OCEC or something :)

[Victor Danilchenko]

They should. Contrary to the standard assumptions that guarantee efficient markets, the power of the bargainers is often uneven. The multinational corps often have far, far more bargaining power than individual sellers -- same as in the job market between employer and employee. The employees form unions to aggregate their bargaining power, and commodities producers should similarly form trading organizations.

[mjv]

I don't think we can exclusively blame this on the "greedy corporations" guys. The corporations didn't cause the price collapse.

Read the article you posted: the cause is overproduction and an increase in poor quality coffee on the market.

Now I wonder what caused those poor little farmers to overproduce and flood the markets with cheap coffee? They got greedy; the resulting price collapse is due to their own overproduction of cheap coffee.

[Shane Costello]

Originally posted by mjv:
I don't think we can exclusively blame this on the "greedy corporations" guys. The corporations didn't cause the price collapse.

Read the article you posted: the cause is overproduction and an increase in poor quality coffee on the market.

Now I wonder what caused those poor little farmers to overproduce and flood the markets with cheap coffee? They got greedy; the resulting price collapse is due to their own overproduction of cheap coffee.

I can see where you're coming from. Since I've no way of knowing where the article came from (link, aup?) I can only hypothesise that the coffee growers are facing the same problem farmers all over the world face, that agricultural production on a small or medium scale simply isn't viable. Off course, this should translate into cheaper prices for the consumer.

[Jon_in_london]

Originally posted by mjv
Now I wonder what caused those poor little farmers to overproduce and flood the markets with cheap coffee? They got greedy; the resulting price collapse is due to their own overproduction of cheap coffee.

I hardly think you can call most of those farmers greedy mjv.

[Tony]

Originally posted by Jon_in_london


I hardly think you can call most of those farmers greedy mjv.

Why?

[Kodiak]

FOXNews web article on 1st quarter 2003 coffee prices (http://www.foxnews.com/story/0,2933,85862,00.html)

[Whoracle]

I've never had a sip of coffee in my entire life, so I'm doing my part to sock it to Starbucks. They'll never get one red cent out of me.

[a_unique_person]

Originally posted by Shane Costello


I can see where you're coming from. Since I've no way of knowing where the article came from (link, aup?) I can only hypothesise that the coffee growers are facing the same problem farmers all over the world face, that agricultural production on a small or medium scale simply isn't viable. Off course, this should translate into cheaper prices for the consumer.

Does this mean the day of the individual is over, we can only be economically viable if we are part of something bigger. Sounds very communist to me.

The whole point is that those that are big are doing very well out of it, those who are small are doing badly. Overproduction in response to the shortage that occurred is partly to blame, but the coffee manufacturers are not the ones doing it hard.

[shanek]

Since when are Vietnam, Latin America, and Africa bastions of capitalism??? :rolleyes:

[shanek]

Originally posted by Kodiak
FOXNews web article on 1st quarter 2003 coffee prices (http://www.foxnews.com/story/0,2933,85862,00.html)

This is a perfect example of the market at work. They raised the price too high, and demand dropped. So they were forced to lower their prices in order to be able to sell the amount they wanted.

[a_unique_person]

Originally posted by shanek


This is a perfect example of the market at work. They raised the price too high, and demand dropped. So they were forced to lower their prices in order to be able to sell the amount they wanted.

You are correct in your first sentence, but do not seem to appreciate the irony in it.

The act like a cartel, raising prices till the demand drops, and leave it a notch below that level. Meanwhile, the farmers get the same price, just about nothing.

[shuize]

If I was getting paid "just about nothing" it'd be time to consider a different line of work. Maybe the coffee farmers should do the same.

No, I forgot ... the world owes them a living.

[a_unique_person]

Originally posted by shuize
If I was getting paid "just about nothing" it'd be time to consider a different line of work. Maybe the coffee farmers should do the same.

No, I forgot ... the world owes them a living.

Yes, let them starve. Lazy bludgers should look to you for inspiration on how to lead an exemplary life.

[shuize]

AUP: Who said anything about lazy?

If the coffee farmers are working for "just about nothing," as you posted, I think a much better condescending description would be that they are "ignorant peasants."

But I'm glad to hear that Australians at least are volunteering to pay more for everything to make all the world's problems right.

[Leif Roar]

Originally posted by shuize
If I was getting paid "just about nothing" it'd be time to consider a different line of work. Maybe the coffee farmers should do the same.

No, I forgot ... the world owes them a living.

But the option to go into a "different line of work" might not be open to them. New seed plants cost money, and there might not even be a local infrastructure to support the production of other commercial crops.

"Have them find another job" is, in many cases, equivalent to the statement "Let them eat cake."


(Edited for typoes)

[Shane Costello]

Originally posted a_unique_person:
Does this mean the day of the individual is over, we can only be economically viable if we are part of something bigger. Sounds very communist to me.

Congratulations on posting the dumbest strawman ever. :rolleyes:

FYI agriculture has never been an individual exercise, unless you can harvest a couple of hundred acres of wheat or coffee on your own, and process it and market it?

