1. Weather conditions
For example, an early frost can harm supply (causing a rise in prices). This is a problem for agricultural products like coffee and bananas – plants susceptible to frost.
Good weather can lead to an unexpectedly large increase in supply (which can lead to glut on the market and falling prices.
Also, disease and pests can affect the supply. If potatoes are affected by blight, it can cause potato prices to rise.
2. Inelastic demand
Demand for coffee and tea are relatively price inelastic . If the price of coffee falls, there will be a smaller percentage rise in demand. This is because there are few close substitutes to coffee/tea. Also, coffee/tea accounts for a small percentage of income and therefore a change in price doesn’t make much difference to overall demand.
With inelastic demand, a change in price causes relatively large change in the price.
3. Inelastic supply
In the short term, the supply of coffee and tea is inelastic. If price rises, farmers can’t respond by increasing supply overnight. You have to clear the ground and plant more coffee plants. It will take 3-5 years before new coffee plants start to produce beans. Therefore, there is a big delay in responding to changing prices.
4. Global market
In recent years, the number of countries producing coffee has increased. Traditional producers like Colombia have faced increased competition from new countries seeking to enter the market. More countries make it harder for coffee producers to influence prices through the use of minimum prices and
buffer stock schemes.
milycent answered the question on February 12, 2018 at 05:54
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