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U309181

U309181

 

 

 

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U309181

Table of contents

Contents                                                                                                                            Pages

Introduction. 3

Analysis of the environment (PESTEL Analysis) 5

Political factors. 5

Economic factors. 6

Social factors. 6

Technological factors. 7

Environmental factors. 7

Legal factors. 8

Analysis of the competitive environment: Porter’s Five Forces Analysis. 8

Threat of substitute products or services. 8

Threat of established rivals. 9

Threat of new entrants. 9

Bargaining power of suppliers. 10

Bargaining power of the buyer/customer 10

Conclusion and recommendations. 10

Reference List 13

 

 

 

 

 

Introduction

Coffee is the second most sought after commodity after oil and ranks higher that gold, corn and sugar, which makes the coffee industry one of the most important industries worldwide. Coffee is consumed as a beverage and is an important source of caffeine to the global population who consume in excess of 400 billion cups every day (Jha et al. 2014). Due to its high and increasing demand worldwide, coffee is an agricultural product of high economic importance to the producers, processors and sellers considering that its global worth exceeds 100 billion dollars. Indeed, coffee is cultivated by 70 countries spread out along the tropics and equatorial belt globally (Rice 2015). Interestingly, coffee is produced predominantly by developing and emerging economies found in the Americas, Africa, Southeast Asia, and India, who account for 90 % of the coffee while its consumption is concentrated in the developed economies of Northern America and Europe. As such, coffee is of great economic importance to developing nations because it is a significant source of revenue for the seventy coffee-producing countries considering that over 100 million people in these countries depend on coffee as their primary source of income and economic livelihood. Notably, the Americans grow about 67 % of the world’s coffee and are therefore responsible for the production of the bulk of the coffee available in the global market. However, according to the International Coffee Organization (ICO), the top five coffee producing countries in the world are Brazil, Vietnam, Columbia, Indonesia and Ethiopia (Jha et al. 2014).

Most of the coffee produced in the world is consumed as a hot or cold beverage, when black, or mixed with milk or alcoholic drinks, although it has utility in the pharmaceutical and cosmetic industries, and its byproducts have been used as flour for exfoliation of the skin, paint, or as manure among various other applications (Ribeiro et al. 2013). Arabica and Robusta are the two commercial varieties of coffee found in the global market with 70 % of the coffee grown in the world being Arabica while the rest is Robusta. Generally, Arabica coffee is considered to have a richer flavor and therefore attracts higher prices and often used to blending while Robusta coffee is cheaper and able to withstand harsher environmental conditions (Jha et al. 2014).

Coffee has a longstanding history in Brazil since its introduction into the country in the early 18th century at a time when sugar plantations were the main economic agricultural activity of the country. Coffee exports in Brazil overtook those of sugarcane after a decline of the demand for sugar in the international market in early 1820s and topped the Brazilian export commodities in the 19th century. Brazil became the largest exporter of coffee worldwide in 1840, which greatly enriched the country and created a new society comprising of wealthy plantation owners called coffee barons. These coffee barons played a major historical role in the affairs of Brazil by detaining the country’s economic and political power including becoming instrumental to the proclamation of the Brazilian republic and defining the direction of the country by influencing the country’s presidential elections thereafter as well (Sphar 2016).  Nonetheless, Brazil enjoyed prosperity during the coffee era as industrialization, financial institutions and infrastructure grew to influence the culture, economy and society of the country.  Brazil controls over 30 % of the global coffee production providing the country with competitive advantage over other producers, particularly in the control of global prices. Brazil is also one of the largest consumers of coffee and the consumption in the country is increasing, with black coffee being the most preferred beverage despite the development of other versions of the coffee beverage. Indeed, Brazil produced 3.3 billion kilograms of coffee in 2016, which was over twice the amount produced by Vietnam, the second largest coffee producer as indicated in figure 2.

Figure 2. Coffee exports of Columbia, Vietnam and Brazil.

Source: ICO (2017)

In addition, analysts have projected that the coffee market in Brazil would grow at a compound annual growth rate (CAGR) of 1.19% by and volume 4.92% by revenue during the period between 2015-2019 (USDA 2017).

