The Coffee
Paradox:
Commodity trade and the
elusive promise of development
Stefano Ponte
Senior Researcher
Danish Institute for International Studies
spo@diis.dk
The coffee paradox
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Presentation based on forthcoming book co-written with Benoit
Daviron of CIRAD, Montpellier (Zed Books, 2005)
TOC
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Preface
Ch.1: Commodity trade, development and global value chains
Ch.2: What’s in a cup? Coffee from bean to brew
Ch.3: Who calls the shots? Regulation and governance
Ch.4: Is this any good? Material and symbolic production of coffee
quality
Ch.5: For whose benefit? ‘Sustainable’ coffee initiatives
Ch.6: Value chains or values changed?
Ch.7: Conclusion
What is the ’Coffee Paradox’?
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Contemporary presence of:
a ‘coffee crisis’ in producing countries (lowest
international prices in a century in real terms)
 a ‘coffee boom’ in consuming countries (specialty
coffee, coffee bar chains, coffee is a ‘cool’ drink
again)
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How can this happen?
The coffee crisis
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Factors:
(1) Oversupply
End of ICA (1989)
 ’Grow more coffee’ campaigns + structural
adjustment
 Technical innovation (Brazil, Vietnam)
 Is that the whole story?
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World coffee production : five year average
160
140
Millions of 60-Kg bags
120
100
80
60
40
20
0
1870
1880
1890
1900
1910
1920
1930
1940
Year
1950
1960
1970
1980
1990
2000
World coffee production : trend difference
40
30
20
10
0
1870
1880
1890
1900
1910
1920
1930
1940
-10
-20
-30
Year
1950
1960
1970
1980
1990
2000
The Coffee Crisis
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Factors:
(1) Oversupply
(2) Oligopoly (market power)
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Market liberalisation in developing countries + end
of ICA
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Government agencies do not control exports anymore
Few global players controlling the market
 Buyer-driven value chain
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Green coffee market share by international trade company (1998) (%)
Neumann
16%
Others
44%
Volcafe'
13%
Cargill
6%
Mitsubishi
3%
Dreyfus
3%
Esteve
Aron 6%
5%
Man
4%
Market share of roasting and instant manufacturing companies (1998) (%)
Philip Morris
25%
Others
31%
Tchibo
6%
P&G
7%
Sara Lee
7%
Nestle'
24%
Additional explanations:
Stock-price relation (1)
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Impact of stocks on price depends on
ownership
Which stocks are readily mobilizable?
ICA period: producing country governments
controlled stocks – not mobilizable (or strong
uncertainty)
Stocks owned by roasters are also ’taken out of
the market’ – not mobilizable
STOCKS AND US COFFEE IMPORT VALUE
25,00
120,00
SMI
100,00
Stocks (Months of world imports)
20,00
Brazilian Monopoly
80,00
15,00
60,00
10,00
40,00
5,00
20,00
0,00
0,00
1880
1890
1900
1910
1920
1930
Stocks
1940
1950
US Unit import Value
1960
1970
1980
1990
2000
US Import Value (Cents by pound, 1967 dollar)
Imperial fragmentation
International Agreements
Agreements
Stock-price relation (2)
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1950s-1980s – ICA effect on prices; large stocks, but
not available, thus relatively high prices
End of ICA – relation stock-price similar to 1910s1930s
After 1997 (SMI) – very low levels of stocks, but much
of this is available (moves from roasters to traders): no
impact on prices
Ownership of stocks counts, in addition to oligopolitic
position
The ’coffee boom’ (latte revolution)
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Increase in value-added consumption of coffee
and coffee-based beverages
Specialty coffee in the US: 17% in volume, 40%
value
’High quality’, single origins, espresso based
beverages, fair trade, organics, other ’sustainable
coffees’
’Sustainable coffees’
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Globally, 16,000 tons of certified coffees in
2000
Up to 52,000 tons in 2003 (approx 0.7% of total
volume of traded coffee)
Except for fair trade, relatively low premium
paid to farmers
Table 5.9: Premium levels for certified ‘sustainability’ coffees
ShadeMarket Utz Kapeh Organic Fair trade
grown
price* premium** premium premium
premium
($/kg,
($/kg
($/kg
($/kg
($/kg
green) green)
green)
green)
green)
0.12 –
Mild Arabica
1.47
0.15
0.35
1.30
0.40
Natural Robusta 0.68
0.00
0.23
1.65
n.a.
Equity issues: Distribution of value added
along the coffee chain – mainstream market
value added in
consuming
countries
transport costs
and weight loss
100,0
50,0
0,0
1971-80 1981-88 1989-99
value added in
producing
countries
price paid to
growers
Unit import value for green coffee and gross margin for roasted coffee in the US
(1980-2002) (USD/pound).
2,5
Dollar per pound
2
1,5
Gross margin for roasted coffee
Unit import Value of green
coffee
1
0,5
0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
A different way of telling the
story
Tanzania-Italy value chain for espresso blends
100,00
90,00
80,00
% of consumption price
70,00
60,00
home, low-end
home, mid-range
home, high-end
50,00
bar, mid-range
bar, high-end
40,00
30,00
20,00
10,00
0,00
farm-gate
auction
export harbour
import harbour
value chain node
roaster
retail
Are specialty and sustainable coffees
scoring any better?
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Specialty (as ’high quality’)
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R&G sale at Starbucks, USA (Kilimanjaro peaberry)
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Coffee cup at Starbucks, USA (same kind of coffee)
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4% goes to the farmer
1% goes to the farmer
Organic: same as above
Fair trade
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Supermarket sale, espresso blend, Italy
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21% goes to the coop (same % as in old ICA system)
Specialty shop, Kili single origin, USA
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11% goes to the coop
What is quality?
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Material attributes
Symbolic attributes
In-person services
Material attributes
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Quality in producing countries mainly relates to
material attributes
Market liberalisation: one price for all coffee –
no incentive to farmers
’Material quality crisis’
Symbolic attributes
and in-person services
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This is what is sold to consumers in the North
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Branding and packaging
Ambience of consumption
Esoticism, good stories
Lifestyle
In-person service (bar, restaurant, specialty shop)
This is where the value added comes from
As long as producers do not control part of this value
addition, there will be no way out of the ’commodity
problem’ in developing countries
Solutions? (1)
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Supply management – I am skeptical
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Failure of ACPC cartel
Failure of the ICO CQP to have regulatory bite
Competition policy (to break the abuse of oligopolistic
position) – legally tricky
Diversification – difficult to impose as a ’policy’; also, in
some areas, there are no alternatives
Improve material quality
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Yes, if there are financial incentives (premium) or positive
returns – not at present for smallholders
Coordination mechanisms need to be re-established in
producing countries
Solutions? (2)
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Sustainability certifications?
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Still small, but growing
BUT, premium is needed at farm-gate
Lower costs of certification
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Consumers need to pay more for getting more
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Improve transparency
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Labelling rules (indicate type of coffee used, %, origin)
Solutions? (3)
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Cultivate consumers, not more coffee
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The ’wine route’
Sell lifestyle, not poverty or development message, to mainstream
consumers
Producers need to sell ’symbolic’ quality and control returns
from it
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Location, esoticism, origin, combination with crafts/music
Limited inroads in in-person service provision (agro-tourism)
Direct marketing, internet auctions
Key: Appellation systems with legal backing; IPR protection
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Producer associations built around appellation areas