Why coffee prices are low?
“A permanent and accumulative surplus over the years have kept the coffee market prices low. Brazil has doubled their coffee production in the past 25 years and Vietnam from a 0.1% of global share in the mid-70’s it is now the second largest coffee producer in the world, allocating 20% of the total market by 2017, and expecting to increase coffee production an astonishing 9% by the end of 2018 alone.”
Currently we are living in a world that claims social justice like never before. Women, minorities, LGBT and other groups have raised their voice demanding justice, equal rights and opportunity. It’s a historical and exciting new era indeed, a step forward in the right direction for a society where we all regardless race, gender, sexual preference could feel safe and respected. Unfortunately social development doesn’t come without consequences, some people have exploited this movement, by taking advantage of the turbulent environment to push their own agendas, incubate radical ideas, intolerance, hate and conspiracy theories towards other groups who do not share their views. Some victims, driven by passion have become offenders, ignoring facts, statistical data and even scientific evidence. These actions are always shameful and counterproductive, they jeopardize the legitimacy and relevance of the social movement as a whole.
Coffee hasn’t been the exception of this phenomenon and some social justice warriors have labeled coffee consuming countries and some large coffee importing companies as the enemy, blaming them for profiting out of children labor and slavering and impoverishing millions of farmers worldwide by manipulating coffee prices and stocks. The statement also claims that only 1% of a cup coffee value goes back to the farmer, and consequently these companies and foreign governments must indemnify coffee farmers for decades of exploitation and abuse.
I understand why this statement is so appealing for some people. I would have believed it myself not long ago. It is very human to try to find a reason and someone responsible for so much poverty, pain and misery smallholder farmers experience worldwide. I personally believe, smallholder coffee farmer’s well-being should be, producing and consuming countries responsibility alike. Likewise, anyone in the industry must be always vigilant, condemning any type of exploitation or abuse. Nevertheless, I am totally certain that a witch hunt or ignoring the facts, would never help to tackle the issue.
So before we unleash our passion and start marching and protesting, we should review some of the recent coffee history.
In 1962, the first International Commodity Agreement (ICA) was signed between consuming and producing countries (97% of the global coffee industry). The whole point of this agreement was to set an international coffee market price, and then adjust annual coffee producing quotas among country members in order to preserve it. To deal with this new system the International Coffee Organization (ICO) was created in 1963. There were many issues with the system at first, but at the end, it was a success. When the coffee price was low, quotas were reduced and when the price was high quotas were increased. After decades of instability, the coffee price was finally stable and coffee market value raised 100% in just one year. The agreement was signed several times until 1983, when, due to a lack of consensus between country members, the ICO effectively decided to suspend the exporting quotas on July 4th 1989.
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The disagreement started when the US complained about coffee quality. Due to the quota system, coffee farmers had focused on increasing volumes at the expense of coffee quality. (Fair trade has also been criticized for the same issue in recent years). US coffee buyers wanted better coffee than the Robusta and low grade Arabica beans available; due to the quota system quality coffee beans were elusive in the market during that time. The final nail in the coffin for the agreement was Brazil’s refusal to lower their yearly producing quotas. Brazil, the largest coffee producer in the world responsible of more than a third of the global production, argue the agreement wasn’t favorable for their economy and it wasn’t incentivizing the growth of the country’s coffee industry. The ICO knew the agreement relevance would vanish without Brazil, any price set by the ICO unilaterally, would be crushed by Brazil’s market influence.
After 1989, once the ICO exporting quota system was over, things got bad really quick for coffee farmers around the world, coffee market price dropped to half in less than five years and by the year 2000 the market price reached a record low of 0.50 USD/lb. the lowest price in 30 years. During this decade, Vietnam thanks to loans provided by the World Bank transformed radically; from being an insignificant coffee producer, it turned into the second largest producer in the world. Simultaneously, Brazil’s coffee farmers tried to counterbalance low coffee prices by producing higher yields and the UNODC and several other institutions in South America, successfully switched thousands of Coca (raw material of cocaine) farmers into coffee farmers. As a result the world coffee oversupply pile up to 3.2 million tons of surplus and kept increasing year after year.
To make things worse, from 1980 to 2000 coffee consumption remained almost static worldwide while production exploded. There is no doubt large companies like Philip Morris and Nestlé got record profits out of this crisis. But besides being indifferent to the collapse of the coffee industry, there is not much else we could blame them for.
Today even though the coffee market price has recovered, the coffee industry still suffers the echoes of those dark times, the coffee market price remains insufficient for farmers and the global coffee production has doubled since the time the International Commodity Agreement (ICA) was originally signed.
SEE ALSO: Could coffee be a sustainable crop?
To conclude, it’s important to remember the global coffee industry officially joined the free market in 1983, as such it’s subject to fluctuations of supply and demand that directly affect price, when the demand is higher than the offer the price increases and when the offer is higher than the demand, it decreases. Unfortunately, today the revenue farmers get out of a cup of coffee sold in a coffee shop is actually about 1%. But to illustrate it better, it is also not less than the money a farmer gets out of the meat from the cattle he raised compared to the restaurant that serves it, likewise, it is not less than the profit he gets from the company that made a jacket from his cow’s leather and so on. My point is, it is deceiving and counterproductive to measure coffee farmer’s revenue this way; being a coffee producer doesn’t entitle the farmer to become a shareholder at the coffee shop.
The brutal and honest truth is this:
“Consuming countries and international companies are not obligated to buy all the coffee produced in the world, especially when they have no market to sell it to. Hence, the coffee market price would remain low as long as coffee farmers keep producing large amounts of coffee, the world’s consumers actually don’t need or want.”