The ensuing report details the Brazilian coffee industry as informed by the various analyses undertaken related to the micro and macro environment surrounding the industry, and the competitiveness in the industry. Specifically, a PESTEL analysis is used to gain insights about the macro-environment or the external environment while the Porte’s fiver forces model is employed to analyze the competitiveness and attractiveness of the Brazilian coffee industry.

Analysis of the environment (PESTEL Analysis)

Political factors

The Brazilian coffee industry has been related closely with the country’s politics since its inception in the 1700s to the extent that the industry has influenced and continues to influence the political environment on the country. Currently, Brazil is experiencing political turmoil occasioned by corruption in political circles, accusations of conspiracy and presidential impeachment battles, which are creating an unstable and unpredictable political environment in the country (Terazono 2015). The situation has influenced the exchange rate of the local currency and in turn, the revenues accrued from the export of coffee. The political unpredictability has occasioned currency fluctuation and also coffee price fluctuations.

Economic factors

Coffee is often traded as futures contracts in international exchanges in New York and London in which the coffee growing farmers have little influence. Being a highly traded commodity, the price of coffee escalates tremendously as indicated in figure 2; with its proceeds not trickling equitably back to the farmer in Brazil because the country only receives about 7 % of the global price.

Figure 2. Depression and recovery of coffee prices between 2014 and 2016

Source: ICO (2017)

This has an effect of stifling the financial returns of the farmers in light of the favorable global process. As such, small-scale coffee farmers in Brazil, who form the bulk of coffee producers in the country, are susceptible to global market forces, whose volatility often subjects these farmers to depressed prices and poverty considering that the farmers may not have the opportunities or the resources to diversify away from coffee farming.

Social factors

While Brazilians consume a substantial amount of the coffee grown in the country, increasing industrialization of the country is influencing the coffee drinking habits of the citizens with consumption of coffee in the country expected to increase going forward (Sousa & da Costa 2015). Already, the country was experiencing an upsurge of the demand of coffee in the local market, which could potentially increase the global prices of coffee as international supply dwindles (Josephs 2014).

Technological factors

Technology has had a longstanding influence in the production of coffee in Brazil since its introduction to the country, and continues to benefit from technological advancements to date in the spheres of farming and brewing innovations. Brazilian coffee started responding to technological innovations that were aimed at increasing production back in the 1970, when innovations in production systems led to improved coffee varieties that could withstand disease and pest infestations, and that could thrive under sunlight. However, these initial developments saw the advent of technified plants that were high yielding although they required application of fertilizers and chemical pesticides to sustain the yields (Rice 2015). The demand for technological developments to sustain high yields in light of increased pests and diseases, increasing water deficiency are driving research and development into varieties of coffee that are more resilient to these increasingly adverse conditions (Myers 2015).

 

 

Environmental factors

Coffee farming is a land intensive activity that threatens the forest cover of Brazil, and can potentially reduce the country’s biodiversity due to deforestation if farming expansion were to continue unabated (Jha et al. 2014). In addition, coffee production in Brazil is beginning to be influenced by the vagaries of climate change and global warming because of diminishing rainfall and desiccation of the coffee plants and beans, which is causing crop loses. The water pans used for irrigating the coffee plantations are holding less capacity of water and farmers are considering changing to other hardier and faster maturing crops that would guarantee steady revenue to the farmers (Garcia-Navaro 2016; Jha et al. 2014).

Legal factors

Although Brazil had a first-adopter advantage in certification of sustainable coffee production practices, the beneficiaries have been the large-scale plantations who have been able to benefit from the high prices presented under fair trade rules (Reinecke, Manning & Von Hagen 2012). However, the small-scale farmers, who form the bulk of coffee producers in Brazil, are incapacitated from benefiting from engaging in a direct relationship with coffee importers that promises higher coffee prices. The economic impact of the fair trade regime is that while Arabica coffee availed through their trade cooperatives benefited from a price of 1.26 dollars per pound, coffee sold outside the regulation regime avails only between 0.7 and 0.9 dollars per pound.

