It is estimated that while world coffee prices hover around 50 per pound, production costs are around 80 per pound.

It is estimated that while world coffee prices hover around 50¢ per pound, production costs are around 80¢ per pound. According to a report issued in September 2002 by the relief agency Oxfam, prices are at their lowest in 100 years, thereby leaving 25 million farmers in crisis. Banks dependent on the industry are collapsing. It is ironic that in a world of designer coffees – mochas and lattes – a worldwide glut of coffee beans has farmers and pickers suffering. One of the hardest hit places is Nicaragua, where the coffee crop is wilting and the people are beginning to starve. Oxfam accuses the roasting companies – Proctor & Gamble, Nestle SA, Kraft Foods Inc., Sara Lee Corp., and Tchibo Holding AG are the biggest – of profiting from the crisis and urges them to pay higher prices. The companies reply that they cannot be blamed for the oversupply, and that paying higher prices would encourage farmers to produce more coffee that nobody wants. The company taking the most heat is Starbucks Corp., the designer-coffee maven, among the top ten coffee buyers in the world. This world-wide chain has a lot to lose if their customers, especially those of college age, see it as a Third World profiteer. “But the plight of the world’s financially struggling coffee farmer is a complicated one – and not all the fault of corporate coffee buyers. Farmers are caught up in the harsh world of commodity markets, where prices are based on supply and demand in a highly fragmented industry. A chronic coffee surplus has resulted in years of low prices.” Sources: “For Coffee Growers, Not Even a Whiff of Profits,” Business Week, September 9, 2002, p. 110; and World Coffee Prices at 100-Year Low,” New York Times, September 18, 2002. Questions: 1. Is the market for coffee perfectly competitive? 2. Does the coffee market meet all six conditions of a perfectly competitive market? 3. Which factor is not represented? 4. Do you buy the Starbuck’s argument that paying higher coffee prices will increase demand and will ultimately increase the glut? 5. Are the coffee growers operating at zero economic profit in the sense in which the chapter defines it?No fewer than 500 words.

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