Can Coffee Bean Growers Be Like OPEC?

See World’s Coffee Growers Seek to Set Minimum Price to Help Poor Farmers: Many growers are switching to other crops or abandoning plantations altogether amid lowest prices in over a decade by Jeffrey T. Lewis of The WSJ. Excerpts:

"Can you make an OPEC-style cartel for coffee?

Growers from Brazil, Colombia and more than two dozen other countries will meet in Brazil this week to talk about how to get more money to farmers suffering from the lowest prices on world markets in more than a decade."

"It takes the three biggest arabica-growing countries to reach a similar number [60% market share] for world production for that variety"

"there are about 20 more coffee-growing countries than cacao producers. Arabica beans, which are considered to have a milder flavor than the robusta variety of coffee, represent a bit more than 60% of world coffee exports.

A lack of discipline among arabica growers would spell doom for the effort, said Silas Brasileiro, president of Brazil’s National Coffee Council, which groups together many of the country’s growers.

“We know that the coffee-industry buyers will just seek out the best price. No one will be able to hold on to their coffee” to try to push prices higher, he said."

"Growers in many coffee-producing nations say it costs more to produce coffee than the price farmers are getting for their beans at the moment. As a result, many growers are switching to other crops or abandoning plantations altogether to migrate to cities in their countries, or in the case of Central America, to trek to the U.S. border."

"Last year, coffee-grower groups representing more than 30 countries sent a letter to more than 20 big coffee buyers, including companies like Nestlé SA and Starbucks Corp. to try to convince them to pay more, but they only got “condolence cards” in response, said Ms. Nogueira. “They said, ‘We’re sorry to hear about your difficulties,’ but that was it.”"

One problem is that the demand for coffee is inelastic ("The elasticity of coffee demand is only about 0.3; that is, a 10% rise in the price of coffee leads to a decline of about 3% in the quantity of coffee consumed." See Elasticity and Pricing from OpenStax).  So if supply increases or shifts to the right, the price decrease is large, as shown in the graph below.



Also, the article says that farmers are switching to other crops due to low prices. In the long-run, if profits fall below average, firms leave the industry.

It is hard to form a cartel. The book The Economics of Public Issues by Roger LeRoy Miller, Daniel K. Benjamin and Douglass C. North has a chapter on cartels that discuss OPEC and why it cannot always meet its objectives. They point out the conditions necessary for cartels to work. These are given below.


From the article excerpts above, it seems like there are many countries growing coffee, that they don't have much solidarity or stability (growers leave when prices fall) and there are substitutes like tea and diet soft drinks.