The whole point is that those that are big are doing very well out of it, those who are small are doing badly

The bigger picture being that small scale agricultural production simply isn't viable. I'm not saying that this is the case here, however, but since you haven't provided a link I can't say for definite.

[a_unique_person]

Originally posted by shuize
AUP: Who said anything about lazy?

If the coffee farmers are working for "just about nothing," as you posted, I think a much better condescending description would be that they are "ignorant peasants."

But I'm glad to hear that Australians at least are volunteering to pay more for everything to make all the world's problems right.

I don't mind if they get more of the price of the coffee I pay for in the slightest.

[Whomp]

although the power of the individual is negligable, you can ALWAYS choose not to support the big conglomerates.
Folger's etc, buy whatever is currently cheapest on the market, (usually a Robusta varietal) to cram into thier cans.

So don't buy from them! Easy enough.

Admittedly, I am a coffee snob, but where I buy beans the proprietors buy from smaller jobbers who deal directly with the growers. Sometimes the lot can be traced back to the individual grower.

Of course ... I roast my own beans too.

Whomp

[BillyTK]

Lazy farmers? The following is anecdotal, not data, but kinda illustrates the problem. My brother-in-law is a small-scale farmer and one of his main crops is potatoes. However last year, when the price for potatoes dropped from UKP40 per ton (Ummm... USD60ish?) to UKP18/ton, the only cost-effective option was to plough the crop back into the field. I'll see if I can track down a source, but typically farmers (and other food producers) get <>10% of the price that supermarkets charge for food.

Shane's right; it's only cost-effective agricultural method is large-scale farming, and these are the guys who really benefit from govt. subsidies (being paid by the acreage not to grow stuff). My feeling though is that this is not a good thing; for instance, one of the accusations against traditional farming practice is excessive use of persticides and fertilisers; my b-i-l pointed out that as a small-scale farmer he couldn't afford to waste the stuff by scattering it willy-nilly, but from his experience of contract work with larger farms wastage wasn't something to be concerned about because of the size of the yield anyway.

So what I say is; "Local farms for local people!" ;) :D

[shanek]

Originally posted by a_unique_person


You are correct in your first sentence, but do not seem to appreciate the irony in it.

The act like a cartel, raising prices till the demand drops, and leave it a notch below that level.

In other words, they set the price at a level where people would be willing to buy the amount they were willing to supply at that level. Only someone like you could see a problem with this.

Meanwhile, the farmers get the same price, just about nothing.

And just what is it, do you think, that stops the farmers demanding a higher price?

[shanek]

Originally posted by a_unique_person


I don't mind if they get more of the price of the coffee I pay for in the slightest.

Then why don't you buy coffee directly from them?

[a_unique_person]

Originally posted by shanek


Then why don't you buy coffee directly from them?

Because it would cost too much in airfares?

[a_unique_person]

Originally posted by shanek


In other words, they set the price at a level where people would be willing to buy the amount they were willing to supply at that level. Only someone like you could see a problem with this.



competition is supposed to ensure I get the product at the lowest price. this is clearly not happening. by some strange co-incidence, they all happen to sell their coffee at about the same price, and the farmer gets about 20cents from a jar of coffee that costs me about $10.




And just what is it, do you think, that stops the farmers demanding a higher price?

The power of the cartels to control the market. The farmers are in competition, and hence the cartels get their coffee at the lowest possible price. When I go to the supermarket, I don't get the coffee at the lowest possible price.

[BillyTK]

Originally posted by shanek
And just what is it, do you think, that stops the farmers demanding a higher price?

Kinda like AUP says, when you've got an industry which is dominated by a few big players--in the UK we've got Tesco, Sainsbury's, Asda (which is owned by Walmart) and a few smaller players like Morrisons and Safeway (who look like they're going to be absorbed into the Sainsbury's empire)--who can dictate terms to their suppliers, well there's nothing stopping farmers demanding a higher price, but they won't sell their produce.

Another practice which supermarkets engage in is deciding to offer products at special prices and making suppliers bear the cost of the discount, which is great for consumers in the short term, but in the long term is bad. This is because it allows the giants to consolidate their power, which inevitably impacts on consumer choice, in that the giants can dictate what that choice can be, particularly when as a consumer your choice is limited to whichever of the giants have stores in your area.

[shanek]

Originally posted by a_unique_person
Because it would cost too much in airfares?

Why on earth would you have to fly there to buy from them? Ever heard of "shipping"? That's the lamest excuse you've come up with yet. You've already read of Whomp doing exactly that.

Vote with your dollars.

[shanek]

Originally posted by a_unique_person
competition is supposed to ensure I get the product at the lowest price.

No, competition lowers the equilibrium price by increasing supply and using demand in the favor of competing suppliers who can get more customers if they can offer the product at a lower price. But the equilibrium effect still applies.

this is clearly not happening. by some strange co-incidence, they all happen to sell their coffee at about the same price,

Maybe because that's the market equilibrium?

and the farmer gets about 20cents from a jar of coffee that costs me about $10.

