Supply Response in the Colombian Coffee Sector

by M. J. Bateman

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The coffee industry in Colombia, which accounts for 8 to 9 percent of national income and is the largest source of foreign exchange, is beset with a continuing production surplus that is of great policy concern to the government. This Memorandum formulates an econometric model of the supply of Colombian coffee to use in estimating how the coffee industry would respond to price incentives to lower production. Empirical results obtained from the model suggest that (1) changes in price do not affect the intensity of harvesting, (2) there are lags of five years between price changes and seven years between production changes, and (3) the elasticity of coffee supply with respect to price is about 0.5. These findings imply that a 20 percent reduction in producer prices would lead to a 10 percent reduction in coffee production, but only after seven years.

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