Coffee Commodity Chain
DEPARTMENT OF ECONOMICS
ISSN 1441-5429
DISCUSSION PAPER 06/08
COFFEE COMMODITY CHAIN
Tine S. Olsen and Brett Inder♦
ABSTRACT:
To explain the value added along the coffee commodity chain we propose and estimate a theoretical model of the coffee commodity chain. The theoretical model consists of four markets and five agents in the coffee commodity chain and predicts that prices in the coffee commodity chain move together but are also influenced by income, technology and production. A vector error correction model is used to test the theoretical predictions. In addition to the theoretical conclusions the empirical model confirms the beneficial role of the International
Coffee Agreement and the importance of the level of production in determining coffee prices.
Key words: global commodity chain, vector error correction model, coffee, value added JEL classifications: O01, F02, Q110, C320, F230, F14
♦
Monash University Department of Economics (Olsen), Monash University Department of Econometrics and
Business Statistics (Olsen and Inder). Corresponding author Tine S. Olsen, tsols1@student.monash.edu.
© 2008 Tine S. Olsen and Brett Inder
All rights reserved. No part of this paper may be reproduced in any form, or stored in a retrieval system, without the prior written permission of the author
COFFEE COMMODITY CHAIN
1. Introduction
Between being grown and picked by a farmer in a developing country and being consumed, most often in a developed country, coffee passes through many sets of hands. Inspired by the global commodity chain literature we here propose a theoretical and an empirical model of the coffee commodity chain.
We want to find out what determines the value added at each stage of the commodity chain. The question touches upon the distribution of income among agents and countries in the commodity chain, the prevailing market structure at each stage of the production process, trade, bargaining power and other factors
ISSN 1441-5429
DISCUSSION PAPER 06/08
COFFEE COMMODITY CHAIN
Tine S. Olsen and Brett Inder♦
ABSTRACT:
To explain the value added along the coffee commodity chain we propose and estimate a theoretical model of the coffee commodity chain. The theoretical model consists of four markets and five agents in the coffee commodity chain and predicts that prices in the coffee commodity chain move together but are also influenced by income, technology and production. A vector error correction model is used to test the theoretical predictions. In addition to the theoretical conclusions the empirical model confirms the beneficial role of the International
Coffee Agreement and the importance of the level of production in determining coffee prices.
Key words: global commodity chain, vector error correction model, coffee, value added JEL classifications: O01, F02, Q110, C320, F230, F14
♦
Monash University Department of Economics (Olsen), Monash University Department of Econometrics and
Business Statistics (Olsen and Inder). Corresponding author Tine S. Olsen, tsols1@student.monash.edu.
© 2008 Tine S. Olsen and Brett Inder
All rights reserved. No part of this paper may be reproduced in any form, or stored in a retrieval system, without the prior written permission of the author
COFFEE COMMODITY CHAIN
1. Introduction
Between being grown and picked by a farmer in a developing country and being consumed, most often in a developed country, coffee passes through many sets of hands. Inspired by the global commodity chain literature we here propose a theoretical and an empirical model of the coffee commodity chain.
We want to find out what determines the value added at each stage of the commodity chain. The question touches upon the distribution of income among agents and countries in the commodity chain, the prevailing market structure at each stage of the production process, trade, bargaining power and other factors
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