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What Is Behind The Italian Coffee Import? Investigating The Most Relevant Dynamics

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Rivista di Economia Agraria, Anno LXXI, n.

1, 2016: 83-92

Bárbara Françoise What is behind the Italian coffee


Cardoso1, Deborah import? Investigating the most
Bentivoglio2, Elisa
relevant dynamics
Giampietri2, Pery
Francisco Assis After the US and Germany, Italy is the third world’s larg-
Shikida3 est importer of green coffee, above all from Brazil, Vi-
etnam and India, being also the second roasted coffee
producer, exporter and consumer in EU, after Germany.
1 CAPES Foundation, Ministry of
Given the importance of coffee import in Italy, this paper
Education of Brazil, Brasilia, Brazil applies the gravity model to investigate the influence of
2 Department of Agricultural,
the main variables affecting the Italian coffee import. In
Food and Environmental particular, the aim of this paper is to identify the most
Sciences (3A) - Università influent factors determining the level of import flows be-
Politecnica Marche, Ancona, Italy tween Italy and its 11 main coffee export partners. Our
3 State University of Western results show that the exporters’ GDP, their coffee pro-
Paraná, Toledo/PR, Brazil duction, the distance between the Italian capital town
and those of the other partners, and finally the continen-
Keywords: Italian coffee import, tal territorial boundary affect the Italian coffee import, as
gravity model, panel data well as the tradition to drink coffee and the consumers’
JEL codes: Q02, Q13, Q17 demand for quality.

1. Introduction

Coffee is one of the most important commodities and widely consumed


beverages all around the world. It is one of the most valuable primary prod-
ucts in world trade, in many years second in value only to oil as a source of
foreign exchange for producing countries(Lewin et al., 2004; Catturani et al.,
2008). Coffee has the largest sales volume and the longest history among fair
trade products (Cerjak et al., 2015). Coffee is also crucial to the economies and
policies, accounting for more than 50% of world’s least developed countries
exports (ICO, 2015).
In 2014, the global production has been about 9 billion tons. The two most
important species of coffee are Arabica coffee, which accounts for about 55%
of world production, and Robusta coffee (USDA, 2014).
After the US and Germany, Italy is the third world’s largest importer of
green coffee, above all from Brazil, Vietnam and India, being also the second
roasted coffee producer, exporter and consumer in EU, after Germany (Cof-
fitalia, 2014; ECF, 2014b; Eurostat, 2015).
Given the importance of the import in the Italian coffee market, this paper
applies the gravity model to investigate the influence of the main variables af-
DOI: 10.13128/REA-18379 © Firenze University Press
ISSN (print): 0035-6190 www.fupress.com/rea
ISSN (online): 2281-1559
84 B.F. Cardoso, D. Bentivoglio, E. Giampietri, P.F. Assis Shikida

fecting the Italian coffee import. In particular, the aim of this paper is to iden-
tify the most influent factors determining the level of import flows between
Italy and its 11 main coffee exporters.

2. An overview of the Italian coffee market

Nowadays, more than 50 countries around the world produce coffee, es-
pecially in South America, Africa and Southeast Asia. In 2014, coffee global
production has been about 9 billion tons, covering up to 10.5 million hectares
all over the world (Panhuysen and Pierrot, 2014). Four countries produced up
to 66% of the global coffee: Brazil (35%), Vietnam (15%), Indonesia (9%) and
Colombia (7%) (USDA, 2014).
In 2013, EU has been by far the largest importer of green coffee with 3 bil-
lion tons, part of which has been re-exported either as green or roasted coffee.
Among the EU Member States, in Italy coffee sector is one of the most dy-
namic in the food and beverage industry, representing 70% of total consumed
hot drinks (USDA, 2014). In the same year, Italy imported about 505 million
tons of green coffee1 (Coffitalia, 2014) mainly from Brazil (30%), Vietnam
(21%) and India (13%), being the second in EU after Germany (ECF, 2014b). It-
aly represents also the second European country in terms of exports. Accord-
ing to Coffitalia (2014), more than over 70% of the coffee imported by Italy is
re-exported, especially to France, Germany and Austria, in the form of roast-
ed coffee2 (about 179 million tons).
In addition, Italians have been one of the largest coffee consumers all
around EU after Germany in 2013 (ECF, 2014a). The Italian coffee consump-
tion has gone up from 279 thousand tons in 1995 to about 339 thousand tons
in 2013 (+22%) (ICO, 2015).

