DEPARTMENT OF ECONOMICS
DISCUSSION PAPER 06/08
COFFEE COMMODITY CHAIN
Tine S. Olsen and Brett Inder♦
To explain the value added along the coffee commodity chain we propose and estimate a theoretical model of the coffee commodity chain. The theoretical model consists of four markets and five agents in the coffee commodity chain and predicts that prices in the coffee commodity chain move together but are also influenced by income, technology and production. A vector error correction model is used to test the theoretical predictions. In addition to the theoretical conclusions the empirical model confirms the beneficial role of the International Coffee Agreement and the importance of the level of production in determining coffee prices.
Key words: global commodity chain, vector error correction model, coffee, value added
JEL classifications: O01, F02, Q110, C320, F230, F14
Monash University Department of Economics (Olsen), Monash University Department of Econometrics and Business Statistics (Olsen and Inder). Corresponding author Tine S. Olsen, firstname.lastname@example.org. © 2008 Tine S. Olsen and Brett Inder
All rights reserved. No part of this paper may be reproduced in any form, or stored in a retrieval system, without the prior written permission of the author
COFFEE COMMODITY CHAIN
Between being grown and picked by a farmer in a developing country and being consumed, most often in a developed country, coffee passes through many sets of hands. Inspired by the global commodity chain literature we here propose a theoretical and an empirical model of the coffee commodity chain.
We want to find out what determines the value added at each stage of the commodity chain. The question touches upon the distribution of income among agents and countries in the commodity chain, the prevailing market structure at each stage of the production process, trade, bargaining power and other factors influencing the commodity chain. Figure 1 provides a graphical representation of the value chain for coffee in Brazil, Colombia and the US.
Value added at the various stages of the chain is the difference between input and output price. For Brazil and Colombia producer’s share is producer price and processing and transport is export price minus producer price. For Brazil international processing and transport is the difference between import price of Brazilian coffee in US and the export price in Brazil and processing in US is the US retail price minus the import price of Brazilian coffee in the US. For Colombia processing in US and transport is the difference between the US retail price and the Colombian export unit value.
Regarding weight-loss due to roasting, green coffee is the commodity at all stages of the chain until it reaches the consumer. We follow one pound of green coffee along the commodity chain and multiply the retail price by 0.8 since coffee looses 20% of the weight in roasting (Daviron and Ponte, 2005, p. 242, n. 5).
Figure 1 shows that the share of value added acquired by Brazil and Colombia has decreased after 1948. Behind this observation lies that the share to producers has decreased in Colombia but remained roughly constant in Brazil while the shares to domestic processing and transport have decreased in both countries, in particular after 1990. What we attempt to explain by this analysis are the decreasing shares of income to producing countries and the disappearing margins to exporters.
The framework of this analysis is global commodity chains, terms of trade literature and price transmission literature. Commodity chains for coffee are described by Talbot (1997; 2002) and Ponte (2002). Commodity chain analysis focuses on the good along the nodes of the chain, and looks at the flow of the good through the commodity chain, the transactions which take place along the chain, the geographical location of the chain, the agents involved in...
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