Case Study 1 - Coffee

Question 1

Price Determination (1.2.6)

Using the case study, explain two supply and demand factors that caused coffee prices to rise in 2024

Answer 1

Supply decrease:

• Vietnam’s heatwave damaged robusta crops (“prolonged heatwave is damaging the crop,” Page 2).
• Heavy rainfall in Brazil reduced arabica yields (“heavy rainfall is feared to have damaged crops,” Page 2).

Demand increase:

• EU deforestation law (effective Dec 2024) prompted roasters to stockpile beans (“build reserves ahead of a new EU law,” Page 2).
• Speculation by hedge funds (“piled into bets on arabica prices rising,” Page 2).
• Diagram link: Supply curve shifts left, demand curve shifts right → Price rises to 3,948/tonne (robusta) and 2.34/lb (arabica) as stated in Page 1

Question 2

Consumer and Producer Surplus (1.2.8)

How did rising coffee prices impact Lavazza’s profitability, as per the case study?

Answer 2

• Producer surplus decline: Lavazza’s profits fell despite 13% revenue growth (“falling profitability on rising coffee prices… revenue last year to $3bn,” Page 1).
  
  • Rising variable costs (coffee bean prices) offset revenue gains, shrinking supernormal profit
• Consumer surplus: Reduced as prices soared (e.g., robusta futures hit a 16-year high, Page 1)

Question 3

Price Elasticity of Demand (1.2.3)

How does the case study suggest PED could influence future coffee prices?

Answer 3

• Elastic demand scenario: “If demand is price elastic and many consumers substitute coffee for tea… price may fall back” (Page 5).
  
  • Example: A significant drop in quantity demanded if substitutes like tea are widely adopted.
• Inelastic demand scenario: Short-term price hikes tolerated (e.g., habitual coffee drinkers), supporting high prices.

Question 4

Volatility of Commodity Prices (4.3.2)

According to the case study, what factors caused coffee price volatility, and how does this affect Vietnam/Brazil?

Answer 4

Causes:

1. Climate shocks: Vietnam’s heatwave, Brazil’s rain (Page 2).
2. Geopolitical risks: Red Sea shipping disruptions (“attacks by Houthi militants,” Page 2).
3. Speculation: Hedge funds betting on arabica (Page 2).

Impact on growth:

1. Vietnam/Brazil: Price volatility destabilizes export earnings, complicating investment in infrastructure/development.
2. Example: Rabobank notes “not much coffee left unsold in Vietnam” (Page 2), highlighting scarcity-driven instability.