Coffee - The Supply Chain
A Nestlé case study

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Page 4: Price - Balancing Supply And Demand

Nestle 5 Image 2Coffee prices are determined day-to-day on the world commodity markets in London and New York and with so many intermediaries standing between the producer and the consumer, how can we ensure that coffee growers receive a fair reward for their labours? Is the answer - as some believe - for coffee manufacturers to cut out the intermediaries, buy their coffee direct from farmers and guarantee a minimum price? The price of coffee is determined by the relationship between the amount of coffee available to be sold (supply) and the amount which people want to buy (demand). If there is more coffee available than people want to buy at current prices, the price will fall. The market thus ultimately determines the price that the farmer receives.

There are circumstances in which farmers can receive more than the market price, for example:

  • if the quality of their coffee is high
  • if they undertake some or all of the processing stages which someone else would otherwise be paid to do
  • if they can sell direct to a manufacturer rather than to intermediaries.

Nestle 5 Image 4Farmers can also reduce their costs if they are able to share processing and transportation facilities with other farmers.Coffee farmers may sell their coffee in a number of ways

  • they can sell to the next link in the traditional supply chain - the collector or processor
  • they may sell to government agencies in countries where the coffee trade is government controlled, although this is becoming less common
  • or, they might sell direct to a manufacturer like nestlé.

However, farmers usually cannot choose the method by which they sell their coffee. Selling directly to manufacturers is attractive as farmers potentially receive above the market price. However, it would be impossible for all the world's coffee to be bought directly by manufacturers from individual farmers a few bags at a time. Although direct purchasing is attractive, it is only one of a number of methods of trading, all of which have their merits and none of which is necessarily fairer than the others. Ultimately it is the market price which determines how much farmers receive.

Nestlé | Coffee - The Supply Chain