Maybe because that's the equilibrium price for the farmer's goods? If that's such a sucky price, why don't the farmers sell elsewhere, like directly to you?

[shanek]

Originally posted by BillyTK
Kinda like AUP says, when you've got an industry which is dominated by a few big players--in the UK we've got Tesco, Sainsbury's, Asda (which is owned by Walmart) and a few smaller players like Morrisons and Safeway (who look like they're going to be absorbed into the Sainsbury's empire)--who can dictate terms to their suppliers, well there's nothing stopping farmers demanding a higher price, but they won't sell their produce.

Because if they raise the price above the market equilibrium, they will be producing more than they can sell.

Another practice which supermarkets engage in is deciding to offer products at special prices and making suppliers bear the cost of the discount,

They can't "make" their suppliers do anything! What, are you saying they're like the mob? If the suppliers don't bear the cost they send Guido over to break their thumbs? :rolleyes:

It's a voluntary arrangement. No one has to take part in it.

[Whomp]

Just as an aside, Instrad of paying significantly more for "gourmet" coffee, I actually pay quite a bit less because I've cut out some of the middle men and I roast the beans myself.

For anyone that's interested, the website is Sweet Maria's (http://www.sweetmarias.com)

[Skeptical Greg]

Originally posted by shanek



They can't "make" their suppliers do anything! What, are you saying they're like the mob? If the suppliers don't bear the cost they send Guido over to break their thumbs? :rolleyes:

It's a voluntary arrangement. No one has to take part in it.

Sorry if this is a tangent, ( I don't think it is much of one) but how do game console makers like Sony ..i.e. ' Playstation ' manage to maintain strict price controls among there authorized distributors..

Apparently Microsoft and Nintendo coopertate with them on fixing prices, along with the game developers..


If a hot game is $49.95, or a console is $199, no one will dare sell at a lower price..?

How do they circumvent antitrust laws?

[BobK]

Over-production and an increase in poor quality coffee - particularly since Vietnam joined traditional coffee growing countries in Africa and Latin America - are to blame, analysts say.

From the above quote...

Vietnam is now a player in the coffee growing market. Why would their farmers get into the market if they didn't think they could make enough to be worthwhile?

Also, does "poor quality coffee" really mean "less expensive coffee?"

It seems to me that Vietnam's production(maybe at a cheaper price) might be the real problem.

When a product is over-produced some of the producers better start looking for a new line of work.

Telling the big companies to give the farmers a fair price for their product is the same a telling them "Although you're charging a fair retail price for your coffee, we'd like you to knock a few million off your shareholder's profits because your shareholders are so altruistic that they'll understand perfectly the idea of the company giving away their profits."

[Thanz]

Originally posted by shanek


They can't "make" their suppliers do anything! What, are you saying they're like the mob? If the suppliers don't bear the cost they send Guido over to break their thumbs? :rolleyes:

It's a voluntary arrangement. No one has to take part in it.

shanek, I'm a little suprised to see this coming from you. You seem to be completely ignoring the realities of commercial power. Larger companies with huge portions of the market don't need Guido. They can do much worse by wielding their market power.

Large supermarket chains charge their suppliers for shelf space. If you don't want to pay, fine. They won't stock your product. They do this because they can get away with it - smaller stores would be killed if they tried to do this. It has to do with power - and it is not all voluntary.

Another example: Large corportation buys from smaller supplier. Supplier credit terms: 2/10 net 30. Large corporation pays after 60-90 days, still takes early payment discount. THey do this because the smaller guy can't afford to not sell to them - just like being afraid of guido.

[BobK]

One more point concerning shareholders.

I would hazard a guess that there are pension plans holding a percentage of the shares in the large coffee companies.

Should pensioners, many of them no longer able to work, be required to give charity to evidently ablebodied coffee farmers that could find another profession.

Like marijuana growing.:D

typo edited.

[Whomp]

Re: Vietnam and poor quality coffee

There are two species of coffee, Coffea Arabica and Coffea Canephora (Robusta), used in coffe production.

Robusta's taste range is neutral to harsh and it is often described as tasting grain-like, oatmeally. One importer likened a particularly bad origin to dung. Their unroasted smell is often described as raw-peanutty. Their roasted smell is often likened to burnt rubber. Robusta has approximately double the caffeine of arabica.

Arabicas are delicate, they require cool tropical climates, lots of moisture, rich soil, shade and sun. They are subject to attack from various pests, and are extremely vulnerable to cold and bad handling. Arabicas also must be grown at a higher elevation of 600 to 2000 meters. Some poor quality arabicas are grown at lower elevations.
Robustas are hardier plants, capable of growing well at low altitudes of 200 to 800 meters, less subject to problems related to pests and rough handling. They yield more pounds of finished goods per acre at a lower cost of production.
Due to the lesser production costs and to their lower quality, robustas cost less.

Vietnam is an up and coming producer of Robusta beans.

The best coffees are Pure Arabicas. Large companies like Folgers blend Arabicas heavily with Robustas. With American tastes in coffee being as they are, the quality pure Arabicas don't sell as well as the cheaper Robusta blends.

