Coffee production in Central America will fall to historic lows in the next few years due to the spread of coffee rust fungus. Production in Costa Rica is expected to drop to its lowest level since 1976-1977. El Salvador's coffee exports for 2013-2014 fell 74%, which was also a historic low. The shortage of coffee from Central America will likely increase demand and prices for upscale coffee in other markets like the US. Factors like drought and disease that impact the supply of Central American coffee can shift the market equilibrium to lower quantities and higher prices. The efficient market theory developed by Eugene Fama suggests that markets quickly incorporate all available information, like the coffee supply issues, into asset prices like coffee prices.

1. Equilibration of Coffee
The Impact of Coffee Rust in Central America

2. Real World
Experience in a Free
Market
• According to Agrimoney.com, dated May
21, 2014, coffee growers in Central
America will continue to pay a heavy toll
for the Coffee Rust (Fungus) plight until
2015.
• Production will fall to a 38-year low. This
dire forecast makes no allowance for poor
weather stemming from the El Nino
weather pattern, which is linked to the
drought in many places in America.
• Costa Rica, production is not expected to
recover toward any relief, but dropping to
1.38m bags, lowest since 1976-1977.
• El Salvador’s coffee exports for 2013-
2014 will fall 74%, a historic low.

3. The Law of Demand
and the Determinants
of Demand
• When determinants (ceteris paribus) are
constant, the law of demand is held constant
in order to demonstrate the relationship
between demand price and quantity demand.
• When the determinants change, they change
the positioning of the demand curve.
• If the demand for upscale coffee from
Central America is increased due to
shortages of coffee beans, the price is going
to soar. A demand increase results in an
increase equilibrium quantity and an increase
in equilibrium price. Starbucks, for one, may
ride out the shortages because they have
extreme stores of high end coffee, other
upscale coffee shops with no surplus may not
escape the shortages that are coming.

4. The Law of Supply
and the Determinants
of Supply
• Supply determinants, which are resource
prices, production technology, other
prices, sellers’ expectations and number
of sellers, hold the law of supply constant
to demonstrate the relationship between
supply price and supply quantity.
• The determinants of adverse weather,
drought, and plant disease of the coffee
beans of Central America interrupt coffee
supplies to America especially.
• With the supply of Central American
coffee in shortage, resulting in a decrease
in equilibrium quantity and an increase in
equilibrium.

5. Efficient Markets
Theory
• Daily consumption of coffee is about 2.5
billion cups, according to author, Geoff
Riley. Millions of people across the world
depend on its production and sale.
• Eugene Fama (Chicago Booth, 2014) is well-known
for organizing the knowledge on
efficient markets and for making it precise.
His most important contribution to the theory
is his 1970 paper "Efficient Capital Markets:
A Review of Theory and Empirical Work,"
which paved the way to numerous academic
papers that sought to test the validity of the
efficient markets theory.
• The most well-known application of the
efficient markets theory can be found in
index funds, introduced in the early 1970s.
Index funds aim to track the performance of
the market by buying a representative cross-section
of all of the stocks in the entire
market or sector of the market, rather than
selecting a few.

6. Surplus and Shortage
• Surplus coffee indicates that the quantity
exceeds the demand for coffee at the price
in which the producers would desire to
sell—equilibrium level.
• If the current market were competitive,
excess supply is equal to the quantity
available in the market above the
equilibrium point of intersection between
supply and demand. This results in a shift
in market equilibrium towards lower price
points.
• Shortage is a term used to indicate that
the supply produced is below that of the
quantity being demanded by consumers.

7. References
CBS This Morning News Videos
http://www.cbsnews.com/videos/search?q=co
ffee%20rust
Agrimoney.com,
http://www.agrimoney.com/news/colombia-coffeee-
exports-to-hit-21-year-high--
7081.html
AP The Big Story
http://www.bigstory.ap.org/article/ap-newsbreak-
brewing-troubles-coffee-fungus
The University of Chicago Booth School of
Business
http://www.chicagobooth.edu/ideas/efficient
market.aspx