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FULBRIGHT ECONOMICS TEACHING PROGRAMCE02-02-4.0Jan 21, 2002NGUY EN XUA N THANHWHY CHEAP GREEN COFFEE DOES NOT MAKE CHEAP.CAPPUCCINO?.After oil, coffee is arguably the second most important commodity as it constitutes an important source.of foreign income for several some developing countries. Coffee, like any other agricultural products, is.a cyclical crop. When the supply of coffee is large, the world price of coffee falls. Many farmers then go.out of business, or they switch from coffee to other similar crops. Consequently, the world supply of.coffee falls, and so prices rise again. Once again, it becomes financially worthwhile for farmers to.produce coffee instead of those other cropsTo counter this cyclical pattern, several major coffee-growing countries set up the Association of Coffee.Producing Countries (ACPC) in 1993. The members of the ACPC were Angola, Brazil, Colombia, Costa.Rica, Ivory Coast, DR Congo, El Salvador, India, Indonesia, Kenya, Tanzania, Togo, Uganda, and.Venezuela. The purpose of this organization was to control coffee prices by adjusting coffee supplies.from the member countriesHowever, just as the coffee producing countries were debating the idea of a coffee cartel like OPEC,.other countries, which never produced coffee before, started developing huge new coffee plantationsAmong these new comers was Vietnam, which produced as little as 1.2 million bags of green coffee in.the 1990-91 season. The 1990s saw a sharp increase in Vietnam’s coffee production, resulting from the.massive expansion of growing areas in its Central Highlands; and from productivity improvementsThe total area of Vietnam’s coffee plantations increased from 200,000 hectares in the mid-1990s to.500,000 hectares in 2000 / 01. During the same period, the average productivity increased from 1 ton per.hectare to 1.8 tons per hectare. In 2000 / 01, Vietnam’s production of coffee reached 15 million bags.1.This made Vietnam the second-largest coffee producer in the world after Brazil, accounting for a tenth.of the total global coffee productionFigure 1: Vietnam’s Coffee Production.Millions of Bags (60 kg)16.14.12.10.8.6.4.2.00-0199-0098-9997-9896-9795-9694-9593-9492-9391-9290-9189-9088-8987-8886-870Source: ACPC, “Review of the market situation”, October 2001.1A bag of green coffee is equivalent to 60 kilograms net.This case study was prepared by Nguyen Xuan Thanh, lecturer at Fulbright Economics Teaching Program. Fulbright Economics.Teaching Program’s cases are intended to serve as the basis for class discussion, and not to make policy recommendationsCopyright © 2002 Fulbright Economics Teaching Program.Why cheap green coffee doesn’t make cheap cappuccino?CE02-02-4.0It was also revealed that although various ACPC’s production restriction programs were in place, they.were not complied with by the members. Even Brazil, the largest coffee producer and the most rigorous.enforcer of ACPC’s “retention” plan (the withholding 20-percent of coffee production), eventually gave.up its commitment and started selling its reserves of coffee by August 2001As a result, many countries had been expanding their coffee production while the global demand for.coffee was flat. An estimate by ACPC, shows that the supply of coffee increased 3.6 percent a year on.average, while the demand for coffee only increased by 1.5% a year throughout the 1990s. Total.production of green coffee in 2000 / 01 was about 115 million bags. This exceeded total consumption.(105 million bags), by about 10 percent.Figure 2: World’s Total Coffee ProductionSource: International Coffee Organization, 2002Consequently, the price of coffee beans in 2001 plunged to their lowest level for 30 years. Coffee.farmers claimed that the coffee price had fallen below actual costs of production. Figure 3 below shows.that the average price of green coffee by September 2001 was only 32% of that in January 1998Figure 3: Fluctuation
