ECONOMICS MAJOR ASSIGNMENT

PART A : ARTICLE ANALYSIS

Brazilian drought hits coffee crops

From: Weekly Times Now
March 17, 2014 1:03PM

Hot: Drought is slashing the size of Brazils coffee crop. Source: News Limited

THE morning caffeine hit is about to get more pricey as drought in top producer Brazil
has sparked fears of a global shortfall of coffee this year, sending the price of beans
soaring.

Coffee prices hit their highest point in two years in New York, with Arabica beans due for
delivery in May fetching 203.75 cents per pound, more than double that of the 100.95 cents
per pound in November.

The worst drought to hit Brazil in decades has sparked fears that the crop in the worlds top
coffee producer could shrink for the second consecutive year for the first time since 1970.

Leandro Gomes Ribeiro Costa, head of coffee at farmer group Coopamig, said some regions
of Brazil have had only a tenth of their average rainfall so far this year during a crucial stage
in the beans development.

Coopamig, which is made up of 5800 farmers from the countrys main coffee producing
region Minas Gerais, expects to harvest up to 30 per cent less coffee this year than in 2013.

Ive never seen such a drought in my life: in some places we have found coffee wilted on the
tree, he said.
The price of robusta, the more bitter variety of bean used in instant coffee, has also surged
due to cold and drought in Vietnam. On Friday, London prices hit $2176 a tonne, up from
$2076 at the same time last week.

The International Coffee Organization (ICO) now forecasts a global production deficit of at
least 2 million 60 kilogram bags of coffee in 2014-15.

F.O. Licht analyst Stefan Uhlenbrock said the market has staged a complete turnaround since
November, when everybody was talking of supply overhang, with Brazil coming off a
record off-year crop, Columbia seeing a very strong recovery in its production and Vietnam
also heading for a bumper crop.

Now everybody is concerned about the supply outlook for Brazil, with a real threat of a
deficit in the coffee market, which has not been the case in the past four years, he told the
ICO recently.

The beginning of the year is a crucial period for the development of Brazils coffee beans,
and the market is easily spooked by fears of a poor crop.

Agronomist Marcelo Almeida said the lack of water in parts of Brazil has stunted the beans
development. This year it will likely take 600-700 litres of coffee cherries to produce a bag of
60 kilogrammes, after washing and drying, compared to 500 litres in a normal year.

It is fairly unprecedented this kind of drought at this particular period of time in terms of
cherry growth, said Kona Haque, who leads Macquaries agricultural commodities research.

F.O. Licht has already reduced its forecast for Brazils crop this year by 15 per cent to 48
million bags.

The real damage will only be seen when the harvest starts in May, Uhlenbrock said.

QUESTIONS

A1 Explain which of the non-price factors affecting demand and the non-price factors
affecting supply apply to this article. (5 marks)

A2 Draw a diagram to show one of the coffee markets as outlined in the article. Clearly
label the diagram to show which market you are referring to. [Hint there is more than
one market described in the article.] (2 marks)

A3 Discuss what is likely to happen in this market in the future. (3 marks)

Word limit : 300 words

PART B see next page

PART B : DATA ANALYSIS
Consider the following data about Australia from 1991 to 2013.

YEAR ECONOMIC INFLATION RATE UNEMPLOYMENT

GROWTH RATE
1991 1.2 0.6 10.4
1996 4.2 4.1 8.3
2001 1.8 2.9 6.5
2006 3.5 2.7 5.1
2011 3.0 3.3 5.5
2013 2.8 2.4 5.8

The data is in percentages(%) . It comes from the RBA (Reserve Bank OF Australia) website.
Search RBA Chart Pack (on the Website view Australian GDP Growth and Inflation (use
the CPI data) and Factors and Production (use unemployment rate) if you wish to see all
the information from 1993 onwards.

QUESTIONS

B1 In theory, explain what the link is between the rate of economic growth, the rate of
inflation and the rate of unemployment. (3marks)

B2 To what extent does the above data support the theory. (4 marks)

B3 With reference to the data explain where Australia currently is (early 2014) on the
business cycle. (3 marks)

Word limit 300 words