Coffee Bean Price Changes Pass Through to Grocery
Shelves
Ephraim
Leibtag
What effect do changes in commodity prices
have on wholesale and retail food prices? Economic
theory suggests that the extent to which cost changes
are passed through to consumers depends on the market
power of producers at each stage of production as
well as the value added to the food product by each
producer. Market power and degree of processing
vary by commodity. ERS analysis of coffee industry
data found that changes in coffee bean costs are
passed through to wholesale and retail coffee prices.
Coffee manufacturers, however, appear unable to
take advantage of the variation in coffee bean prices
to raise wholesale prices beyond the change in bean
costs.
Over the past 10 years, coffee
bean prices have varied between 3 and 20 cents per
ounce. Coffee bean prices fluctuate with supply,
driven by factors such as the weather in coffee-producing
countries and the entry of new producers into the
international market. Wholesale and retail food
prices are generally more stable than commodity
prices. Between 1997 and 2002, average prices charged
by coffee manufacturers dropped from 23 cents to
17 cents per ounce, while average retail coffee
prices dropped from 25 cents to 19 cents per ounce.
According to ERS analysis of data
on coffee prices and costs for the years 1997-2004,
on average, a 5-cent change in the cost of a pound
of green coffee beans yields a 1-cent per pound
change in wholesale and retail prices in the current
quarter. If a change in the cost of beans persists
for several quarters, it will be fully incorporated
into both wholesale and retail prices. The 5-cent
change in bean costs results in a 5-cent change
in coffee prices. In the long run, given the substantial
fixed costs and markups involved in coffee manufacturing
and retailing, a 10-percent change in commodity
prices translates into about a 3-percent change
in retail prices.
Some studies of cost pass-through
in other food industries have found that manufacturers
are often more quick to pass along price increases
in ingredient or other input costs than to pass
on lower input costs. ERS tested for this type of
asymmetry, and the analysis did not systematically
support the view that prices respond more quickly
to either price increases or decreases. Retail prices
respond similarly to both increases and decreases
in coffee bean prices.
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