The coffee crisis

The crisis

Sip your coffee - whether it be from Starbucks or instant brewed at home, it's hard to believe your drink comes from an industry in crisis. Indeed, supermarket prices of coffee have stayed relatively static recently. It's hard to believe that a large amount of peasant coffee growers can no longer even afford to break even - the opportunity cost of not growing drugs is becoming larger, and that's where a lot of them are turning.

The cause of the problem is over-supply: there's simply too much coffee on the market, and this is pushing the price down. Due to supply and demand, when there is a huge glut of a particular commodity, buyers are not willing to pay much for it, so the price falls. In the year 2000-2001, the price of green coffee (coffee before it's roasted), fell fifty percent. Cofee is worth a quarter (in real terms) of what it was thirty years ago. This is due to new types of coffee and intensive farming that are producing much bigger yields. Yet we know nothing of it, because the savings are not being passed onto the consumer. Coffee roasters are experiencing hugely super-normal profit as their costs fall and their selling prices remain relatively static. In the supermarket, prices have fallen by a small amount, but nowhere near as much as the price of green coffee.

Starbucks is possibly the biggest winner in all this. Their prices are going up, as is their popularity. Of course, they have a lot more overheads to cover - staff, property and marketing, but with all this they add a lot of value, and hence can afford to increase their prices. They also need to cover these costs, however - the price of coffee beans is only one factor in their prices.

Possible solutions

There are two overall ways to approach the problem of the exploitation of coffee growers – supply-side and demand-side. The main function of supply-side techniques is to reduce supply, and the main function of demand-side policies would be to aim to increase demand. Both of these would have the effect of dragging the price upwards.

One way to push up the price would be for the coffee-exporting countries to meet and establish a cartel. The Association of Coffee Producing Countries (ACPC) tries to establish such a cartel, aiming to push up prices by limiting supply. When supply is reduced, buyers will pay more for a product because it is scarcer. This seems like a good way to push up the price, but unfortunately there are problems with it. For a start, not all producing countries are members of the ACPC, and there are fears non-members will try and grab ACPC business by taking advantage of the situation. Another problem is the geographical distances between the various countries in ACPC – from South East Asia to South America; it would be difficult to organize things over such a vast distance.

Attempting to set price floors and ceilings is a price-support mechanism that, if successful, would result in prices being between two boundaries that were acceptable to growers and provided them with an acceptable standard of living. An example of a price floor is the agreement that, prior to 1989, guaranteed a minimum price for coffee growers. Columbia intervenes as a "buyer of last resort" when prices fell below a certain level, hence guaranteeing a minimum price for producers. The problem with price floors is that they’re hard to organize through a cartel for the reasons given above, and countries cannot afford to subsidise their coffee farmers and provide them all with a decent standard of living. Coffee provides for a third of rural employment in Columbia, so clearly it’s not economical to continue this policy when prices are very low.

The World Bank and the International Monetary Fund have been active in countries to increase coffee production, most notably in Vietnam. With their encouragement, Vietnam has doubled its production. With the glut of coffee on the market, this is clearly no longer beneficial to anyone, not even the peasant farmers of Vietnam. Encouraging the World Bank and IMF to cease their activities in these countries would stop things getting worse by reducing supply, and they might even be encouraged to help the farmers produce something else.

Quotas (allowing countries to export a certain amount only) would help keep supply down, but again, they require an organized cartel like the ACPC. The ACPC is impractical because not all countries are members, and because of the organizational difficulties across geographic and language barriers.

On the demand-side, there have been suggestions that demand could be increased by branding coffee like wine. At the moment, premium coffee is not enjoyed by the majority – this is as opposed to wine, in which the market is very heterogeneous and every type is very different. Many people enjoy branded and varied wine, but coffee-drinkers tend to stick to one of the standard brands (Nescafe, Maxwell House, etc.) By differentiating between each type more and selling it on particular flavour attributes (strength, bitterness, etc) demand could be increased and prices pushed upwards as people drank a variety of their favourite brands. The possibilities are almost endless: coffee could be branded for different times of the day or different occasions (much like wine is sold to be consumed with a particular type of food). This could be a very effective way of driving demand upwards and moving coffee upmarket.

Other forms of market development could take place – organic coffee is currently not a huge seller, but if marketed the right way it could be. Not only would this bring coffee to new, premium markets, it would hopefully lead to more growers receiving organic certification and hence meaning they receive more money. Product development could take place, with particular flavoured coffees being sold (for instance, in Starbucks, you can get raspberry or wild berry coffee). This is much like what is done with tea, and would create further markets and further demand.

An excellent opportunity for market development exists with fair trade coffee - not only does this ensure in itself that growers receieve an adequate price for their product, it appeals to a certain market which is willing to pay a premium price for the product.

Ideally, we would be able to create enough new demand to eat up the glut of coffee on the world markets and push the price upwards. This would bring the most prosperity for all – unfortunately, it is not likely that enough demand can be created to deal with the current situation of over-supply. Hence it is probably best to focus on price-support mechanisms that drive prices up by reducing the amount of coffee on the market. A mixture of these mechanisms and trying to help large producers switch to other cash crops (and make them stay away from drug growing) is probably the best solution to the current problem, although all have their positive and negative side.

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