3. Methodology

The gravity model derives from Newton’s gravity law, which says that two
bodies are attracted each other with a force that is directly proportional to the
product of their masses and inversely proportional to the square of the dis-
tance between them. In the international trade analysis, the theory around
the gravity model follows the same logic, in which the attraction force is

1 Decaffeinated and not decaffeinated coffee.


2 Processing green coffee, roasted coffee gets a weight loss of 20% (roasted coffee = 80%
green coffee).
What is behind the Italian coffee import? Investigating the most relevant dynamics85

represented by trade flows, import or export, and the masses are represent-
ed by Gross Domestic Production (GDP), population or territorial extension
(Linnemann, 1966). However, to analyze the international trade by means of
gravity model it is necessary to insert more variables beyond the original ones
like territorial boundaries, common languages, exchange rates, common par-
ticipation in trade agreements, and others (Cochrane, 1975; Anderson, 1979;
Frankel, 1997).
In order to analyze the Italian coffee import, we used a gravity model in
panel data (Rahman, 2003) designed to cover imports between Italy and his
major 11 trading coffee exporters (Brazil, Cameroon, Colombia, Ethiopia,
Guatemala, Honduras, India, Indonesia, Tanzania, Uganda and Vietnam)3
during a period of 19 years, from 1995 to 2013.
Gravity model has been intensively used in literature to investigate both bi-
lateral and multilateral trade (Martinez-Zarzoso and Nowak-Lehmann, 2003;
Thai, 2006; Finco et al., 2009; Almeida et al., 2012; Shinyekwa and Othieno,
2013) as for the coffee sector (Ademe and Yismaw, 2013).
In order to choose the more efficient method for interpreting the results,
among pooled estimation, random or fixed effect, gravity model has been es-
timated by all three statistical tests: Chow test (1975), LM Breusch Pagan test
(1979) and Hausman test (1983). Moreover, the Wooldridge test has been ap-
plied in order to check the first order autocorrelation. All the estimates have
been performed using STATA12.
The estimated gravity model has the following form:

α α α α α
IMPi = α 0GDPit _ pci 1 GDPc _ pc j 2 PRODJ 3 CONS _ pci 4 DIST 2ij 5 e
α 6 ADJ ij +α 7 HARB j +uij
(1)

The above equation can be reformulated after having logarithmic applica-


tion as:

IMPi = α 0 + α1GDPit _ pci + α 2GDPc _ pc j + α 3 PROD j + α 4CONS _ pci + α5 DISTij + α 6 A

4
CONS _ pci + α5 DISTij + α 6 ADJ ij + α 7 HARB j + uij (2)

where:
i = Italy
j = Brazil, Cameroon, Colombia, Ethiopia, Guatemala, Honduras, India, Indo-
nesia, Tanzania, Uganda and Vietnam

3 In this paper we analyzed only the major countries that export to Italy because the countri-
es where Italy exports and the countries from where Italy imports are not the same. So, in
this case, the gravity model (in panel data) doesn’t analyze both together.
86 B.F. Cardoso, D. Bentivoglio, E. Giampietri, P.F. Assis Shikida

α0 intercept
α k slope
IMPi Italian coffee import (not roasted not decaffeinated coffee, not roasted
decaffeinated coffee and roasted coffee)
GDPit _ pci Domestic Production (GDP) per capita for Italy
GDPc _ pc j Gross Domestic Production (GDP) per capita for all cited coun-
tries
PROD j coffee production in the cited exporter countries
CONS _ pci coffee consumption in Italy per capita
DISTij distance-squared between the Italian capital town and those of the
partners
ADJ ij dummy representing continental territorial boundary and indicates
whether the exporting country is adjacent with the European continent (adja-
cency)
HARB j dummy representing the presence of the harbor in the cited exporter
countries
uij error term

Data related to Gross Domestic Production (GDP) for all cited countries
derived from United Nations Statistics Division (UNSD, 2015) while Italian
coffee imports have been obtained from Eurostat (2015). The exporter coun-
tries’ coffee production has been collected from Faostat (2015); Italian coffee
consumption has been taken from International Coffee Organization (ICO,
2015). Finally, the distance-squared between the Italian capital town and
those of the exporter partners come from the Centre d’Études Prospectives et
d’Informations Internationales (CEPII, 2015).

