Free Market Killed the Coffee Industry

Steve GSeptember 12th, 2007
By: Steve G

During the 1980’s, the price of green coffee beans reached its apex, when each pound sold for at least $7-8. In today’s market, green coffee beans are sold for $1 to $2 per pound at best. A depreciation of over 75% is shocking. When considering a commodity like coffee, which is the second highest traded commodity in the world, one has to be amazed at how prices have dropped so low. What happened in the world that caused such a dramatic upheaval in coffee prices?

thumb-brazil1.jpg

Brazil first major producer of coffee.

The short answer is unrestricted free market ideology. During the beginning of the 20th Century, Brazil stood alone in the coffee industry. Providing over 75% of the world coffee production, it controlled the overall coffee prices in the world. Although it had a dramatic influence over the markets, Brazil was still prey to the whims of overseas speculators (in the New York and London Stock Exchange) who dictated the prices that Brazil would be able to negotiate with.

Frustrated by its lack of economic power, Brazil instituted programs to regulate and maintain the prices of coffee. The agency in charge was known as the Instituto Brasileno do Café (IBC). Originally, independent coffee workers controlled the IBC, but eventually the Brazilian government bought it out. Through this agency, Brazil could regulate and maintain the prices of coffee by utilizing the most basic concepts of economy: supply and demand.

The objective of the IBC was to simply protect the pivotal stepping stones for Brazil’s economy, coffee. The method to achieve this was uncomplicated. The Brazilian government would purchase a portion of the green coffee bean supply (unbeknown to the rest of the world) and withhold this portion to limit supply, thereby increasing demand. By stockpiling, and in some cases purposely destroying, shipments, Brazil had a mechanism to artificially maintain good prices. For a while, this strategy worked well for Brazil. Soon, however, other countries wanted a piece of the coffee action.

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The wealth of free markets is not always even.
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