Responding to the Coffee Crisis: What We Can Learn from Price Dynamics

An econometric model of coffee price dynamics is specified and estimated to capture the evolution of coffee prices at the farm, wholesale and retail levels. It investigates the historical influence of the International Coffee Agreement (ICA) through its effects on yield and planting decisions. In the short run, the ICA caused Brazilian farm prices to become disconnected from international prices. The ICA helped coffee producers to better incorporate current world price information into planting decisions. This created a price cycle that did not exist in non-ICA periods. The low coffee prices experienced since the disintegration of the ICA are consistent with low supply response to price information. Asymmetric price transmission at the retail level helped roasters and retailers benefit from upstream price interventions. Our results urge caution when considering future coffee price interventions.