Question

The Coffee Buzz: The Impact of Exchange Rates on Coffee

You are about to read a short case detailing a situation in the global coffee market. Together, Brazil and Vietnam produce more than two-thirds of the world’s coffee. However, while Brazil is enjoying the benefit of strong revenues from its exports, Vietnam, thanks to the impact of exchange rates, is not. You will be asked to answer questions linking your knowledge from the chapter to the situation detailed in the case.

Review the text material on foreign exchange rates, and then read the following short case. When you have finished reading the case, answer the questions that follow.

Brazil and Vietnam share a common attribute. Both countries offer the perfect conditions for growing coffee and together account for more than two-thirds of the world’s coffee production. While you might expect the two countries to share similar revenue streams and investment in coffee production, planting more crops of popular beans and reducing production of less popular types, in reality, there is a vast and seemingly growing divide between the two countries when it comes to coffee.

In Vietnam, coffee growers are wondering whether it’s time to move into other more lucrative crops. Revenues from coffee exports are so low that some farmers such as Y Kua Milo are choosing to store their crops while they wait for prices to rise. As a result of changes in exchange rates, the price of robusta coffee has fallen more than 29 percent in dollars and about 27 percent in Vietnam’s currency. In contrast, thanks to a depreciating local currency, Brazil is enjoying a boom in coffee exports, so much so that farmers such as João Elvidio Galimberti are considering planting even more coffee. Why the difference? It all comes down to exchange rates.

Vietnam pegs its currency, the dong, to the U.S. dollar. As the dollar has appreciated, so has the dong. In Brazil, just the opposite has occurred. The Brazilian real has fallen sharply in value relative to the U.S. dollar, giving the country’s coffee producers a substantial boost in profits from their coffee exports. Indeed, over the last year, the real has dropped some 30 percent relative to the dollar. So, while coffee exports from Brazil jumped 21 percent last year, Vietnamese coffee exports have slumped to their lowest level in six years. Now, analysts expect that going forward, farmers in Brazil will increase coffee production, while growers in Vietnam will shift to other crops.

What type of exchange rate regime is present in Vietnam?

A. spot

B. managed

C. floating

D. pegged

E. fixed

Which of the following has contributed to the problems Vietnam is facing with its coffee revenues?

A. Farmers failed to hedge.

B. The managed float system results in variable earnings.

C. Vietnam’s currency is pegged to the dollar.

D. Most farmers decided to turn to alternative crops.

E. Spot prices for coffee have not kept pace with inflation in Vietnam.

Brazilian coffee farmers have benefitted from

A. the depreciation of the U.S. dollar.

B. the drop in the value of the Brazilian real.

C. the drop in the price of robusta beans.

D. the sharp appreciation of the local currency.

E. the depreciation of the Vietnamese dong.

Which of the following statements is true of how the strong U.S. dollar has affected the global coffee market?

A. Brazilian growers are decreasing coffee production.

B. Coffee is being stockpiled in Brazil by farmers who are unwilling to sell at current prices.

C. Vietnamese coffee farmers are reducing coffee production and investing in alternative crops.

D. Brazil’s coffee exports are declining rapidly.

E. Vietnam is benefiting from high export revenue.

Which of the following would be most beneficial for Vietnam’s coffee growers?

A. a depreciation of the Brazilian real

B. an appreciation of the euro

C. an appreciation of the Vietnamese dong

D. a depreciation in the value of the U.S. dollar

E. a depreciation of the British pound sterling

Answer 1

What type of exchange rate regime is present in Vietnam?

Answer= Pegged

Reason=Pegged exchange system is one in which there is a fixed value of the currency against the foreign currency

Which of the following has contributed to the problems Vietnam is facing with its coffee revenues?

C. Vietnam’s currency is pegged to the dollar.

Reason= Due to pegging with the US Dollar, as the US Dollar exchange rate increases, the currency of Vietnam also increases causing the negative effect in the export market

Brazilian coffee farmers have benefitted from

B. the drop in the value of the Brazilian real.

Reason= As the Brazilian real increased, it resulted in improved export

Which of the following statements is true of how the strong U.S. dollar has affected the global coffee market?

C. Vietnamese coffee farmers are reducing coffee production and investing in alternative crops

Reason= Due to reduced export, the farmers of Vietnam will look to invest in other crops

Which of the following would be most beneficial for Vietnam’s coffee growers?

D. a depreciation in the value of the U.S. dollar

Reason= As US Dollar and Vietnamese currency are pegged so a decline in US dollar will be in favor of Vietnam’s coffee growers

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