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Cost Past-Through in the U.S. Coffee Industry
Ephraim Leibtag, Alice Nakamura, Emi Nakamura, and
Dawit Zerom
Economic Research Report No. (ERR-38), March 2007
A perennial issue in economics is the effect of changes in
commodity prices on manufacturer and retail food prices. The
traditional explanation is that the extent to which cost increases
are “passed through” in a vertically organized production
process depends on the market power of producers at each stage
of production as well as the value added by each producer in
the production process. The U.S. coffee industry is an excellent
venue to study the issue of cost pass-through, since green coffee
beans are important components of the marginal costs in this
industry and are publicly traded commodities.
What Is the Issue?
This report uses unique data from the U.S. coffee industry
to estimate how changes in commodity costs affect retail coffee
prices. The results are relevant beyond the coffee industry,
providing insight into how changes in commodity costs pass through
to consumer and producer prices in other industries, too. “Cost
pass-through” is a central issue in international economics
since it determines how an economy responds to exchange rate
adjustments as well as to changes in the prices of other imported
commodities, such as oil.
What Did the Study Find?
Average manufacturer coffee prices dropped from 23 cents in
1997 to 17 cents per ounce in 2002. That drop corresponded with
a fall in the coffee-bean share of the manufacturer price from
48 percent to 24 percent, while labor and other material costs
rose from 15 percent to 32 percent.
The authors found that, on average, a 10-cent increase in green-coffee-bean
prices per pound yields a 2-cent increase in both manufacturer
and retail prices in the current quarter. If a cost change persists,
it will be incorporated into manufacturer and retail prices
approximately cent-for-cent with the commodity cost change.
In addition, cross-sectional differences in prices are substantially
larger at the retail than the wholesale level.
Since manufacturer prices adjust approximately one-for-one
with commodity prices (rather than proportionally), the ratio
between manufacturer prices and commodity costs rises as commodity
costs rise. The study does not find robust evidence that coffee
prices respond more to increases than to decreases in costs.
How Was the Study Conducted?
An unusually rich collection of data on the ground-coffee industry
was used to analyze the issue of cost pass-through. The data
set included market-level average retail prices collected by
Nielsen ScanTrack, market- level manufacturer prices collected
by Promodata, and panel data collected by Nielsen Homescan to
calculate the share of coffee by brand for each income level.
Regression analysis was used to estimate the impact of changes
in commodity prices on retail and manufacturer prices. These
regressions are carried out for both absolute levels and in
percentage terms. In addition, instrumental variable and fixed-effect
methods were used to look at the manufacturer-retail price relationship
and to analyze whether prices respond asymmetrically to cost
increases and decreases.
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