It's the Arabica farmers, who have to work harder with a delicate crop that only grows at certain elevations and less yeild per acre that are hurting.

Whomp

[BobK]

Whomp,

Thanks for the info. Interesting.

With American tastes being what they are, I vote the rest of the world responsible for picking up the slack for the Aribica growers.:D

[Whomp]

Ya know BobK,
Just like sceptics say "If they would just LISTEN", If people would just TRY decent coffee, they'd never go back.

[Skeptical Greg]

Originally posted by Whomp

The best coffees are Pure Arabicas. Large companies like Folgers blend Arabicas heavily with Robustas. With American tastes in coffee being as they are, the quality pure Arabicas don't sell as well as the cheaper Robusta blends.

It's the Arabica farmers, who have to work harder with a delicate crop that only grows at certain elevations and less yeild per acre that are hurting.

Whomp

Sounds like the marketplace at work...

The Araciba growers might think about putting in a few Robusta plants.


------------------------------

Araciba grower.. " Hey, I can't make any money. Nobody's buying my stuff.."

Financial advisor.... " Maybe you should double your price.. That way you can not make twice as much.."

[BillyTK]

Originally posted by shanek
Because if they raise the price above the market equilibrium, they will be producing more than they can sell.
But the price is not the result of market equilibrium! Unless you're going to stretch the definition of market equilibrium to include deliberate price fixing!
They can't "make" their suppliers do anything! What, are you saying they're like the mob? If the suppliers don't bear the cost they send Guido over to break their thumbs? :rolleyes:

It's a voluntary arrangement. No one has to take part in it.
Of course it's a voluntary arrangement! Suppliers have complete freedom to sell at whatever price the big guns dictate, or, well not sell their stuff. If you want to sell to me you'll have to accept my conditions, or you can sell to Bob down the road who imposes exactly the same conditions, or Kevin or Arnold or whoever.

Minor tangent from the thread topic, but you might be interested in CD price fixing in the UK (http://www.guardian.co.uk/business/story/0,3604,794646,00.html). Typically CD prices in the UK and Europe are up to 50% higher than US prices, because, well, um, they just are.

[shanek]

Originally posted by Thanz
shanek, I'm a little suprised to see this coming from you. You seem to be completely ignoring the realities of commercial power. Larger companies with huge portions of the market don't need Guido. They can do much worse by wielding their market power.

:rolleyes:

Their "market power" depends on them following the trends of supply and demand. And it's still a voluntary arrangement.

Large supermarket chains charge their suppliers for shelf space.

And why shouldn't they?

If you don't want to pay, fine. They won't stock your product. They do this because they can get away with it

"Get away with it"??? It's their shelf space!!! What exactly are they "getting away with"?

- smaller stores would be killed if they tried to do this. It has to do with power - and it is not all voluntary.

Total and complete BS. It is a voluntary arrangement. If your shelf space is prime, you can demand the prices for it. If it isn't worth that, you can't demand the price. But either way, no one is forcing anything on anybody.

Another example: Large corportation buys from smaller supplier. Supplier credit terms: 2/10 net 30. Large corporation pays after 60-90 days, still takes early payment discount. THey do this because the smaller guy can't afford to not sell to them - just like being afraid of guido.

:rolleyes:

These are VOLUNTARY ARRANGEMENTS!!!! No one is forcing anyone else in the above scenarios!!! They're voluntary business deals!

Sheesh...

[a_unique_person]

Originally posted by shanek



These are VOLUNTARY ARRANGEMENTS!!!! No one is forcing anyone else in the above scenarios!!! They're voluntary business deals!

Sheesh...

You seem to be unable to see market manipulation. Those with strength use it. The naieve ideal presented by Milton Friedman in 'Free to Choose' is just that, an ideal as empty as that presented in Marxist Utopia. It is only because we have institutions in place to control the power of those who have too much that makes capitalism work.

As for those farmers, it is curious how the 'price equilibrium' doesn't ever seem to hurt the likes of Nestle.

[shanek]

Originally posted by BillyTK
But the price is not the result of market equilibrium!

How is it not?

Unless you're going to stretch the definition of market equilibrium to include deliberate price fixing!

Show how there is either an over or undersupply with regard to demand AT THAT PRICE LEVEL. If there isn't, then it's at equilibrium.

Of course it's a voluntary arrangement!

Well, Thanz seems to be having a problem with that concept...

Suppliers have complete freedom to sell at whatever price the big guns dictate, or, well not sell their stuff.

Well, sure. Just as I have complete freedom to buy a car, or a loaf of bread, or whatever at whatever price the market dictates, or not buy it at all.

If you want to sell to me you'll have to accept my conditions,

That's true in every single sale that takes place. If I go buy a DVD player, I want a warranty. If your DVD player doesn't have a warranty, I won't buy it.

You people seem to have a real problem understanding how the market works.

[shanek]

Originally posted by a_unique_person
As for those farmers, it is curious how the 'price equilibrium' doesn't ever seem to hurt the likes of Nestle.

