Are commodity prices reflective of demand and supply?

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Step 1
The commodity selected is coffee. The historical prices of coffee reached a peak of 282 c/pound in May 2011. Now it has declined to a low of 122.25 and now has recovered to 129.30 today. This decline in the price of coffee has led to most coffee sellers reducing their prices. Large coffee brands such as Maxwell House, Folgers, and Dunkin' Donuts are reducing prices and passing on the savings to consumers. J.M. Smucker announced that most of its packaged coffee brands prices were being reduced by 6 percent. This is the third such price cut in three years. Reuters however says that most of the large coffee companies are changing their coffee blends. The costly coffee is Arabica and the lower-grade coffee is Robusta beans. The large brands are substituting Robusta beans for costlier Arabica. This in effect degrades the quality of the coffee. The demand for Arabica beans among coffee buyers has declined by 27% this year whereas Robusta demand has increased by 25%. From a different perspective, the coffee companies are trying to match demand for their product with the price that people are willing to pay. In contrast high quality coffee companies such as Starbuck have maintained their prices.

Step 2
There are several factors of demand and supply of coffee that have caused a decline in the price of Arabica coffee. All over the world under the effect of economic downturn, there is a reduction in prices of sandwiches, donuts, and burgers which are consumed with coffee. These are complementary goods of coffee. With a reduction in price of these products there was pressure to reduce the price of coffee. Even prices of substitutes such as tea and chocolate drinks have declined. These increase the pressure on coffee prices. With economic weakness there was a negative ...