Coffee is the world's largest agricultural commodity, and is also one of the world's most volatile. Large global coffee price fluctuations mean coffee has seen many periods of rapidly increasing prices. But new research shows that when global coffee prices rise, farmers do not see the same rise in the price they receive. In their new study for Economic Development and Cultural Change, Marcel Fafchamps and Ruth Vargas Hill look to the long-time coffee producing nation of Uganda to attempt to answer this riddle. The country's economy is fully liberalized, and the large coffee market makes up nearly the entire bulk of its agricultural exports. "The story we tell," say Fafchamps and Hill, "is unexpected. Normally as economists we believe that competition is good, yet here it does not achieve the desired result." To their surprise, they found that the influx of seasonal buyers--the so-called "ddebe boys"--that attends higher prices actually means price increases are not fully passed on to the growers
Fafchamps and Hill find that increases in the international coffee price are reflected relatively rapidly in domestic prices paid by exporters and large traders. However, increases in the international price are not fully reflected in the price paid to farmers at the farm gate. Fafchamps and Hill examine why this is the case. An analysis of marketing costs such as transport, handling, storage, and processing found that those costs do not increase with price.
The authors instead find that rising prices bring additional small, occasional traders into the market. These traders, called "ddebe boys"after the twenty kilogram "ddebe" tins they use to buy the coffee, tour the countryside in search of coffee taking advantage of farmer's ignorance about price movements to insert themselves between farmers and larger permanent traders and mills. Whether a system of transmitting current market data to farmers would solve the problem is unclear at this point, but deserves further investigation. Fafchamps and Hill have shown that without it, even competitive agricultural markets do not ensure global price increases are not immediately passed on to farmers.
Marcel Fafchamps is Professor of Development Economics in the Economics Department at Oxford University. He is also a Professorial Fellow at Mansfield College and serves as Deputy Director of the Centre for the Study of African Economies.
Ruth Vargas Hill is a Postdoctoral Research Fellow at the International Food Policy Research Institute (www.ifpri.org). She has worked for the Centre for the Study of African Economies at the University of Oxford, and for the Rural Development and Research Departments at the World Bank.