The great coffee debate

The Great Coffee DebateIf like me your day has not quite kick-started until you have had that first taste of coffea arabica or coffea canephora (‘robusta’), you will agree, how, where and when you drink it can make or break your day. The stuff of myth, legend and countless tales, coffee has allegedly been part of mankind’s daily ritual since 15th century Sufis in Yemen imbibed it with gusto. Originating in Ethiopia, coffee has historical links with religious rites, has been banned for political reasons and associated with subversive activities. The rise of coffee culture and mass consumption has made the beverage an intricate part of modern society. To such an extent that it is now the second most traded product in the world after petroleum. And just as controversial …

Putting coffee into perspective – the facts and figures

  • The global coffee market (fresh & instant) was worth $71 billion in 2011. A 17.5% increase on the previous year. (Fairtrade and Coffee Report: May 2012)
  • Globally 1.6 billion cups of coffee are consumed daily
  • 125 million people worldwide depend on coffee for their livelihoods
  • 25 million small scale farmers produce 80% of the world’s coffee
  • Coffee is produced in some of the world’s poorest countries (Honduras, Guatamala, Ethiopia), while the majority of consumption is in the world’s wealthiest countries (European Union – 67%, USA – 22%)
  • Coffee growers receive on average 7-10% of the retail price in supermarkets
  • Many coffee growers subsist on less than $1 per day

A large share of the profits in the coffee supply chain go to the middlemen and the large roasters. Five large companies control this trade: Neumann and Volcafé (both based in Germany), Ecom, Decotrade (trading arm of Sara Lee/Douwe Egberts) and Taloca (owned by Philip Morris/Kraft), all based in Switzerland.

Six companies control more than half the global retail market:

  • Nestlé – Nescafe, Nespresso, Ricoffy
  • Kraft – Carte Noire, Jacobs, Gevalia, Kenco, Maxwell House
  • Sara Lee – Douwe Egberts, Chat Noir, Cafe Continental
  • J.M.Smucker – Folgers, Millstone, Dunkin Donuts, Kava
  • Starbucks – house brands
  • Tchibo – house brands

Top brands in South Africa (2011):

(Source: Euromonitor)

  • Nestle’s Nescafe – 30% of the market
  • National Brands’ House of Coffees brand – 10%
  • Kraft Food’s Jacobs – 8%
  • National Brands’ Kenna and Ciro – 4% each

A massive paradox is at play – global coffee consumption has increased, with related profit increases for the big roasters and retailers, but the small scale growers remain stuck in chronic poverty and destitution. A situation that has worsened over the past 20 – 30 years.

Corporate revenue has increased due to:

  • population growth
  • the growing middle class with their expendable income
  • effective marketing of speciality coffees as an aspirational beverage

At the same time the coffee growers have received little benefit from the rise in global consumption due to:

The collapse of the International Coffee Agreement in 1989

  • existed since the 1960s to regulate the global coffee trade through a system of export quotas and buffer stocks, ensuring stable and equitable prices
  • collapsed due to abuse of the quota system and the rise of free market policies

Fluctuating markets exploited by opportunistic speculators

  • global coffee production varies according to weather patterns and disease, causing volatile price fluctuations
  • commodity (coffee) futures markets are used by hedge funds, investment banks and private speculators to gamble on the price of coffee
  • in essence, non-commercial traders’ speculation causes distortions in the market, setting up boom and bust cycles

Exploitation of market power by retailers and roasters

  • big multinational companies pit 25 million smallholder sellers against each other under the guise of the free market system

Rapid supplier growth, creating a buyer’s market

  • funding and encouraged expansion of low cost – low quality robusta coffee has seen Brazil and Vietnam take 48% of the global export market (ICO 2011/2012)
  • this has had a massive impact on deforestation and water supplies
  • According to the World Wildlife Fund, of the 50 countries with the highest deforestation rates from 1990 to 1995, 37 were coffee producers

WTO and IMF policies

  • advised countries to switch to coffee in the 1960’s and 1970’s contributing to a glut in the market
  • strict free-market programmes required governments of producing countries to privatise state-controlled industries and open up to competition from private traders, which lead to prices plummeting

Furthermore, subsidies for agricultural products in developed countries (read: Europe & USA) have made it difficult to switch to alternative cash crops. Current high coffee prices are offset by high input costs, resulting in little real income growth.

One of the touted solutions to the above disparities is ‘fair trade’ – an organised social movement focused on helping producers in developing countries create better trading conditions through certification and promoting awareness of ethical trade practices.
The biggest and most well known fair trade organisation is Fairtrade, which also includes FLO-CERT, an independent certification company. FLO-CERT inspects producers and traders to ensure they comply with Fairtrade standards. Global coffee exports totalled 6.2 million tonnes in 2011 of which less than 88,000 tonnes were Fairtrade. That translates to less than 1.5% of the total coffee traded globally.