Analysis of the competitive environment: Porter’s Five Forces Analysis

Threat of substitute products or services

Soya is a crop that is widely grown in Brazil and is already being consumed as a beverage, and serves as an alternative to coffee. In addition, Brazil is a topical country and therefore has a variety of fruits grown in the country that are used to make fruit juices that have been an alternative to the coffee beverage. Indeed, pineapples, papaya, oranges, mangoes, guavas and many other tropical fruits are plentiful in Brazil, and freshly squeezed juices from these fruits have been popular in the country as alternatives to coffee. In fact, Brazil is a leading exporter of orange juice concentrates although the Brazilians prefer consuming fresh juices that have not been processed or adulterated. With the increasing health conscience of foods becoming a major trend within and outside the country, it is likely that existing coffee consumers could easily adopt the consumption of fruit juices and soya as the healthier beverage alternative. In addition, although availability of fruits in Brazil is enormous and fruit farming is undertaken in almost all regions of the country, fruit exportation has not been undertaken as a lucrative and profitable business. However, with the demand for fresh fruit and juices increasing in America and Europe, Brazil could take advantage of this demand from traditional coffee drinkers and venture into an export market that has the potential of brining in about 500 million worth of revenues into the country within the next decade (Shurtleff & Aoyagi 2012).

Threat of established rivals

Although Brazil has maintained a leadership position among the coffee producing countries of the world, it has faced major threats in coffee production occasioned by long draught spells, which have seen the production volumes dwindle. Meanwhile, countries such as Honduras, Ethiopia, Cameroon and Nicaragua have been enjoying different weather conditions and their production has risen alongside (McCrae 2016). Some of these countries are already big coffee producers globally, which makes the competition with Brazil very intense.

Threat of new entrants

The Brazilian government has imposed a 10 % duty on imported coffee, which protects the domestic market from imports from competitors. However, with the ongoing shortage of Robusta coffee in the country, Brazilian market is threatened by imports from other major coffee producers in the Latin and Central American region. In addition, the liberalization of the coffee market facilitates the entry of new producers (Russell, Mohan & Banerjee 2012)

Bargaining power of suppliers

The major growers of coffee dictate the availability and pricing of coffee in the global market. Brazil, being the largest producer of coffee in the world, contributes about 30 % of the coffee found in the international market. As such, Brazil, due to its significant production volumes, is able to dictate the global prices of coffee as a supplier, lending it a large bargaining power. For instance, the recent dry spell in Brazil, which has seen the production of coffee reduce in the country, has occasioned the recent upsurges in price that has been observed in the global market.

Bargaining power of the buyer/customer

The industrialized countries of the world are the major consumers of coffee and much of the coffee futures are traded in their markets. This enables them to set the global prices of as informed by the demand of coffee in their markets. For instance, the higher demand for Arabica coffee due to its superior taste and aroma makes it to be higher priced than Robusta coffee although it is more difficult to grow. In addition, the major bulk importers of green coffee are companies such as Nestle and Starbucks are able to deal with the coffee farmers directly and avoid the coffee exchange, which gives them the power to dictate the prices to the farmers and create demand to the varieties of coffee that they prefer. Moreover, buyers are increasingly demanding for coffee products that adhere to Rainforest Alliance certifiedUTZ certified and fair trade certification standards, which is causing producers to change their production methods to be able to access buyers (Jha et al. 2014) 

Conclusion and recommendations

It is recommended that the government of Brazil stabilize its political environment because of its influence on the economic, social and environmental factors in the country. Such stability would ensure that the Brazilian real stabilizes as well because the recent appreciation of the real has occasioned the reduction of coffee revenues to farmers as the currency was matched unfavorably to the dollar, which is the currency used in international trade. The role of the government extends to influencing the research and development initiatives undertaken by the coffee sector in the country and ensuring that small-scale farmers have access to these new technologies. To this end, it is recommended that there be investments in innovating new coffee plant varieties that can withstand warmer and drier climatic condition, and ways to extending the shelf life of coffee so that the country can control the global supply and in turn control the price of coffee on the international market. In addition, innovations in production processes and encouraging the production of specialty coffee varieties would help the country take advantage of the growing specialty coffee markets while helping small-scale farmers forge trading relationships with major specialty coffee processors.