4. Results

Performing all three tests as above mentioned (α = 0.05), we found that


the best equation estimation method is random effect4. Table 1 shows the es-
timation results of multilateral trade between Italy and its main coffee import
partners using equation (2).
The χ2 value shows that the model is significant or the variation in the de-
pendent variable can be explained by the variables considered as an explanato-
ry, being the coefficients in the model different from 0. The determinant vari-

4 Chow test: F (4,194) = 48.05, Prob> F = 0.0000; L.M. Breusch-Pagan test: chibar2 (01) =
526.23, Prob> chibar2 = 0.0000; Hausman test: χ2 (4) = 0.78, Prob> chi2 = 0.9405. Autocor-
relation Wooldridge test: F (1,10) = 33.707, Prob> F = 0.0002.
What is behind the Italian coffee import? Investigating the most relevant dynamics87

ables considered for the Italian coffee import explain 76% of the variation in
the model, being the variation among the years explained up to 48% and the
considered countries up to 83%. The model results show that four of the total
variables (seven) are significant at 5% level of significance (GDPc_pc, PROD,
DIST, ADJ) and one at 10% (CONS_pc).

Tab. 1. Gravity model results

Dependent variable = IMP Coefficients Std. Err. z P>|z|

GDPit_pc 0.3882 1.0341 0.38 0.707


GDPc_pc 0.8427 0.1984 4.25 0.000*
PROD 0.5247 0.0992 5.29 0.000*
CONS_pc 1.5530 0.9082 1.71 0.087**
DIST -0.8333 0.2732 -3.05 0.002*
ADJ 0.6127 0.1717 3.57 0.000*
HARB -0.1922 0.2236 -0.86 0.390
cons 10.8300 7.7129 1.40 0.160
R2 (overall) = 0.7582 R2 (within) = 0.4812 R2 (between) = 0.8294
χ2 (8) = 144.47, Prob>χ2 = 0.0000 n = 209 id = 11 temp = 19
* = 5%; ** = 10%
Source: own elaboration, 2015

The Italian GDP per capita represents population’s purchasing power, i.e.
the Italian richness magnitude, but this variable is not significant for the cof-
fee imports. One of the possible reasons is that in Italy drinking coffee is a
tradition, despite the economic possibilities of people. In addition, coffee is
not one of the main imported products in Italy, being the 0.08% of the Ital-
ian GDP in 2013 (Eurostat, 2015; UNSD, 2015). On the other hand, import
partners’ GDP per capita, representing the productive capacity of each coun-
try (economic magnitude), boasts a positive relation with the Italian coffee
import. It is expected that the higher the GDP of the exporter countries, the
greater their capacity to supply the importing countries’ consumption needs
and to diversify the exported products.
This last evidence is in line with the study of Agostino et al. (2007) assum-
ing that the normal level of bilateral trade flows are positively affected by the
mass of the trading countries (richer and larger nations both export and im-
port more).
88 B.F. Cardoso, D. Bentivoglio, E. Giampietri, P.F. Assis Shikida

Moreover, there is a positive relationship between exporter countries’ cof-


fee production and the Italian coffee import. Being Italy one of the largest
green coffee importers in the world, the exporter countries tend to produce
more when the Italian demand increases.
The Italian coffee consumption per capita is significant at 10% but, accord-
ing to our level of significance (0.05), this variable is not significant. It can be
explained by the fact that Italy imports more green coffee than the other kinds,
than processes it and finally exports roasted coffee to other countries, especial-
ly those belonging to the European Union. The distance, the presence of the
adjacency and the presence of harbor are all linked to the transport used for
coffee imports. However, the distance and the adjacency are significant. In par-
ticular, geographical distance between trade partners has a negative relation-
ship with the Italian import (Simwaka, 2006; Agostino et al., 2007).
The presence of the harbor is not significant. The abovementioned nega-
tive relationship represents a sort of resistance to trade because high trans-
port costs limit the import; nevertheless, this relationship does not reflect at
all the Italian trend, where the tradition to drink coffee and the consumers’
demand for quality coffee are so strong to overwhelm this kind of limit. Final-
ly, the adjacency, as continental territorial boundary, has a positive relation-
ship with the Italian import flows. The significance reflects the relevance of
physical borders for the coffee trade. In addition, the quality of infrastructure
(roads, port, airport and telecommunications) and the cost and quality of re-
lated services are another important determinant of trade performance. The
infrastructure efficiency could have an impact on trade among all partners. A
poor quality of infrastructure is likely to be associated to a higher risk of dam-
aging the cargo and therefore higher losses and insurance costs (Nordås and
Piermartini, 2004). Therefore, the quality of infrastructure can also create or
reinforce comparative advantage in the international coffee trade.