Criticism of Fair trade:

  • None of the big coffee retailers carry more than 10% fair trade certified product, which could be seen as window dressing.
  • Discrepancies between retail premiums on fair trade coffee and what reaches the grower have been pointed out.
  • Opportunity for corruption via false labelling or slack certification procedures.
  • Fairtrade certification is not free – application fees, initial certification fees, membership dues and annual audit fees may cost thousands of dollars/euros – huge amounts for small farmers.
  • Duplication of existing labour and contract laws in some countries, e.g. minimum wage regulations.
  • Administrative burden for often illiterate small producers.
  • Artificial markets are created in stead of farmers being more productive or switching to a more profitable crop or industry. It creates dependency and subsidises inefficiency.
  • Accusations of evolving from a socio-economic advocacy group into a marketing model for ethical consumerism (basically becoming a player in the market).
  • Lack of independent trade impact studies, detailing fair trade efficacy.
  • Imposition of socio-political standards on societies who don’t necessarily agree with them – an extension of the greater Western chauvinism when dealing with marginalised communities.

Fair trade’s greatest legacy could well be the increased awareness of global socio-economic inequalities, and how consumerist societies are linked to marginal ones.
Its biggest crime may be propping up a flawed system and providing jobs for aspiring NGO bureaucrats.

At the core of all global economic inequities is the ‘might is right’ attitude of multinational conglomerates and the apathy of consumers. The arrogance of the global companies date back to the mercantilism of the 16th – 18th century, when colonial powers such as the Dutch started coffee plantations in Java and Ceylon after subjugating the local populations. Many European countries plundered their way to developed status, only to continue to do so under the guise of trade. Consumer apathy can be ascribed to both ignorance and moral laziness.

A few possible solutions to look at:

  • Oversight of ‘fair trade’ groups and their impact with regular reports and audits provided by independent bodies.
  • Global clamp down on commodity futures speculation with regards to essential foods.
  • Overhaul of the World Bank, IMF with accompanying trade policy changes (this will never happen as long as the USA and EU run the two organisations).
  • Renegotiate the terms of fair trade, with all role players having an equal input.
  • The fair trade certification process should include the total fair trade percentage of a company to avoid window dressing. A minimum threshold should be determined before fair trade certification is awarded.
  • Media exposure to both Fairtrade certified companies and options offered by uncertified companies. Sometimes companies that are uncertified, because they can’t afford the Fairtrade certification or don’t agree with the Fairtrade process, still run ethical businesses.
  • Increased price regulation and supply control by resurrecting the International Coffee Agreement.
  • Aiding coffee-producing countries to diversify crops by reducing subsidies and other trade barriers.
  • A global online information bureau that provides consumers with regularly updated statistics regarding individual company performance in relation to fair trade.

Due to its high trade volume and mass consumption, coffee is at the vanguard of the global battle for fair trade. Companies will keep on doing what they are created for, the maximising of profits. Despite the best efforts by individual governments, fair trade organisations and advocacy groups, it boils down to individual consumers to hold companies accountable with the most powerful weapon at their disposal: money. The internet and other forms of modern mass communication have taken away the excuse of ignorance. The only one that remains is apathy.

Recommended documentary: Black Gold (2006)
An award-winning documentary film about the international coffee trade and its ramifications for the farmers who grow coffee. Find out more at: www.blackgoldmovie.com

If you want to drink ethically produced coffee click  here to view a selection of Fairtrade coffees available in South Africa.

2 thoughts on “The great coffee debate

  1. I read your article about coffee. It’s a very complex topic, but for what it’s worth, here’s my opinion:

    1) Price regulation is always a bad idea. Market forces should be allowed to work. Here the U.S. and the EU are the biggest culprits with their farming subsidies, but both areas (especially EU) is bankrupt, so I do not know how long they can still continue to pay subsidies.

    2) Commodities futures perform an important function, because it enables producers to hedge their next harvest. The farmer plants his crop (which requires a huge capital investment) and sells the harvest according to the futures price and thus reduces his risk. If this mechanism was not there, the farmer himself could be bankrupted by lower coffee prices. If the farmers are not sophisticated enough, there should simply be more investment in education. Nobody is entitled to handouts. There are actually a lot less speculation on commodity futures exchanges than people think (it’s mostly physical traders and producers who ‘hedge’). All forms of financial speculation could be reduced if the U.S. Fed stops its Quantitative Easing programme (there is too much liquidity in the system), and the big investment banks were forced to separate their deposit taking and investment banking divisions (reinstatement of Glass Steagall Act). But commodity futures still perform a very important role.

