Analysis of Coffee as a Commodity in International Trade

Coffee is seen to be one of the most demanded tropical agricultural commodities. There are 70 producers of coffee in the world who depend on the commodity for foreign exchange earnings and tax incomes. Despite the changing world economic trends, the demand of coffee keeps increasing in most countries of the world (International Coffee Organization, 2011). One of the main importers of coffee is USA which is a developed country. The exporters of the commodity include such countries as Brazil, Burundi, Zambia and Uganda. This paper will use Uganda as an export country and USA as the importing country. USA is a developed country while Uganda is a developing country.

Despite the rising demand of coffee, the production (Supply) of the commodity has been faced with cycles of deficits and surpluses over the years. This can be illustrated in the table below. The table provides data for the export volume (supply), value and prices of coffee in the world market.

Coffee year US$ billion Million bags US Cents/lb FOB
1999/00   8.7 89.4   74
2000/01   5.8 90.4   49
2001/02   4.9 86.7   43
2002/03   5.5 88.2   47
2003/04   6.4 88.8   55
2004/05   8.9 89.0   76
2005/06 10.1 87.9   87
2006/07 12.5 98,4  96
2007/08 15.0 96.1 118
2008/09 13.5 97.4 105
2009/10 15.4 93.4 125

Table 1: World coffee exports by value, price and volume 1999/00 – 2009/10 (International Coffee Organization, 2011)

The table indicates a fluctuating trend in the supply of the commodity in the world market. The first cycle is a cycle which reflects a high level of supply between 1999 and 2001. Within this period, the price of coffee was also low as noted in column 4 of the table above. The column represents the price of coffee in US Cents/Ib. In 1999, the amount of coffee exported in the world market was 89.4 million bags and the amount of US Cents/Ib. was 74. In 2000, the supply increased to 90.4 while the price reduced to 90.4 reduced even further to 49 US Cents/Ib. The price reduced to even lower 43 US Cents/Ib. The second cycle was a trend of reduced supply and the prices started to rise slowly. This was evidenced between 2002 and 2006. The last and the most recent cycle is a cycle of increased supply and sharp increase in prices of coffee. This occurred between 2006 and 2010.

The trade in coffee in the world market involves exports mainly from developing countries and imports into developed countries. Developing countries depend on such exports for their foreign exchange earnings. The purchasing power of developed power such as the US harms other developing countries which don’t produce coffee because the developed countries will purchase the largest amount of the commodity while developing countries lack the purchasing power to import the commodity. It could make sense theoretically for developing countries which demand but do not produce coffee to form cartels so as to increase their purchasing power (LeClair, 2000). Uganda in our case study also exports its coffee at low price because its product is raw. However, if the country would process the coffee it would make good foreign exchange earnings. Theoretically also, Uganda could engage in forward collusion whereby the country could form a cartel with a coffee processing country such as Brazil so that they can produce and process the coffee jointly and sell the product at higher prices (Levenstein et al., 2006). While such a move is illegal within OECD countries, there is no such an international law. If anti-trust law applied internationally, therefore, such a move would be illegal.

The main suppliers of coffee are Uganda, Kenya, Rwanda, Burundi, Brazil, Colombia, Cameroon, Ecuador, Indonesia and Philippines. The importing countries include Germany, USA, U and Japan. These suppliers and purchases operate in industries which are significantly affected by tariffs and non-tariff barriers to trade (Dlabay & Scott, 2011). The tax system of Uganda and other exporting countries as well as importing countries such as the US are faced with a lot of trade barriers such as custom duties and price caps. Agricultural industry is also full of subsidies whereby countries subsidize their coffee producers so as to enable a low price offer in the domestic market, hence decreasing competitions from foreign suppliers. This is the case in developed countries. In this case, a country like Uganda will always end up selling its coffee at low prices. the low prices result coupled with trade tariffs in international markets lead developing countries such as Uganda to make very little foreign exchange earnings which would have otherwise boosted their economy.

Despite the above challenges faced by developing countries such as Uganda in international trade, there are ways in which the country can position itself in the market. First, the country may improve the quality of its products as compared to other competitors. Quality coffee will attract more importers and the country will not only depend on USA as its primary importer. The price of the country’s coffee will also increase. Another strategy for positioning in the world market is also by improving the country’s relationship with foreign countries (Daft, 2010). This enables the country to develop good business relationship with importers and increase its bargaining power as a supplier in the world market. This leads to increased prices of its commodity. Finally, the country may promote its product through appropriate marketing mix strategies such as internet marketing.

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