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How has the Brazilian economy been affected by the decline in wrld coffee prices?

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Introduction

TITLE: How has the Brazilian economy been affected by the decline in wrld coffee prices? HYPOTHESIS: Based on the fact that previous to Brazil producing coffee, it had no single economic influence. This suggests that they rely heavily on the production and success of coffee, and therefore the current coffee crisis could only mean difficulties for their economy. FINDINGS: Coffee is the world's second most traded commodity (after oil). The coffee growing industry employs over 100 million people from over 60 developing countries. It best grows in areas like Arabia, India, Africa, the West Indies and South and Central America, with 60% of coffee output deriving from Latin America. Brazil's relationship with coffee can be traced back to the mid 1800s. In 1930 the Brazilian government first approached Nestl´┐Ż (Nescafe) as they knew that Nestle were looking for a coffee producer to supply them for a new brand of coffee; 'Nescafe'. From then until the 1970's over 50% of Brazil's foreign trade income came from growing coffee beans. Prior to this they didn't really have a single major influence on their economy; they were in a colony which prevented it from becoming more developed because Spain used to control its trade. Brazil would be expected to provide raw materials for Spain at little of no cost. Today Brazil makes up 30% of total coffee output and is the world's largest coffee producer. ...read more.

Middle

However, as we can see from above, many of these aims have not been fulfilled in respect of Brazil. The paying condition of the farmers is not Brazils only worry, more recently the coffee industry has begun to see the beginnings of a crisis. They have witnessed a sharp increase in global production. The basic concept of demand and supply is that changes in market demand for a good will lead to a change in equilibrium market price. This means that for a given level of demand, there is a downward pressure created on supply (as explained by the graph) Over the last 2 years a significant rise in market supply has caused a sharp fall in market prices, coffee prices are now less than a 1/4 of 1970 levels and producer prices have plummeted to an all-time low, while prices on the retail end are mostly at an all-time high. Some factors that could be driving prices down is the abandonment of export controls (retention scheme, see below). Also countries are forced to increase supply to protect export earnings. An added factor is that Vietnam has seen an increase in out in the last 4 years, probably due to improvements in growing techniques. This is probably resulting from technology transfers, whereby large corporations set themselves up in under developed countries to take advantage of low labour costs. ...read more.

Conclusion

This means that there is less coffee being exported and therefore, in theory, less supply. In an interview with the Agriculture Minister of Brazil, Marcus Vinicius Pratini de Moraes, said that the reasoning behind the failure of the plan was that only Brazil and Colombia had stuck to it. After this, the Brazilian Government announced that it was going to leave the scheme; it had kept back over 170,000 tonnes since the scheme was introduced. CONCLUSION: To me it seems clear that Brazils situation has reached an all-time low, their producers realise the threatening loss they are going to continue to make. It is clear that they have made many attempts, with the help of the ACPC and ICO, to rectify the situation: retention schemes, removing low grade coffee. The fact they these institutions also failed suggests that the problem cannot be dealt with by Brazil alone, it is a global issue. There may be some hope in this issue, as demand is rising more quickly in some countries, for example emerging markets like Russia. In addition there is faster growth for the demand of richer coffee beans. An added fact is that coffee is inelastic, this means that there is no substitute for real coffee. This means that if the coffee production can be crbed then there is still hope of the economy regaining it's former state. The only way the situation will improve is for demand to radically increase or for production to greatly decrease. ...read more.

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