    3) The largest coffee retailers make their money by huge advertising campaigns and the promotion of certain brands. The actual cost of coffee beans does not play such a big role in their profits. Obviously these companies want to maximise their profits, but the cost of coffee beans is not their number one priority. I think the coffee beans for a cup of coffee cost about 65 U.S. cents, while Starbucks’ coffee retails at $2.5 – $5. You can, however in some other American coffee shops buy a cup for $1.50. Starbucks has huge profit margins, but it is driven by brand development. For the lower priced coffee retailer the price of coffee beans has thus more of an impact, but for companies like Starbucks it is all about customer service, brand image, etc.

    4) Commodity futures exchanges make coffee pricing more transparent, which means it’s harder for people to manipulate the price (that is a very good thing).

    5) The modern trend is for commercial farms to be bigger (assimilation) in order to bring down overhead costs. A lot of small farmers simply do not make economic sense. There is only so much fertile land on the planet, and it’s in everyone’s interest that it is farmed as productively as possible (this will also prevent the destruction of forests and other vegetation to make more agricultural land available). If coffee farmers are suffering, it means there are too many of them, and market forces will reduce their numbers until equilibrium is reached again.

    • Hi Adam. Thank you for the well articulated comments. Just in reply:
      With regards to price regulation – Remember that there is a historical perspective, which entrenched many subsistence farmers in their current situation. I disagree respectfully with the dogmatic opinion that the free market will resolve all issues. There are just too many variables at work: barrier to entry, existing monopolies based on prior illegal or anti-competitive behaviour and coercion in the past from IMF and World Bank which created oversupply. The 1930’s New Deal has been debated to a great extent, but I support the view that it was a necessary intervention in a dysfunctional market place, where those with capital held the rest at their profit taking mercy.

      With regards to commodities futures – The hedging of commodity prices is done by middle men traders and big companies, not the small producers. Futures work in favour of capital flush market speculators and retailers, not the small farmer. As stated, coffee is a highly traded commodity, which means that futures trading may create boom and bust cycles out of proportion to natural harvest fluctuations. There was a mechanism in place as mentioned: the International Coffee Agreement, which ensured an equitable income based on regulated quotas and buffer stocks.

      Regarding the sophistication and education of subsistence farmers – So its ok for people with knowledge(education) and money to take advantage of those without it? A simplistic statement, but it becomes important if you look at the history of revolutions, the recent Arab spring a case in point. Even within a capitalist system there is a moral obligation to balance the power of the haves and have-nots. It actually works in favour of companies and economies to operate in a transparent and equitable manner, ensuring long term sustainability and stability. Legalistic and elitist attitudes are all fine and dandy until the ‘unwashed’ and ‘stupid’ masses decide that enough is enough and start burning everything down, because they have nothing else to lose. And of course the small farmers are not sophisticated, that’s the whole point. It does not make it right for powerful companies to take advantage of that. Laws and regulations are there to protect people, especially the weak. Agreed though that investment in economic and financial education is part of the solution. Are you volunteering?

      With regards to the volume of speculation in the commodities market – Not according to the Fairtrade and Coffee report 2012. The producers you mention are obviously not the small growers who make up 80% of the supply chain. But there may have been some easing in speculation over the past year or two. You do make some good points regarding the effects of Quantitative Easing and the separation of deposit taking and investment banking.
      Although commodity futures may fulfill an important function in some sectors, it may not hold true for all. You need to look at the intricacies of each sector.

      With regards to advertising costs vs cost of coffee beans – Not necessarily true. It is extremely difficult to get a break down of individual coffee conglomerates’ expenses and profit breakdown. By playing small farmers off against each other, they obviously keep the cost of beans as low as possible compared to other expenses. The fact is that big coffee companies are making more money than ever before, without a comparable rise in living standards for the small farmers.

      The article’s focus is on the 6 biggest international coffee retailers. Would you be able to provide marketing expenditure by for example, Starbucks as a percentage of total cost? It does not change the argument that small coffee growers are at the mercy of big retailers playing them off against each other. The discrepancy between the amounts paid to small coffee growers and the profits made by big companies still remain. To reiterate two important facts: (1) 80% of the world’s coffee is produced by small growers (2) in real terms the living standards and income of those small growers have decreased since 1989.
      Branding, customer service etc maximise profit and market share, but that does not necessarily mean that there is a fair sharing of revenue.

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