Market equilibrium doesn't harm anyone, farmers or Nestle. Any price other than the equilibrium would hurt them. But given your steadfast refusal to learn even the basics of how economics works, I don't expect you to be at all open-minded about this.

[a_unique_person]

Originally posted by shanek


Market equilibrium doesn't harm anyone, farmers or Nestle. Any price other than the equilibrium would hurt them. But given your steadfast refusal to learn even the basics of how economics works, I don't expect you to be at all open-minded about this.

I think you don't see the difference between idealised economics and real world economics. Much like the difference between idealised Marxism and real world Marxism.

For example, the farmers aren't hurting, and I'm not paying too much for coffee.

And Nestle doesn't have a long history of market manipulation, harrassing whistle blowers and encouraging women in third world countries use formula and stop breast feeding.

[Supercharts]

http://www.greenmountaincoffee.com/social_environmental/scripts/coffee_communities.asp

[shanek]

Originally posted by a_unique_person
I think you don't see the difference between idealised economics and real world economics.

Since I have already demonstrated how this case fits in with economic theory, and the price levels are at the market equilibrioum, and no one has yet to rebut it, these are just empty words from a desperate individual trying to legitimize his biases.

[shanek]

Originally posted by Supercharts
http://www.greenmountaincoffee.com/social_environmental/scripts/coffee_communities.asp

From the site:

Green Mountain Coffee Roasters is committed to conducting its business in a socially responsible manner. The Company believes that doing well financially can go hand in hand with giving back to the community, supporting coffee growers and their families, and protecting the environment. The Company contributes at least 5% of its pre-tax income to social and environmental initiatives involving numerous non-profit organizations in the USA and in coffee-producing countries.

Okay, so AUP, Thanz, BillyTK: If there's all this force and no freedom in the market because of these bad, nasty-wasty, evil coffe conglomerates, then how can a company like that even exist? And why don't you give your money to them instead?

[a_unique_person]

Originally posted by shanek


Since I have already demonstrated how this case fits in with economic theory, and the price levels are at the market equilibrioum, and no one has yet to rebut it, these are just empty words from a desperate individual trying to legitimize his biases.

I do not think I am being desperate. Your resort to ad-hominem, however, seems to be a resort to it.

Can we get a few basic ideas sorted out here.

1. Farmers are doing it hard.
2. Big companies aren't.
3. Not every commercial transaction benefits those who make it equally. This could only happen in an ideal world.

[shanek]

Originally posted by a_unique_person
I do not think I am being desperate.

Then why all the rhetoric with absolutely no attempt to refute me at all?

[a_unique_person]

Originally posted by shanek


Then why all the rhetoric with absolutely no attempt to refute me at all?

I have been.

[Thanz]

Originally posted by shanek


Since I have already demonstrated how this case fits in with economic theory, and the price levels are at the market equilibrioum, and no one has yet to rebut it, these are just empty words from a desperate individual trying to legitimize his biases.

As I understand it, you have 5 or 6 companies that effectively control the market for coffee beans. When those companies collude to set the price at an extremely low level, the farmers who grow the beans have no choice but to sell to those companies at the artificially low price, due to the inequality of bargaining power. The market is not at a price equilibrium due to the collusion between the bean buyers to set prices artificailly low.

So, yes, it fits in with economic theory - just not how you think it does. It is an example of how colllusion can distort a market.

[shanek]

Originally posted by a_unique_person
I have been.

You have not said ONE SINGLE WORD about my description as to why the effect is an example of market equilibrium price effects. NOT ONE WORD.

[shanek]

Originally posted by Thanz
As I understand it, you have 5 or 6 companies that effectively control the market for coffee beans. When those companies collude to set the price at an extremely low level,

Conspiracy theories...bah...What's stopping one of these companies from breaking off and competing with the others? There have been some examples posted in this thread of companies who are doing exactly that in the coffee business.

The market is not at a price equilibrium due to the collusion between the bean buyers to set prices artificailly low.

If it's not at equilibrium, then show how there is either an over- or under-production of coffee. If you can't, then it's at equilibrium. Plain and simple.

What you completely refuse to understand is that the coffee companies only control the demand side of the equation. The farmers still control the supply side. Even if there were some vast conspiracy among them, the only way they could make the equilibrium price drop is to decrease overall demand. Since I have demonstrated that the price is indeed at equilibrium, and no one here has done even the slightest thing to refute that, then this must be the case. But why would they decrease the demand when it would mean they would be getting less coffee to sell?

[Thanz]

Originally posted by shanek


Conspiracy theories...bah...What's stopping one of these companies from breaking off and competing with the others? There have been some examples posted in this thread of companies who are doing exactly that in the coffee business.

Why would they do that? So they can pay more for the beans? They use their collective power to keep the price they pay artificially low. If they were competing, the price would rise, as farmers would have a legitimate choice of going to a competitor for a better price.

If it's not at equilibrium, then show how there is either an over- or under-production of coffee. If you can't, then it's at equilibrium. Plain and simple.

