Price Analysis Under Production Differentiation in Green Coffee Markets

To better understand the world green coffee market especially from the perspective of the coffee producing countries, I study three topics to overview and identify a puzzle: why growing differentiation of the coffee industry in final product markets has not been reflected in a similar pattern of differentiation to coffee farmers. My first essay is a descriptive overview of the world coffee market, based on the framework and definition of competitiveness to understand both the demand and supply side of the coffee market. This paper then focuses on product differentiation as the source of competitiveness in the industry. Coffee as a physically differentiated crop and its nonphysical differentiation process are the two key sections of the overview, which provides a comprehensive background for the second and the third essays. The second essay applies an Error Correction Model to identify the price links between the grower price and the world price for Colombian Milds and Vietnamese Robusta, focusing on both the long-run relationships and short-run adjustments. The long-run relationships between the world price and grower price are statistically significant for both Colombian Milds and Vietnamese Robusta. The short-run price adjustments toward equilibrium are asymmetric for both types. The degree of market integration for Colombian Milds is slightly higher than for Robusta. The results have policy implications for the two quality-differentiated green coffee beans. Based on the results from the second essay, the producer price and the world price are adjusted asymmetrically and the causality is unidirectional from the world price to the producer price. In the third paper, market power may significantly affect the price relationship between upstream and downstream prices, and that is a possible explanation for the asymmetric price adjustment. These results have important implications for policy-makers and producers. Better organization of coffee producers can increase their bargaining power with the buyers in the market, which may result in higher prices at the farm level