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Tarah Cleveland
Professor Lau
Microeconomics 201
April 14, 2014
Will We Pay Big Bucks for Starbucks?
Arabica coffee beans—a staple commodity good for businesses such as Starbucks, Dunkin’
Donuts, and other big-name coffee brands—are expected to cause a shift in the market supply of coffee.
The world’s leading Arabica coffee producing country has experienced the driest January in half of a
century. High temperatures and low rainfall in Brazil have left coffee bean growers and coffee sellers
paying the price (Biz Asia America). In a market economy, buyers and sellers must interact to set prices
for certain goods and services (Tucker). In the case of coffee beans, sellers might soon be taking a hit as
the price of coffee beans rise. So what exactly does this mean for suppliers in the market for coffee,
what economic behaviors are a result of Brazil’s extreme weather, what does this mean to the local
economy in Valley City, ND, and most importantly, how does the drought impact supply and demand?
In a typical market economy, the interaction between buyers and sellers is supply and demand.
Demand is based on buyers in the market; it is “a curve or schedule showing the various quantities of a
product consumers are willing to purchase at possible prices during a specified period of time, ceteris
paribus” (Tucker). Supply, the main focus for coffee bean growers and big-name coffee producers, is
based on sellers; supply is “a curve or schedule showing the various quantities of a product sellers are
willing to produce and offer for sale at possible prices during a specified period of time, ceteris paribus”
(Tucker). Ceteris paribus is a term that means all variables are held constant. But what happens when
variables are not held constant? The drought in Brazil is an unexpected nonprice determinant of supply.
More specifically, the drought in Brazil has driven the resource prices (coffee beans) to rise, so the
expectations of producers have changed, causing a leftward shift on the supply curve. Starbucks and
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Dunkin’ Donuts both pay very close attention to the weather conditions in Brazil because their
companies rely on Brazil’s resources. Surprisingly, Starbucks says they are not worried about running out
of coffee. Annually purchasing over 500 million pounds of green (roasted and unroasted) coffee beans,
Starbucks’ coffee costs are only about 9% of their total operating costs. It would take a huge increase in
commodity price to make Starbucks pass on the extra expenses to the consumers. So while the coffee at
Starbucks may be too hot to handle, the recent price increase of coffee beans for the company is not.
The company is protected by price locking (Bailey). According to Jeff Bailey, former reporter, editor, and
columnist for Wall Street Journal and New York Times, Starbucks had fixed-price purchase agreements of
$588 million as of September 29, 2013. Dunkin’ Donuts and Starbucks seem to be on the same page.
Neither company is reacting to the expectations of the future coffee supply. Even with the steady
increase in demand, and limited supply, for specialty coffee beverages, Starbucks, Dunkin’ Donuts, and
other coffee companies are keeping everything but their coffee cool (Rudarakanchana). However, if the
drought in Brazil does not end soon, coffee companies may need to start blowing off some steam
because the price per pound of coffee beans could continue to rise.
The two graphs below represent the impact the coffee bean shortage has on the market for
coffee. The first graph shows the leftward/inward shift in the amount of coffee beans supplied. The
drought is a factor that causes an entire curve to shift inward. The second graph is a result of the shift
from the first graph. Whenever a supply curve or demand curve makes a shift, there is a resulting
change in the equilibrium price of the good or service for the market in question. In this case, an inward
shift of the supply for coffee beans will cause an increased equilibrium price for the coffee beans. In the
second graph, notice the S1 curve shifts inward. This shift inward causes the equilibrium price to rise.
Even if the demand curve had not shifted outward (like it did in graph 2), we would still see an increase
in the equilibrium price for coffee beans (Enn).
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What exactly happens to supply and demand when weather acts against producers? In the
coffee bean market, we are dealing with a price expectation. The demand for coffee should increase
because consumers are expecting future costs of coffee to rise. The coffee companies too are
anticipating a rise in future coffee bean prices, however, their reactions come like their frappes…iced.
According to Jeff Bailey the reason for this is because major coffee companies plan ahead; “Buying
ahead means today’s financial results are benefitting from last year’s low coffee prices” (Bailey). Though
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coffee prices may be higher today than they were last year, they are still considerably lower than three
years ago. The graph below from YCharts and Jeff Bailey shows the New York Arabica coffee price
patterns from 2009 to 2014. It shows the current coffee price to be $1.35 per pound (Bailey). This price
graph proves that there will be little change in Starbucks, Dunkin’ Donuts, and other coffee company
supply behavior.
As for local economies, the expected climb in the price of coffee should not affect consumers
any time soon. Here in Valley City, North Dakota, we do not need to worry about rising costs in our daily
brew. Starbucks plans to actually save $100 million in commodities in the coming year
(Rudarakanchana). For everyday Viking Grounds coffee consumers, this is good news. Starbucks does
not want to pass rising costs to consumers quite yet.