What you completely refuse to understand is that the coffee companies only control the demand side of the equation. The farmers still control the supply side. Even if there were some vast conspiracy among them, the only way they could make the equilibrium price drop is to decrease overall demand. Since I have demonstrated that the price is indeed at equilibrium, and no one here has done even the slightest thing to refute that, then this must be the case. But why would they decrease the demand when it would mean they would be getting less coffee to sell?

You have not demonstrated that price is at equilibrium - you have merely stated it as fact. That is not a demonstration.

Next, you seem to be confused as to how colluding cartels make the price drop. They say to the farmers - we will buy your crop, but only at x price. The farmers have a choice - sell at x to get some money, or sell to no one for no money. The colluding buyers keep the price low by only offering that price - and by controlling enough of the market for the beans that selling elsewhere is not a viable option. They don't need to decrease demand - they just need to control the market so that the farmers have essentially no choice but to sell to them at the price they dictate. This is not "equilibrium".

[OBgac]

Originally posted by shanek


Since I have already demonstrated how this case fits in with economic theory, and the price levels are at the market equilibrioum, and no one has yet to rebut it, these are just empty words from a desperate individual trying to legitimize his biases.

http://www.investopedia.com/terms/o/oligopoly.asp


Its a classic situation of an oligopoly, more often seen in countries where large retailers controlling the market for example fresh produce can use their leverage by offering low prices to farmers safe in the knowledge that the few other retailers with equivalent purchasing power are not going to spoil the party by starting a price war which will mean 'only' the farmer will win.

The only solution for the bean prducers are larger co-operatives who can charge a premium for the beans through guaranteeing supply, quality etc. But I suspect this equivalent level of the supply chain is already controlled by the buyers (pure speculation on my behalf).

[DaChew]

For those of you who think the world coffee market (indeed, commidities markets in general) are sooooooo easy to understand: What are you doing here?????? Don't you realize that with your vast knowledge of world commodities markets you could be making MILLIONS in futures contracts? By spending even the smallest amount of time debating this issue you are wasting huge amounts of potential personal wealth!!!!

IF your theory is correct and there is this vast coffee price fixing conspiracy to depress the price of coffee on the world market then why are you not shorting the market?

Or could it be that puting YOUR money where YOUR mouth is has a bitter taste????

[Shane Costello]

Originally posted by a_unique_person:
And Nestle doesn't have a long history of market manipulation, harrassing whistle blowers and encouraging women in third world countries use formula and stop breast feeding.

If women in the third world have enough income to spend on formula feeds, and Nestle thinks it worthwhile to encourage them to do so, then that's progress in my book.

Farmers are doing it hard.

That's because farming is an inherently hard way to make a living, and it only get's tougher as the scale decreases. Farmers are always going to have it harder than the companies. It would be nice to think that simple peasant farmers could make a viable and prosperous living in some pleasant Arcadia, but historically this has never been viable. The only people to have ever made a decent income put of agriculture have been the big guys, from the owners of large villas in Roman times, to feudal lords of the manor in the middle ages, to the largest agricultural enterprises of the present day. Small scale farming is always going to be a precarious existence.

And if anyone thinks that intervention in the market is desireable, well it's already happening and if your a taxpayer you're footing the bill. It's gotten so bad that in Ireland farmers long ago abandoned even the pretence of being for profit enterprises. They now feel entitled to vast transfers from everyone else, without even having to justify it.

If you don't like the way the coffee market operates, then don't drink coffee. If you don't like agricultural subsidies, then tough, it's the law.

[Leif Roar]

Originally posted by shanek


Conspiracy theories...bah...What's stopping one of these companies from breaking off and competing with the others?


Common sense? Game theory?

There have been more than enough real world examples of companies working together to fix prices (both for raw materials and for products) that there's little point in arguing that "the free market will prevent that behaviour" - it clearly does not do that in all circumstances.

[shanek]

Originally posted by Thanz
Why would they do that? So they can pay more for the beans?

So they can strike better deals with the growers that grow better coffee, for example. If it's a case where none of them would want to do it anyway, then why the need for collusion?

If they were competing, the price would rise, as farmers would have a legitimate choice of going to a competitor for a better price.

But you've just contradicted what you've said above&mdash;why would a competitor want to pay a higher price?

You have not demonstrated that price is at equilibrium

Yes, I have. I demonstrated the effect that led the price to fall and the effect the falling price had.

They say to the farmers - we will buy your crop, but only at x price. The farmers have a choice - sell at x to get some money, or sell to no one for no money.

And what stops the farmers from colluding against the buyers?

You still labor under the completely ignorant pretext that big evil corporations draw prices out of a hat and bend others to their will. It ain't so. There are market reasons why the price is the way it is.

They don't need to decrease demand

They do if they don't want a shortage.

they just need to control the market so that the farmers have essentially no choice but to sell to them at the price they dictate. This is not "equilibrium".

What prevents a shortage at the artificially low prices?

If you'll look at true examples of artificially low prices, such as government price caps or the minimum wage, you will see a shortage of supply and a glut of demand. Why isn't that happening here?

