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Responding to the coffee crisis: What can we learn from price dynamics?

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  • Mehta, Aashish
  • Chavas, Jean-Paul

Abstract

We develop a semi-structural price vector autoregression to capture coffee price dynamics over various time horizons. The presence of the International Coffee Agreement is permitted to alter supply responses to price signals through yield and planting effects. In the short run, the ICA caused Brazilian farm prices to become disconnected from international prices. In the long run, the ICA promoted supply response by providing a stable environment in which producers could use current price information to predict future prices. In the intermediate run, it muted supply response by necessitating an institutional price wedge between wholesale and farm level prices. In net, the ICA created a price cycle that does not exist in non-ICA periods. Oxfam's proposal to burn 300 million pounds of coffee will provide temporary relief to farmers, but cannot be used repeatedly as a long term strategy. The low coffee prices experienced since the disintegration of the ICA may be due to the interaction of supply lags, a shift in the composition of coffee demand, and low price response due to price uncertainty. No evidence of asymmetric price transmission is found.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 85 (2008)
Issue (Month): 1-2 (February)
Pages: 282-311

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Handle: RePEc:eee:deveco:v:85:y:2008:i:1-2:p:282-311

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  1. Jesus Otero, 2001. "Coffee export booms and monetary disequilibrium: some evidence for Colombia," Applied Economics, Taylor & Francis Journals, vol. 33(2), pages 267-276.
  2. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
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  14. Mehta, Aashish & Chavas, Jean-Paul, 2008. "Responding to the coffee crisis: What can we learn from price dynamics?," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 282-311, February.
  15. Ben Shepherd, 2005. "Market Power in International Commodity Processing Chains: Preliminary Results from the Coffee Market," International Trade 0511013, EconWPA.
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  17. McMahon, Gary, 1989. "The income distribution effects of the Kenyan coffee marketing system," Journal of Development Economics, Elsevier, vol. 31(2), pages 297-326, October.
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Cited by:
  1. Subervie, Julie, 2011. "Producer price adjustment to commodity price shocks: An application of threshold cointegration," Economic Modelling, Elsevier, vol. 28(5), pages 2239-2246, September.
  2. Mehta, Aashish & Chavas, Jean-Paul, 2008. "Responding to the coffee crisis: What can we learn from price dynamics?," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 282-311, February.
  3. Michael S. Webb & Viv B Hall, 2009. "Application Of A Dynamic Panel Data Estimator To Cross-Country Coffee Demand: A Tale Of Two Eras," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 34(1), pages 1-17, June.
  4. Lee, Jun & Gomez, Miguel I., 2011. "Impacts of the End of the Coffee Export Quota System on International-to-Retail Price Transmission," Working Papers 126600, Cornell University, Department of Applied Economics and Management.

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