In conclusion, the Brazilian coffee industry remains the largest and most influential supplier of coffee in the world due to its competitive and comparative advantage. The advantage of Brazil has emanated from being a first adopter of the coffee production industry and its ability to produce large quantities of both Arabia and Robusta varieties occasioned by the development of coffee plant varieties that can thrive in different climatic conditions. In addition, the sheer vastness of Brazil and its general conduciveness for growing different varieties of coffee has enabled to country to supply large amounts of coffee to the global market. However, the intense competition that Brazil faces from other coffee producers necessitates continuous improvement of the Brazilian coffee industry as informed by the macro-environment and micro-environment, and the internal and external factors of the coffee industry. Indeed, information and insights emanating from the PESTEL and the Porter’s five forces analysis of competitiveness would be informative in facilitating the Brazilian government evaluate the strengths and weaknesses, and the opportunities and threats of the local and international coffee market that would enable the government to leverage the industry’s strengths and opportunities. Therefore, the government has a major role to play in ensuring that its domestic coffee industry, which is supported by small and large sale coffee farmers thrive and maintain the countries market leadership in the regional and global coffee market.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reference List

Garcia-Navaro, L  2016, ‘Coffee and climate change: In Brazil, a disaster is brewing’, NPR Food. Available from: https://www.npr.org/sections/thesalt/2016/10/12/497578413/coffee-and-climate-change-in-brazil-a-disaster-is-brewing [15 November 2017].

ICO 2017, Coffee market report – October 2017. International Coffee Organization. Available from: http://www.ico.org/ [15 November 2017].

Jha, S, Bacon, CM, Philpott, SM, Ernesto Mendez, V, Läderach, P & Rice, RA 2014, ‘Shade coffee: update on a disappearing refuge for biodiversity’, BioScience, vol. 64, no. 5, pp.416-428.

Josephs, L 2014, ‘Coffee producers sell more at home, driving up the price of a cup’, The Wall Street Journal. Available from: https://www.wsj.com/articles/coffee-producers-sell-more-at-home-driving-up-the-price-of-a-cup-1407172749 [15 November 2017].

McCrae, RM 2016, State of the art review on climate change and coffee. Revista Vinculando.

Myers 1 2015, ‘The dark side of coffee: an unequal social and environmental exchange’, The Conversation. Available from: https://theconversation.com/the-dark-side-of-coffee-an-unequal-social-and-environmental-exchange-46838 [15 November 2017].

Reinecke, J, Manning, S & Von Hagen, O 2012, ‘The emergence of a standards market: Multiplicity of sustainability standards in the global coffee industry’, Organization Studies, vol. 33, no. 5-6, pp.791-814.

Ribeiro, H, Marto, J, Raposo, S, Agapito, M, Isaac, V, Chiari, BG, Lisboa, PF, Paiva, A, Barreiros, S & Simões, P 2013, ‘From coffee industry waste materials to skin‐friendly products with improved skin fat levels’, European Journal of Lipid Science and Technology, vol. 115, no. 3, pp.330-336.

Rice, RA 2015, ‘In the Pursuit of Sustainability: Lessons from the Coffee Sector’, International Journal of Environmental Protection & Policy, vol. 3, no. 1, pp.14-19.

Russell, B, Mohan, S & Banerjee, A 2012, ‘Coffee market liberalization and the implications for producers in Brazil, Guatemala and India’, The World Bank Economic Review, vol. 26, no. 3, pp.514-538.

Shurtleff, W & Aoyagi, A 2012, History of Roasted Whole Soy Flour (Kinako), Soy Coffee, Coffee Alternatives, Problems with Coffee, and Soy Chocolate (1540-2012). Soyinfo Center.

Sousa, AG & da Costa, THM 2015, ‘Usual coffee intake in Brazil: results from the National Dietary Survey 2008–9’, British Journal of Nutrition, vol. 113, no. 10, pp.1615-1620.

Sphar, JA 2016, Politics, state power, & policies: Exploring the contemporary nature of economic governance through the case of Brazil. Clark University.

Terazono, E 2015, ‘Brazil’s political turmoil hangs over agricultural markets’, Financial Times. Available from: https://www.ft.com/content/b0b67b34-0d17-11e6-b41f-0beb7e589515 [15 November 2017].

USDA 2017, ‘Coffee: World markets and trade’, United States Department of Agriculture. Available from: https://apps.fas.usda.gov/psdonline/circulars/coffee.pdf. [15 November 2017].

 

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