Price Determination in Coffee Market: The Impact of Supply and Demand Shifts

Abstract

Coffee market prices have been unstable over time. Determining the relative impact of supply and demand shift on price is a subject of discussion in this thesis. I use an index approach that was first introduced by Marsh (2003) to estimate the annual shifts in demand and supply for the periods from 2005 to 2017. This approach gives estimates to change in demand and supply of a given commodity which is due to other factors apart from the commodity’s own price. The results show that both demand and supply for coffee beans shifts considerably between periods, with the global average annual supply shift as 0.99% and global average annual demand shift as 3.19%. Much of the shift in supply fluctuate frequently between positive and negative shifts implying an increase and decrease in supply respectively, where as much of the shifts in demand are mainly positive implying demand growth over the same period. Since both supply and demand are non-constant over time, they do explain the continuous fluctuations in coffee bean prices. However, since shift in supply experience more positive and negative shifts, it is determined that price fluctuations in coffee are more influenced by supply shift than demand shift.