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Analysis On The Importance Of Coffee Production On Colombian Economy

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This essay as a major objective seeks to illustrate the importance of coffee production for the Colombian economy. It seeks to evaluate its effect from different angles applying a variety of economic concepts. To understand its importance, this essay will start observing its impact on Colombian GDP. More exactly, the causation of coffee prices, production and GDP. It analyses how these factors benefit the economy. More importantly, how the government influence these factors to take place. With true-based data of employment, exports value and opportunity cost, this essay ensures the reader, the veracity of each paragraph. To conclude, the essay summarizes the data analyzed to state, how important is coffee on the Colombian economy.

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Importance of coffee production in Colombia

Colombian coffee production started in 1860’s and since then, more than 500,000 coffee plantation or Fincas exist in this country, 95% being 5 or less hectares in size. They are for instance, family owned, according to the World Bank 2017. Coffee growing is an essential force that constructs social sustainability and peace. It generates more than 850,000 direct jobs and throughout the value chain, more than 1.6 million indirect Jobs. In other words, coffee growing generates 3.5 times more employment than crops of banana, potatoes and rice put together. Those are important factors that boost Colombian economy and reduce poverty.

Relationship between coffee prices, production and Colombian GDP

Coffee prices seem to be correlated with the efficiency of management of the farms (production). It also appears to have a direct relationship with the nation’s GDP. As coffee prices decrease, and to minimize the cost of production, so does the investment in fertilizers and pesticides, which make the crops vulnerable to CLR.

CLR (coffee leaf rust) is a fungus disease which kills coffee plantation. In Colombian history, there has been two occasions when CLR has spread out. It has happened at the same time as when coffee prices declined. Which means, that when prices went down, and to create profit maximization, farmers invested less money on pesticides, which led to a CLR infestation. It caused a negative impact on the level of coffee production. At this point, farmers income is lower, and according to Economics for today 5th edition by Layton, income is a powerful driving force of a nation’s GDP. Clear example is the world bank statistics, which demonstrate that 10% increase in coffee production is causation of a 3.4% growth of Colombia’s GDP in 2015. This data represents the value of coffee exports as percentage of GDP. The previous graph also shows that, Colombian economy depends less of the crop production each year due to its increasing economic diversification.

On a deeper insight, statistics show that a 10% increase on coffee production involves 2.4 points decrease on school enrolment out of 60 points. The theory explains that as labor work increases in the Finca, the kids would stay at home working rather than attending school. However, this assumption could be result of association rather than causation and, its effect is worth-study further.

Colombian coffee opportunity cost

Understanding how coffee growing is important for Colombian economy involves analyzing the cost of disappearance of this sector. Coffee agriculture supports more than 565,000 families and, the nation would have to pay more than 800 billion pesos a year to replace this product. Not to mention, to link this families with (Red Unidos program) which would exceed 2 trillion pesos.

Furthermore, incentivizing alternative projects for these families (Job opportunities) would cost the nation another 2 trillion pesos each year. Clear example of it is the (productive partnership). A government program which supported 10,700 families at the cost of 39.4 billion pesos per year, according to the Federacion Nacional de Cafeteros (FNC), 2015. All of it not counting the commercialization of new emerging products.

Disappearance of coffee growing for instance, would promote the production of illicit products. High altitude land and rich volcanic soil are both suitable environment for the growth of coffee and Coca plants. As a product substitution for income generation farmers could cultivate this illegal plant. In addition, this outbreak would increase unemployment, causing crime rates to rise. Migration is another important factor at stake. Hypothetically, families would start migrating to cities, promoting social unsustainability and poverty. Government would have to allocate 648 billion pesos each year for humanitarian care, based on the reparation of victims, event occurred on 2012. More deeply, coffee growing appearance would dismantle the heart of Colombian culture and national identity.

Government intervention on Colombian coffee production

Colombian government knows the opportunity cost of this product, which is why Colombian congress provide subsidies and resources when, for example, coffee prices are down. To start, president of Colombia, Juan Manuel Santos (2012), announced the investment of US $17 million to support producers to reduce CLR outbreaks in the future. Since then, no CLR outbreak has infested the crops. This investment represented an optimization on coffee production PPF. It delivered technologic advancement to protect the crops and increase production. To protect the 180,000 coffee farmers affected by the CLR on 2008-2011, around US $32 million were executed through the Federation FNC as a support of income loss. Second, Colombian government seeks to enhance Coffee production PPF by investing and promoting programs. They project to improve labor by incentivizing young men and women to the country side with, opportunities of coffee productive cultivation. The formalization of the possession of the land is another promotion. It involves the access to credit and better security in all senses for coffee farmers. This credit will specially attach itself to improve the channels of liquidity needed to increase their production. Furthermore, Colombian grower’s federation FNC, signed an agreement for US $12 million to scientific research. This program is another seeker of PPF optimization through investment in technological development.

Government intervention on Colombian coffee prices

As far as June 2018, coffee prices internationally were US $1.15 per Lb. According to Colombia’s coffee federation CEO, this is an “embarrassment”.

The CNF has asked for government intervention this year several times. They aim an strengthening in the peso currency, which would improve export income. In addition, they claim to sell to at least a price of US $1.30 Per Lb at an exchange rate of 3,000 pesos per dollar. According to CNB journalists, Velez (CEO in 2018) told the media that these “embarrassing prices” are just a break even for coffee farmers. As far as June 2018, dollar trade was 2,932.1 pesos. In accordance with Economics for Today, there are factors that create fluctuations on the price of a product. In this case, a surplus of quantity supplied has exerted downward pressure on the price of coffee beans. To corroborate, report writers of CNB, Luis Jaime Acosta and Marcy Nicholson, explain that, expectations of a surplus in supply; by top grower Brazil, has pressured to put the prices down of the crop in 2018.

Discussion, pros and cons on intervention of price discovery by the government

As the evidence shows, Colombian growers have no power over the price of coffee beans. As a solution, Colombian government should continue to intervene in the price discovery of coffee in Colombia. The government not only provides resources to technological development or protection when outbreaks occur; but also, it should intervene on the protection of coffee prices. They should help to surpass, with political power, the barriers that stop coffee farmers from creating higher incomes.

Future objectives of the Colombian federation of coffee growers (FNC)

Representants of coffee farmers understand the struggle of Colombian government to interfere in the prices of this product. However, according to “The Colombian coffee insider magazine” The CEO of the FNC said that they are seeking to improve this situation by augmenting productivity levels. The project intends to produce 21 bags of coffee per hectare. In this way, they will decrease the AFC (average fixed costs) and keep up their market share. Coffee consumption increases on about 2 million bags every year. By increasing production from 17 to 21 bags per hectare, they will maintain global share for the next 4 years approximately.

Conclusion

Coffee production is highly important for the Colombian economy. Each aspect influences the effect of the other. Among the most crucial is the possession of the market. It is owned by more than 560,000 families. For instance, it generates 850,000 direct jobs and more than 2 million indirect jobs. Income and employment are key contributors of a GDP. Which means that, it is directly related with Colombian GDP. As a result, Colombian government intervene on the optimization of coffee production. Still, intervention on the price of this product, needs to be executed by the government. Opportunity cost exhibits the price the government would have to pay to replace this product. For instance, and regardless there is no relevance of the relationship between coffee production and secondary enrolment; It is relevant that, Coffee production downsizes unemployment, fights poverty and promotes sustainability. Which is why, Coffee farming is a vital force of the Colombian economy.

03 December 2019

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