5. Conclusion

EU acceded to the International Coffee Agreement in 2007, recognizing


the importance of the coffee sector to the economies of many countries and
considering the importance of improving relations between coffee exporting
and importing countries (ICO, 2007).The agreement aims at enhancing and at
promoting the sustainable development of the worldwide coffee sector. As the
other Member States, Italy fulfils to this agreement, being also one of the larg-
est green coffee importers in the world.
Italian coffee import is continually increasing, so that in 2013 the Italian
imports increased by 64% respect to 1995. Nowadays Brazil is the most impor-
What is behind the Italian coffee import? Investigating the most relevant dynamics89

tant player in the Italian coffee import (30%), followed by Vietnam (21%) and
India (13%). Coffee import can be affected by many variables, such as GDP,
production, consumption, distance among countries, territorial boundary and
the presence of harbor and many others.
This paper applied the gravity model in panel data with random effect to
investigate the influence of the main variables affecting the Italian coffee im-
port, covering the period of 19 years from 1995 to 2013. In particular, the aim
of this work is to identify the most influent factors determining the level of
import flows between Italy and its 11 main coffee exporters.
The investigated variables explain up to 76% of the variation in the model.
The model results show that the exporters’ GDP (GDPc_pc), their coffee pro-
duction (PROD), the distance between the Italian capital town and those of
the other partners (DIST), and finally the continental territorial boundary
(ADJ) mostly affect the Italian coffee import.
Investigating the Italian coffee import’s determinants, we have not consid-
ered the tariff firstly because there is a lack of times series data. Additionally,
since we decided to analyze the Italian import flows and it is note that tariffs
in exporting countries are frequently higher than those in importing countries
(ICO, 2011), we considered that this variable could not highly affect the im-
port. Finally, considering that tariffs are lower for raw and unprocessed prod-
ucts than for processed products (e.g. roasted coffee), we assumed that export
is more influenced than import by tariff (e.g. various tariffs, consumption
taxes and excise duties). On the contrary, from the side of exporter countries,
tariff becomes important as it could limit the development of local coffee con-
sumption as well as the production of blends and the coffee quality diversifi-
cation (ICO, 2011).
The macroeconomic variables considered in this paper mostly explain the
determinants of Italian coffee import. However, some other factors can influ-
ence it, such as the coffee tradition and the consumers’ demand for quality
coffee. Coffee is a part of Italian culture, indeed, and this engenders an in-
teresting field for consumers’ behaviour investigation (Caracciolo et al., 2015;
Giampietri et al., 2015; Giampietri et al., 2016). According to this, coffee con-
sumers are primarily influenced by brands followed by price and varieties of
coffee (Rotaris and Danielis, 2011; Jones, 2014).
In addition, given than over 70% of the coffee imported by Italy is then
processed and re-exported, it would be interesting in future studies to include
this variable. We believe this further analysis will certainly contribute to a
better understanding of international coffee trade.
To conclude, we would like to emphasize our results, suggesting some evi-
dence on the international trade between Italy and each exporter country. In
this context, Italy should improve the existing bilateral and multilateral agree-
90 B.F. Cardoso, D. Bentivoglio, E. Giampietri, P.F. Assis Shikida

ments mainly improving the quality standard required from the consumers,
implementing more efficient certification and labeling systems that seek to en-
hance environmental and social sustainability (Raynolds et al., 2007; Marie-
Vivien et al., 2014) and to ensure the exact origin of the product, and limiting
trade tariff-related and regulatory barriers. It is worth reaffirming that coffee
is crucial to the economies and politics of many developing countries since its
cultivation, processing, trading, transportation, and marketing provide em-
ployment for millions of people worldwide (Mussatto et al., 2011).
Finally, the authors suggest that future study investigating both the role
of the other major coffee importers (US and Germany) and the Italian export
could provide important information in order to complete the analysis of cof-
fee trade.

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