[shanek]

Originally posted by OBgac
Its a classic situation of an oligopoly,

But oligopolies do not work in collusion, as is being asserted here. Oligopolies are significant because the supply or demand (in this case, demand) rests in so few hands. Since the demand is low, this has the effect of a lower equilibrium price.

[davefoc]

Shanek is making classic arguments for market driven decisions. He is also arguing, that in the end, even though greedy capitalist organizations will no doubt attempt to form cartels their efforts will not succeed because they will lose to people who gain market share by undercutting them. I think he is probably right and would refer people to some of Milton Friedman's works for some of the best arguments for this view.

This is a quote from an organization that seems to be working with farmers to increase the price they receive for their coffee beans:
http://www.globalexchange.org/economy/coffee/coffeeCooperatives.html

The oversupply is often influenced by centralized political decisions -- small coffee farmers are encouraged to grow more by governments eager to boost exports earnings. These governments are sometimes encouraged by the IMF and the World Bank to produce more, without being made aware of the potential of catastrophic price falls.


I don't know whether AUP caught the gist of that quote, but the point of it was that centralized government decisions from government bureacracies were responsible for a lot of the coffee farmers problems.

[shanek]

Originally posted by davefoc
Shanek is making classic arguments for market driven decisions. He is also arguing, that in the end, even though greedy capitalist organizations will no doubt attempt to form cartels their efforts will not succeed because they will lose to people who gain market share by undercutting them.

Unless, of course, the cartel has government support, like the MPAA or the RIAA, and can criminalize any attempt to undercut them.

This is a quote from an organization that seems to be working with farmers to increase the price they receive for their coffee beans:
http://www.globalexchange.org/economy/coffee/coffeeCooperatives.html

Ah, so there is an oversupply&mdash;and, surprise surprise, it's caused by government.

[a_unique_person]

Originally posted by davefoc


I don't know whether AUP caught the gist of that quote, but the point of it was that centralized government decisions from government bureacracies were responsible for a lot of the coffee farmers problems.

I think the title points out the main point of the thread, that although farmers are not getting much, the large corporations are making a killing.

[shanek]

Originally posted by a_unique_person
I think the title points out the main point of the thread, that although farmers are not getting much, the large corporations are making a killing.

And the important question is, why? I mean, GM makes a lot of money selling cars, but the guy who sweeps the floors isn't getting much. Who is creating how much wealth and what is the market price for their services?

[a_unique_person]

Originally posted by DaChew
For those of you who think the world coffee market (indeed, commidities markets in general) are sooooooo easy to understand: What are you doing here?????? Don't you realize that with your vast knowledge of world commodities markets you could be making MILLIONS in futures contracts? By spending even the smallest amount of time debating this issue you are wasting huge amounts of potential personal wealth!!!!

IF your theory is correct and there is this vast coffee price fixing conspiracy to depress the price of coffee on the world market then why are you not shorting the market?

Or could it be that puting YOUR money where YOUR mouth is has a bitter taste????

I don't think the price can go any lower. They don't want the price to drop below starvation levels. Kind of like a Mafia Protection racket.

[davefoc]

AUP,
I could have been more careful to tie what I said into exactly the subject of this topic. I think the story is complicated and did not want to write too long a post that more fully explained my thinking. I will try to do so a little bit better below:

There are really two fundamental markets here. The market for raw coffee beans and the market for roasted, sorted, blended, packaged, transported and marketed coffee that the consumer buys.

For many things there is a very tight relationship between the cost of the raw material and the cost of final product. 2x4 studs is an example of a product that follows the cost of the raw material closely. The lumber mills have to pay more for the raw lumber the cost of a 2x4 goes up and conversely the cost of a 2x4 goes down when the lumber mills pay less for the commodity. Many things we buy are much less constrained by the cost of the underlying raw materials, greeting cards and software are a few examples of this.

Coffee, I suspect, is a product that does not follow the cost of the raw material closely. There are two other components of manufactured coffee that probably affect its pricing more strongly than the cost of the raw material.

1. Large production, and shipping costs associated with the manufactured coffee product.
2. The retail coffee market is driven at least partially by successful marketing campaigns that lead consumers to spend more money than they might otherwise because the marketeers are successful in convincing the consumer that there are benefits to expensive, elitist brands.

The point of the above is that to blame high retail coffee prices or low raw coffee prices on some grand capitalist conspiracy is not accurate. Retail market prices are set by one set of factors or which the price of raw coffee is only a small component and raw coffee prices are set by market forces that are not controlled strongly by the retail coffee manufacturers.

Unfortunately for the raw coffee producer one of the consequences of this situation is that the supply/demand curve is relatively flat. This means that as the raw coffee producers drop prices the demand for raw coffee does not go up very fast. This has the effect of making it so that the price of raw coffee can drop dramatically when there are small increases to the supply as was caused to happen by the actions of various governments.

I do sympathize with the plight of the raw coffee producer with regard to this but simple ideas to fix the problem seem likely to have very bad consequences. Certainly, the disastrous American agricultural subsidy programs have been no model to follow. Perhaps you have some thoughts on what should be done. The Fair Trade folks that I referenced above are doing something that might be of some value to the farmer, perhaps as a start you might buy coffee that they reccomend.

