Economics Article Analysis - Luan Tian

Gulp! High coffee prices will be hard to

swallow
Jared Lynch (10/03/14, the

Age)

The price of the morning cup of coffee has increased since the start
of the year and it is looking likely to continue its rise in price. This is
mainly caused by a drought in Brazil. The drought has limited rainfall and
created rough conditions for the growth of different crops including the
coffea plant. This has caused the lowest harvest of coffee in the last five
years.
Australian people have always had a high demand for coffee. This
means that Australian consumers today are willing and able to afford a
large quantity of coffee. However, due to the drought in Brazil, the
quantity of coffee available, the supply, has decreased. Farmers are no
longer able to produce coffee to sell thus creating a shortage of supply
where there are simply not enough coffee to be shared amongst the
consumers. This microeconomic issue in the industry of coffee can be
shown accurately through the diagrams shown below:

In both cases, the decrease in supply due to the drought in Brazil

causes a smaller quantity of coffee to be available at each price. The
leftward supply curve shifts from S1 to S2 and the equilibrium point, where
at a certain price, the quantity demanded by the consumer equals the

quantity supplied by the firms (Q1) has also changed. At the new supply
curve S2, the previous equilibrium price does not provide a sufficient
amount of coffee to meet the demand curve because point A, the quantity
on S2 at P1, is in fact below D, the demand curve. In order for the D to
intersect S2, the price must be raised from P1 to P2. This way, at the higher
price of P2, selling coffee makes more money for the producers and firms,
in other words, increasing the coffees profitability. On top of that, due to a
higher price, fewer consumers are willing or able to pay for their coffee
thus decreasing the quantity demanded. The rise in the price of coffee to
P2 acts as a signal for some consumers to moderate their spending on
coffee and for the firms to begin producing more coffee to make more
money. Therefore, the decrease in D in combination with the increase in S2
creates the new equilibrium point at E2 where P2 stimulates the firms and
the consumers to produce and buy a quantity of Q2. The arrows in the
diagrams show how the equilibrium price (E1 to E2) has changed due to the
change in quantity (Q1 to Q2) and price (P1 to P2) due to the shift in supply
(S1 to S2).
In the first diagram, the stakeholders on display are the firms who
sell and distribute the coffee and the farmers to produce it. The drought
has caused difficulties for the farmers to grow and make coffee thus
causing the leftward shift in the supply curve. With the same demand as
before, the firms now experience a shortage in the supply of coffee and
price of coffee which the farmers distribute increases. The second diagram
illustrates behaviour of the firms and the consumers as a result of the
events shown through the first diagram. The firms now have to pay more
to import the coffee which they sell, so the cost of production of the coffee
is increased which means lower profitability. They now also decrease
supply and there is a shortage for coffee amongst the consumers. Once
again, the prices are raised, this time by the firms, and their profitability
rises again. Finally, the firms are willing to produce more and the
consumers are willing to purchase less and reaching an equilibrium shown
by the point E2 on the second diagram. Due to the drought, the price
which coffee is sold at in Australia has increased and the quantities which
consumers are willing to buy have also decreased.

This crisis shows that todays coffee agriculture is still heavily

dependent on the weather which is out of the farmers control. Just two
months of dry weather in January and February in Brazil has caused the
global price of coffee to rise by up to 60 cents a cup. To prevent a similar
event from occurring in the future, perhaps it is worthwhile to undergo a
green revolution for coffee in order to stabilise supply and abate the
effects of unseasonable weather.