The Market for Coffee: An Analysis of the Effects of Sustainability Labels on Consumers' Choice and U.S. Import Demand

Demand for specialty coffee worldwide is increasing, yet producers primarily located in developing countries struggle to cover their production costs and sustain their livelihood. Coffee producers are globally seeking higher profits by adapting their conventional production practices to be more socially and environmentally responsible. This dissertation aims to analyze the U.S. import demand for coffee and investigate consumer preferences and willingness to pay for coffee labels representing sustainability efforts. Chapter one introduces the coffee industry and the three chapters of this research. In the second chapter, I analyze the influence of consumers' values and the warm glow effect of giving on their willingness to pay for sustainable coffee using a non-hypothetical auction mechanism. I use an information treatment to test the effect of information on consumers' willingness to pay. Providing information increases the premium consumers are willing to pay for sustainable coffee. Regarding values, consumers that like coffee and experience the warm glow of giving are willing to pay a premium for coffee with a sustainability label. Using a hypothetical online choice experiment, in the third chapter, I investigate coffee consumers' preferences and willingness to pay for Fair Trade, Direct Trade, Rainforest Alliance and USDA Organic coffee. I find that consumers value sustainability labels that aim to solve social issues more than those whose primary goal is to solve environmental problems. I find that when two labels are together on a coffee bag, there is no effect on consumers’ utility. However, there is a positive effect on consumers' willingness to pay for coffee labeled simultaneously for Fair Trade and Organic, and simultaneously for Direct Trade and Organic. In the fourth chapter, I estimate coffee price elasticities between major coffee exporters to the U.S. and calculate pass-through import cost using a system-wide differential demand system. I compare imports of arabica and robusta green coffee and estimate the degree to which they complement each other or substitute one another. I find that arabica and robusta from Brazil, Colombia, and Mexico are substitutes but some exceptions show a complementary relationship. The inclusion of the exchange rate into the demand system has a significant effect on U.S. coffee demand. I find an incomplete pass-through cost of the exchange rate to U.S. import prices. Chapter six concludes by summarizing the results of this dissertation and discussing the future challenges for the coffee industry.