[DaChew]

I don't think the price can go any lower. They don't want the price to drop below starvation levels. Kind of like a Mafia Protection racket.

Then, of course, your making long range investments in coffee yes? If you believe the price is as low as it can go then now's the time to get in wouldn't you say? This "mafia racket" (completely missing how commodities markets work again) can't control the demand side forever. Other companies are going to move in on the action, they always do. So now's your big chance! Buy contracts to purchase coffee at current low, low prices sometime in the distant future and you're a rich person. It's so simple. I can't believe everyone isn't doing it.

[a_unique_person]

Originally posted by davefoc
AUP,
I could have been more careful to tie what I said into exactly the subject of this topic. I think the story is complicated and did not want to write too long a post that more fully explained my thinking. I will try to do so a little bit better below:

There are really two fundamental markets here. The market for raw coffee beans and the market for roasted, sorted, blended, packaged, transported and marketed coffee that the consumer buys.

For many things there is a very tight relationship between the cost of the raw material and the cost of final product. 2x4 studs is an example of a product that follows the cost of the raw material closely. The lumber mills have to pay more for the raw lumber the cost of a 2x4 goes up and conversely the cost of a 2x4 goes down when the lumber mills pay less for the commodity. Many things we buy are much less constrained by the cost of the underlying raw materials, greeting cards and software are a few examples of this.

Coffee, I suspect, is a product that does not follow the cost of the raw material closely. There are two other components of manufactured coffee that probably affect its pricing more strongly than the cost of the raw material.



For something that is not easily manufactured, I can understand, software being a good example.



1. Large production, and shipping costs associated with the manufactured coffee product.
2. The retail coffee market is driven at least partially by successful marketing campaigns that lead consumers to spend more money than they might otherwise because the marketeers are successful in convincing the consumer that there are benefits to expensive, elitist brands.

The point of the above is that to blame high retail coffee prices or low raw coffee prices on some grand capitalist conspiracy is not accurate. Retail market prices are set by one set of factors or which the price of raw coffee is only a small component and raw coffee prices are set by market forces that are not controlled strongly by the retail coffee manufacturers.



Yet they cannot pay a decent amount. Economics was supposed to be about the efficient allocation of resources, I thought, not being able to screw someone, as often happens.



Unfortunately for the raw coffee producer one of the consequences of this situation is that the supply/demand curve is relatively flat. This means that as the raw coffee producers drop prices the demand for raw coffee does not go up very fast. This has the effect of making it so that the price of raw coffee can drop dramatically when there are small increases to the supply as was caused to happen by the actions of various governments.

I do sympathize with the plight of the raw coffee producer with regard to this but simple ideas to fix the problem seem likely to have very bad consequences. Certainly, the disastrous American agricultural subsidy programs have been no model to follow. Perhaps you have some thoughts on what should be done. The Fair Trade folks that I referenced above are doing something that might be of some value to the farmer, perhaps as a start you might buy coffee that they reccomend.

I would doubt that I am allowed to import coffee. There are very strict quarantine rules in Australia. (Damm fire ants turned up a few years ago, despite that).

Still, in small business, part of the business process is the give and take. A business relationship is just as important as anything else. Although legally they might be doing everything right, you wonder at how they can do it morally.

[davefoc]

AUP said:
Yet they cannot pay a decent amount. Economics was supposed to be about the efficient allocation of resources, I thought, not being able to screw someone, as often happens.

It is difficult to arbitrarily change a market price without severe unintended consequences. If one just decides, say that the price of raw coffee should be $1.00 per pound instead of $.50 the number of producers will skyrocket and almost immediately there will be massive surpluses. At this point in time who will buy the excess coffee to maintain the above market price?

I agree with you, that farmers who for generations have made a living from coffee production that all of a sudden find themselves competing in a world coffee market that has new players that are causing the market to crash are to be sypathized with. How would you deal with this? Should the UN go to Vietnam and tell them they can't sell coffee?

Your thought seems to be that companies should act in ways that you consider moral. Folgers for instance should reason that they know the farmers are struggling so they should pay them 20% more than the market price or something like that. In the short term under unusual circumstances I might even agree with you. There could even be benefits to Folgers for a policy like this, both for its reputation and because it may assist long term suppliers to survive in difficult times. But in the long term there are problems with this for Folgers and others:

1. By paying an above market price Folgers puts their company at a disadvantage with their competitors, in time the cost of this policy could not be just a reduction in profits but the elimination of Folgers as a company.
2.When Folgers raises the prices to its suppliers it will encourage its suppliers to stay in a business that perhaps they should be figuring out how to get out of.
3.Folgers will now have more suppliers than it knows what to do with since it is paying above market prices, coffee producers all over the world will be trying to figure out how to sell to Folgers. One way that will surely be tried is bribery. This may have severe consequences for the bribers and the bribees as the corruption eats away at the integrity of both supplier and consumer organizations.