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So far this discussion has covered mainly the supply of the major coffee companies and their
readiness to combat the shortage of coffee beans with their stock of pre-purchased coffee. It is also
important to look closely at the supply and demand relationship in the coffee market. Many fear that
the stash of coffee beans will run out and the drought, which has forced over 140 cities to ration water,
will cause the price of Arabica beans to rise (Yang). In economics, expectations cause buyers and sellers
to act a certain way. When the drought hit, coffee consumers found out that there would be a potential
rise in the price of their morning brew, so many consumers rushed to the store to purchase coffee at a
reasonable price. The anticipation of the price of coffee to rise caused the demand for coffee to
increase. This is why earlier I mentioned the constant increase in demand, with the limited supply. This
limited supply refers to the supply of coffee Starbucks and other companies have purchased in advance.
The expectation of rising coffee prices and anticipation of consumers causes the demand curve to shift
to the right. This shift shows that at all possible prices, consumers are willing to purchase a greater
quantity of coffee (Tucker). On the contrary, the expectation for supply due to the Brazilian drought
would cause a leftward shift. What happens is coffee companies anticipate a rise in the price of future
coffee bean prices, so they decide to decrease their current supply of coffee. Whenever there is an
expectation of prices to rise on a commodity, companies react by limiting the quantity of a good they
are willing to sell at all possible prices (Tucker). Is this what happened to the coffee market? In a way,
yes. For the time being, coffee companies are staying afloat. However, it is not to say that soon the
drought will catch up and the coffee companies will fall right into the economic pattern that
expectations have on supply and demand.
Although rising temperatures and dry conditions in Brazil are causing coffee bean farmers to
stress. Starbucks, Dunkin’ Donuts, and other leading specialty coffee sellers remain calm. They fully
intend to keep their price per cup constant, without passing recent price in commodity increases onto
consumers. Though the drought is not good for suppliers in the coffee market, things have been worse.
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Thanks to price-locking, big-name coffee companies will continue to flourish, just as long as the drought
ends soon. The drought has had an impact on supply and demand of coffee; as of right now, this impact
is not so obvious, but as the drought wears on, the damaging effects that the harsh weather had on the
coffee crop will become apparent in the behaviors of buyers and sellers. As for the coffee market in
Valley City, it does not look like we will be paying big bucks for Starbucks anytime soon.
Reflection:
From researching Brazil’s coffee bean crisis and reading and understanding the course text, I
was able to gather my thoughts on Chapter 3 and relate them to the drought in Brazil. There are so
many concepts of this issue that relate to economics; it really is astounding. For example, before relating
the text to the coffee bean market, I would have never thought that the supply of coffee beans could
affect the price we pay for coffee. I usually just go to Starbucks and pick up a medium Pike’s Place Roast,
without ever thinking twice. After writing this paper, I will now think more about my purchasing
decisions and how price of coffee affects my decision to buy a small, medium, or large beverage. Writing
this paper has also made me more aware of nonprice determinants of supply. Both resource prices and
expectations are nonprice determinants affected by the drought in Brazil. Most importantly, writing this
paper has prompted me to take an even closer look at supply and demand, specifically their interaction
in a market economy. I have made a connection to real world problems that affect the global economy,
which will give me better understanding of these topics as we move farther into the course.
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Bibliography
Bailey, Jeff. Starbucks Stock: Coffee Price Rise Evaluated. 21 February 2014. 26 February 2014.
<http://seekingalpha.com/article/2039833-starbucks-stock-coffee-price-rise-evaluated>.
Biz Asia America. "Drought in Brazil Threatens Coffee Crops ." CCTV America, 6 February 2014. Video. 26
February 2014. <http://www.youtube.com/watch?v=gLk5Y1YOmO0>.
Enn, Yoon Pei. Starbucks Drinkers Won’t Get Break as Colombia Supply Drops. 26 October 2013. Web. 22
April 2014. <http://econmicro.wordpress.com/2012/10/26/starbucks-drinkers-wont-get-breakas-colombia-supply-drops-2/>.
Rudarakanchana, Nat. Coffee Beans: A Market to Watch in 2014. 23 October 2013. 26 February 2014.
<http://www.ibtimes.com/coffee-beans-market-watch-2014-1436836>.
Tucker, Irvin B. Economics for Today. 7th. Joe Sabatino, 2011.
Yang, Jia Lynn. Worst drought in decades hits Brazil coffee belt as buyers brace for prise rise. 25 February
2014. Washington Post. 26 February 2014.
<http://www.theguardian.com/world/2014/feb/25/brazil-drought-threatens-coffee-crops>.