If you’re like me, and every other average American, you’re happy to reach for your 1.96 cups of coffee each morning. You’re probably even happier that market prices for commodity coffee have been in sharp decline since 2015 and that, if you’re reading this, you’re living in the US where the average price of a cup of coffee is $2.70. Life is good for the caffeine addict and the general consumer alike—commodity prices are down. Theoretically, this means that abundant supply and stable demand have reconciled to make low prices and happy consumers.

As a zealous consumer of coffee, it is simple to examine the economy from my perspective as a consumer, my perspective where lower prices equate to a “better” economy. That perspective, however, is not only narrow-minded, but also ignorant. A full economic picture must examine each step of the supply chain, green coffee grower to distributor. Why? Because each player takes a cut of that $2.70 you pay at Starbucks each morning before your 8am lecture, morning meeting, or daily workout.

The free-market economy suggests that prices are determined by two factors—supply and demand.

These economic rules may seem fairly pedestrian, but may be visually represented by the above graph showing the steady decline in coffee prices in the late 90s and early 2000s. General consensus credits this decline in the commodity price of coffee to a new entrant in the coffee producer scene—Vietnam (“The Global Coffee Trade,” Stanford Graduate School of Business). In contrast, 2014 yielded abnormally high coffee prices due to a prolonged drought in Brazil which rendered inadequate supply to satiate the appetites of worldwide caffeine consumers. With coffee demand growing relatively uniformly worldwide, market price fluxes appear to be most strongly correlated with supply disruptions.

Supply volatility, however, is not the singular issue.

Here’s the reality—coffee farmers cannot live on their negotiated wages, are subject to the whims of climate (even more so in the past decade), and lack the infrastructure needed to process and roast their coffee beans, leaving them with little bargaining power. While processors like Nestle and P&G certainly take advantage of their roasting infrastructure and supply chain, there is a deeper truth about commodity pricing—consumers demand superior products at low prices. How can free markets support and satisfy all members of the economy, producer to consumer, while operating under these parameters?

An attempt at a short answer to a long question about coffee economics, supply, and demand is this: because consumers, coffee enthusiasts like you and me, want lower prices, companies will fight on our behalf to get those lower prices. That is their role as competitive businesses. When we think about supply and demand, we cannot merely consider how much we demand, but what exactly we are demanding. We—I—demand high quality, superior tasting, convenient, caffeine-rich coffee at a good price every time I step into the coffee shop.  Those are intangible properties I associate with my tangible good. If I’m not willing to pay for those intangibles at the coffee shop, a coffee grower in Brazil will be paying for them instead.

 

 

Getting people to purchase a good or service is the primary goal of any functioning company in the world. Corporations spend millions of dollars to understand what makes people tick, on research analysis, focus groups, in-depth marketing, and surveys, and what might influence them to purchase products. The level of confidence that households on a wide scale have in the economy and vis-a-vis their personal finances is extremely vital to any organization. Consumer sentiment helps companies better understand how much of a good to produce, as well as where best to sell. Whether it is an apparel company like Nike attempting to figure out how many shoes to produce this year while projecting its American sales figures, or a technology company such as Apple setting its targets for a new iPhone, companies highly desire the latest consumer attitudes on the economy.

For decades, consumer confidence has been tracked by the The Conference Board by Nielsen, a global provider of information and analytics on the buying and watching habits of people around the world. The consumer confidence index helps measure the health of the U.S. economy and is “based on consumers’ perceptions of current business and employment condition, and their expectations for business, employment, and income for the next six months.” The company surveys thousands of households every month, with five questions total — two related to present economic conditions and three regarding expectations. Each question can be answered positively, negatively, or neutrally. Since 1985, the index has been set to 100. Today, the index is at 95.3 for the month of August 2018, the lowest in a year.

To explain the low confidence, “consumers voiced the least favorable views on pricing for household durables in nearly ten years, since October 2008. Vehicle buying conditions were viewed less favorably in August than anytime in the last four years, with vehicle prices being judged less favorably than anytime since the close of 1984. Home buying conditions were viewed less favorably in early August than anytime in the past ten years, with home prices judged less favorably than anytime since 2006.” In other words, some of the most important things that people purchase, that they spend the largest amount of money on and use nearly every day for a long period of time – cars and homes – have highly unfavorable prices and supply. With cars, the decline in consumer favorability could be explained by a sudden shift in preference from sedans (long a staple of the American economy and road) to more costly, larger cars like SUVs and crossovers, without the adequate supply to satisfy rising demand; additionally, this year marks the highest average cost of a used car in 13 years.

All types of organizations – including investment firms, manufacturers, retailers, global financial management firms, as well as governments – see the sentiments of consumers as key to planning strategy and actions for the foreseeable future. According to Yahoo, because weak consumer confidence may indicate declining consumer spending, manufacturers will likely decrease their inventories in advance. Asset management firms or institutional investors might not invest in new projects and companies involved in the large-scale selling of goods, such as retailers like Walmart. Construction of homes will decline due to lower demand. Governments would need to ready for future tax revenues reduction and quickly figure out where its spending cuts will likely have the least significant impact.

The consumer confidence index is considered to be a leading economic indicator for the United States economy. Additionally, the Organization for Economic Cooperation and Development (OECD) considers consumer confidence a global leading economic indicator. Thus, by analyzing consumer confidence, investors, companies and governments alike will get a better sense of what they should do to reflect the latest attitudes about the economy.

Sources:

https://www.wsj.com/articles/america-has-fallen-out-of-love-with-the-sedan-1535169698

https://www.usatoday.com/story/money/cars/2018/06/15/used-cars-price-hit-record-high/700362002/

https://tradingeconomics.com/united-states/consumer-confidence

https://finance.yahoo.com/news/why-consumer-confidence-important-economic-170019558.html