Monopsony pricing in the Arabica coffee market: identifying externalized market power along global commodity chains

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This study investigates mild Arabica pricing conventions in reference to diverging price trends at different stages of the commodity chain, favoring firms at concentrated downstream nodes at the expense of fragmented farmers. We examine the Coffee “C” futures contract for mild Arabica coffee and the International Coffee Organization (ICO) type-specific price indicators for potential distortions from their assumed market-clearing function. Regression analysis reveals that “C” futures contract price movements are more associated with non-tenderable coffee grades than with the underlying commodity itself. Speculative trading is also associated with further distortion from physical fundamentals. Grade-specific indicator prices were also examined using regression and a modified Lancaster attribute model to understand their connection with their respective commodities. Evidence suggests that these do not account for differences in respective fundamentals, rather reinforce the dominance of non-mild Arabica coffee in pricing, suppressing mild Arabica prices. These findings suggest a process of externalized and generalized application of market power vis-à-vis pricing institutions based on a tacit consensus among concentrated buyer firms with common interests, which we acknowledge as externalized monopsony power, and results in the observed pattern of global South-North flow of monopoly rents.

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