Microeconomics of Coffee

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The world consumes nearly 2.5 billion cups of it per day. Farmers depend on it for their livelihoods. It has worked its way up to become the second most traded commodity in the world and become such a big part of the economy. What is it? Something no bigger than the size of a paper clip, the coffee bean.

Nearly ninety five countries in the world depend on coffee exports for at least half of their exporting revenue. Only countries that have a warm, dry climate, are about 1,500 meters above sea level, and within 1000 miles of the equator can productively grow coffee, giving countries like Brazil, Peru, and Columbia a comparative advantage. With such an advantage, one would think that these countries would be among the wealthiest nations in the world. Unfortunately, even though the coffee market earns over 70 billion dollars a year, these countries only “see” about 5 billion dollars in revenue, meaning the countries’ farmers’ income is very little. Still, many of these farmers produce a surplus of crops every year, much of which is never brought to market. Although this might not make sense to the average consumer, it makes sense from the economic standpoint. The law of supply and demand shows us that increasing supply decreases the price for which the product is able to sell. Bringing more coffee to market would decrease the amount of revenue farmers bring in, putting them out of business. New companies are buying bags of coffee beans from farmers at a fixed price, in order to ensure the farmer enough to live on each year. Companies then have to find a way to make up for the cost and end up charging the consumer more for their coffee, and consumers are willing to pay more for a variety of reasons. The company makes the bags of coffee more appealing to consumers through packaging, organic mixes, and whether or not the money goes straight to the farmer.

The coffee market looks as if it will continue to rise, and hopefully more companies will begin to think of...
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