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The coffee price crisis explained in 5 minutes.

The coffee price crisis explained in 5 minutes

The coffee price crisis is caused by the huge volumes of coffee produced by Brazil and Vietnam who share 53% of the global market, Brazil has doubled their coffee production in the past 30 years and Vietnam has grown from 0.6% of the global coffee production in the early 90’s to 17% today.

Hello Guys Marcelo here.

I have always believed the best way to address a problem is to understand it well.

We can only defeat our enemy if we know who our enemy is; and this subject in particular, I am going to talked about today is usually full of myth, misconception and it is historically sensitive.

I have talked about this thoroughly in my webpage www.thecoffee.blog but this time I would like to do it a little different.

I would like to explain the coffee price crisis we are experiencing today, the best way I can, in just five minutes.

In order to understand the issue, we should start by getting familiar with commodities. Especially, we need to know what they are and how we globally trade them.

Commodities are goods worth based on intrinsic value, considered raw materials, just the means to develop more complex and differentiated products.

Information such as where they come from and how they are produced are irrelevant. The only important variable here is their price.

For instance, when you need gas for your car, you go to a gas station, you fill the tank up regardless where the gas comes from, you do not care whether the gas comes from South Sudan, Norway or Saudi Arabia. You only care about moving your car from point A to point B and the cost involved. The same happens with cotton, our clothes is made out of cotton from very different origins and we are oblivious of it, because it has absolutely no impact in the way our clothes looks.

SEE ALSO: Why is the coffee market price so low?

Commodity prices depend on availability, commodities like gold, platinum and other precious metals, which are scarce and mined at volumes below their demand, often gain value over time while other types that we extract or produced at higher rates tend to lose value.

In coffee, we are currently producing 167 million bags but consuming 165 million of coffee worldwide, which is a difference of 2 million bags of surplus.

This is the second year in a row we are experiencing the issue and what makes this crisis different from others before it, is that this one is not going to be temporary.

The main issue is, at least two of the coffee sourcing countries have become too good at producing coffee. Brazil and Vietnam share 53% of the global market, Brazil has doubled their coffee production in the past 30 years and Vietnam has grown from 0.6% of the global coffee production in the early 90’s to 17% today. In 2018 alone Vietnam coffee production increased 10%.

Therefore, the question is, if there is so much coffee, why producing countries keep producing it?

The only way coffee producers have to stay profitable in an economy where they have no control over coffee prices, it is by lowering cost, and the only way they have to lower cost it’s by scaling volumes.

Unfortunately, the more farmers scale production, the more they hurt global coffee prices. Closing a vicious cycle that makes the situation even harder for them and the rest of coffee producers around the world.

This situation is not exclusive to coffee; other commodities experience the same situation as well. However, in richer nations like the US, essential agriculture commodities like corn, soybeans, wheat, cotton, and rice are significantly subsidize by the government; so regardless the commodity international market price and produced volumes, farmers could keep thriving, investing in technology, efficiency and increasing yields. Otherwise, surplus would have affected farmers in richer nations as well.

SEE ALSO: Are foreign aid-projects a failure?

It is interesting to witness how a country that leads the Economic Freedom index, it is subsidizing important agricultural crops. Probably because they already know that using agricultural commodities to develop a nation’s economy is a lost battle.

So in conclusion,

Can we blame Brazil and Vietnam for the coffee price crisis, just because they have been more efficient than anybody else has? Or should we blame the rest of producing countries for being less efficient? Probably we should blame the big coffee companies and conglomerates for profiting so much out of the crisis.

In my opinion, finding someone to blame is a waste of time. We all in the industry created this mess and we all should help to find a way out of it.

This all for today, do not forget to subscribe and like this video

Thanks for watching.

See you in the next one.

 
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