South-Western College Publishing - Economics  
Now, Finally, Another Cup of Coffee is Not Just Another Cup of Coffee
Topic Monopolistic Competition
Key Words Cup of Excellence, Brazil, Fair Trade, price, coffee, commodity, specialty.
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News Story A competition that was created in 1999 has grown to become a way out of poverty for some farmers in developing countries. Known as the Cup of Excellence, this competition encourages farmers to engage in investment designed to stimulate quality of the bean.

Over the last fifteen years, the coffee market has seen the elimination of trade barriers, a huge jump in production, especially among the developing countries, and a tendency by some to assume that coffee is coffee, regardless of who produces it or where it is produced. Enter the competition, which has taught people that one cup of coffee is not necessarily the same as another. Beans are beginning to be identified by country, region, mountain, or even farmer, depending on the location.

As a result, the competition has helped to create a split coffee market. The market has become split between specialty coffee, where farmers look toward quality as the defining point, and commodity coffee, in which farmers look to produce as much as possible for as cheaply as possible. Specialty coffee farmers then can sell to upscale roasters, such as Starbucks and other coffee retailers. Commodity coffee farmers sell to whoever offers them the market price.

In some developing nations, though, coffee farmers are too poor to undertake the initial investment to sell in the specialty coffee market. That is where the Fair Trade movement, micro credit opportunities, and other methods can be used to give farmers the start they need to move into this potentially lucrative side of the market.

The result? Farmers are learning that investments in technology, sustainable production techniques and the like can become extremely profitable. Last year's winner of the Cup sold his coffee crop for about US$40,000 - 10 times the price of the regular commodity coffee. Not bad for a poor coffee farmer in a developing country.

Discussion Questions:
1. Suppose we were to completely separate the coffee market into a specialty coffee market and a commodity coffee market. What kind of market structure do you think would govern each, based on the information in the article?
2. Does someone selling beans in the commodity coffee market have the same incentive to engage in sustainable farming methods as a farmer in the specialty market? Why or why not?
3. Use a graph of supply and demand in the market for coffee to illustrate what happened over the last fifteen years prior to the quality competition. Why did price fall?
Multiple Choice/True False Questions:
1. As a result of this split coffee market elasticity of demand for specialty coffee has ------- , while elasticity of demand for commodity coffee has -------- .

  1. Increased; increased.
  2. Increased; decreased.
  3. Decreased; increased.
  4. Decreased; decreased.
2. True/False. A commodity coffee farmer has just as much incentive to engage in sustainable farming as a specialty coffee farmer.

3. True/False. As trade barriers fell in the market for coffee, the price of a bag of coffee beans fell as well.

Source "Excellence in a Cup." The Economist. January 25, 2007.
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