Price Crisis Response Initiative Part 2

 

PART 2: BACKGROUND OF COFFEE INDUSTRY

(these are my personal notes from reading through the SCA price crisis response initiative to be used for a summary for my clients and coffee friends)

SLAVERY & COLONIALISM

Consumption of coffee began in AD1000. Trading of coffee began in 1400s. Yemeni merchants popularised the beverage throughout the Muslim world where it began to be grown by small scale farmers.

There was minimal coffee that came to Europe for consumption.

British and Dutch East India colonies began trading coffees in the mid 1600s. At the end of the 17th century, large scale cultivation began.

This particularly began in the East Indies because of their forced labour from the Dutch colonies, and they began to dominate the market.

Other colonies than began to follow suit and by the end of the 18th century, coffee was second to sugar in the quantity of slaves used for production.

MARKET STRUCTURE OF THE GLOBAL NORTH EXERTING POWER OVER TRADE OF COFFEE PRODUCED IN THE GLOBAL SOUTH BY ARTIFICIALLY LOW-COST LABOUR, IS STILL REFLECTED IN THE PRESENT-DAY MARKET.

 BRAZIL & VIETNAM

Brazil and Vietnam challenge the power structure behind coffee through their enormous production volumes and subsequent influence on global coffee price.

1850 was when Brazil began producing half of the world’s coffee.

The Brazil production volume and increase in coffee production in Latin America lead to low coffee prices. It is an important precedent for a regions influence on supply and price of coffee.

Coffee wasn’t introduced into Vietnam until 1857 by French Missionaries. It didn’t become globally significant until the quota system was eliminated from the International Coffee Agreement (ICA) in 1989.

Then coffee production exploded in Vietnam due to incentives provided by the Vietnamese government. In the 1990’s, Vietnam went from producing less than 2 million bags per year to over 25 million bags per year.

C-MARKET

The commodity market was found in New York in 1882, the NEW YORK COFFEE EXCHANGE. (modelled on the successful cotton exchange) with the goal to establish a consistent and well-regulated market.

They created standards for coffee grades, an arbitration procedure to deal with disputes, and allowed buyers and sellers to hedge risks by enabling prices to be fixed in the present for coffee to be delivered at a future date.

The exchange doesn’t grade the coffee itself, but the price is used as a reference price for specialty coffee contracts. A price premium or differential gets added to the base price (C price).

(Robusta and arabica are on different pricing mechanisms)

SUMMARY OF THE PROBLEM

So each country has a unique coffee history. Colonialism, Brazil and Vietnam, Creation of C-market price have all had long-lasting impacts on the structure and dynamics of the value chain.

Coffee production is concentrated in the Global South, and according to the document, many of these countries rank low in economic and sociological development metrics. 18/44 of the coffee producing countries are in the category of least developed countries according to World Coffee Research.

Coffee remains an important agricultural commodity in its contribution to rural employment, GDP and export.

If the current system doesn’t change, the sector will be unable to make contributions to the United Nations Sustainable Development Goals and may push progress in the coffee growing countries and communities backwards.

IN 2017, IT WAS NOTED THAT PROFITABILITY FOR COFFEE FARMERS BEGAN AT $1.14 PER LB.

THE C-MARKET PRICE WAS BETWEEN $0.95-$1.05 PER LB.

THIS INDICATES THAT MANY COFFEE FARMERS HAVE BEEN WORKING AT A LOSS.

Income of respondent coffee growers in a survey in 2018 had decreased by 10% that year. It is the low productivity/high cost countries that are most severely affected.

In 2015/2016 53% of Colombian coffee farmers and 25% of farmers in Costa Rica/Honduras were operating at a loss.

PRICE VOLATILITY

Coffee is characterised by boom and bust cycles. Weather shocks can result in huge shifts in global supply and price. These are amplified by inelastic supplies of coffee due to a long lag between planting and harvesting (approx. 3 years). Combine this with a 20-30 year investment horizon and it’s an incredibly volatile market.

Recent historically low prices are in part because of the huge surplus of volumes in Brazil and Vietnam.

Price volatility affects all in the value chain, but the least equipped to deal with it, are coffee farmers. Especially small holder coffee farms which account for 80% of the worlds coffee growers!

Women are exposed as their ability to supplement their income is compromised by unequal access to resources and land titles.

The low and volatile coffee prices are correlated with increased child labour and food insecurity in households.

They are also linked to migration, especially from central America into the USA.

Low coffee prices mean:

1.     Pauperisation of rural communities

2.     Social unrest

3.     Domestic and international migration

4.     Abandonment of coffee growing

5.     Transition to farming illicit crops.

Read the full SCA Research document here