Mugged: Poverty in Your Coffee Cup

By Oxfam America

December 10, 2005

In this report, Oxfam calls for the major players in the coffee industry to support a Coffee Rescue Plan to overcome the current crisis and create a more stable market.

Over the past five years, the price of coffee has fallen almost 70 percent from a high in 1997, to a 30-year low, in many cases, forcing coffee farming families out of business. Small coffee farmers in developing countries sell their beans for less than they cost to produce. Meanwhile, the largest coffee corporations continue to reap enormous profits. In this report, Oxfam calls for the major players in the coffee industry to support a Coffee Rescue Plan to overcome the current crisis and create a more stable market. The report analyzes the origins and effects of collapsed coffee prices and urges American consumers to join Oxfam in bringing relief to farmers and a change to the system.

SUMMARY

There is a crisis destroying the livelihoods of 25 million coffee producers around the world. The price of coffee has fallen by almost 50 percent in the past three years to a 30-year low. Long-term prospects are grim. Developing-country coffee farmers, mostly poor smallholders, now sell their coffee beans for much less than they cost to produce – only 60 percent of production costs in Vietnam’s Dak Lak Province, for example. Farmers sell at a heavy loss while branded coffee sells at a hefty profit. The coffee crisis has become a development disaster whose impacts will be felt for a long time.

Families dependent on the money generated by coffee are pulling their children, especially girls, out of school. They can no longer afford basic medicines, and are cutting back on food. Beyond farming families, coffee traders are going out of business. National economies are suffering, and some banks are collapsing. Government funds are being squeezed dry, putting pressure on health and education and forcing governments further into debt.

The scale of the solution needs to be commensurate with the scale of the crisis. A Coffee Rescue Plan, which brings together all the major players in the coffee trade, is needed to make the coffee market benefit the poor as well as the rich. This is about more than coffee. It is a key element in the global challenge to make trade fair. The coffee market is failing. It is failing producers on small family farms for whom coffee used to make money. It is failing local exporters and entrepreneurs who are going to the wall in the face of fierce international competition. And it is failing governments that had encouraged coffee production to increase export earnings.

Ten years ago producer-country exports captured one-third of the value of the coffee market. Today, they capture less than ten percent. Over the last five years the value of coffee exports has fallen by US$4bn; compare this with total debt repayments by Honduras, Vietnam, and Ethiopia in 1999 and 2000 of US$4.7bn.

The coffee market will also, arguably, end up failing the giant coffee processing companies, at present so adept at turning green beans into greenbacks. The big four coffee roasters, Kraft, Nestlé, Procter & Gamble, and Sara Lee, each have coffee brands worth US$1bn or more in annual sales. Together with German giant Tchibo, they buy almost half the world’s coffee beans each year. Profit margins are high – Nestlé has made an estimated 26 percent profit margin on instant coffee. Sara Lee’s coffee profits are estimated to be nearly 17 percent – a very high figure compared with other food and drink brands. If everyone in the supply chain were benefiting this would not matter. As it is, with farmers getting a price that is below the costs of production, the companies’ booming business is being paid for by some of the poorest people in the world.

Paying prices as low as they can go – whatever the consequences for farmers – is a dangerous business strategy in the long term. And even in the short term it does not help the business interests of the producers of instant coffee. It is particularly risky given that these companies depend on the goodwill of consumers. The rise of Fair Trade sales in recent years has demonstrated that consumers care about the misery of those who produce the goods they buy.

The coffee industry is in the process of a radical and, for many, extremely painful overhaul. It has been transformed from a managed market, in which governments played an active role both nationally and internationally, to a free-market system, in which anyone can participate and in which the market itself sets the coffee price. Recently this has brought very cheap raw material prices for the giant coffee companies.

At the same time, Vietnam has made a dramatic entry into the market and Brazil has increased its already substantial production. The result is that more coffee is being produced and more lower quality coffee traded, leading to a cataclysmic price fall for farmers. Eight percent more coffee is currently being produced than consumed. In the meantime, coffee companies have been slow to comply with what one of them identified as being their core responsibility within the current crisis: the generation of demand for coffee. The current growth rate of 1-1.5 percent per year in demand is easily outstripped by a more than two percent increase in supply.

Despite the stagnant consumer market, the coffee companies are laughing all the way to the bank. In the free market their global reach gives them unprecedented options. Today’s standardized coffee blends may be a mix of coffees from as many as 20 different coffee types. Sophisticated risk management and hedging allows the companies, at the click of a computer mouse, to buy from the lowest-cost producer to mix these blends.

At the other end of the value chain the market does not feel so free. Without roads or transport to local markets, without technical back-up, credit, or information about prices, the vast majority of farmers are at the mercy of itinerant traders offering a ’take it or leave it’price. Their obvious move out of coffee and into something else is fraught with problems. It requires money that they don’t have alternative crops that offer better prospects. For a farmer to turn her back on the four years spent waiting for coffee trees to start bearing fruit is a highly risky strategy.

The coffee-market failure is also, in part, a result of stunning policy failure by international institutions. The World Bank and the IMF have encouraged poor countries to liberalize trade and pursue export-led growth in their areas of ‘comparative advantage’. The problem for many poor countries is that the advantage can be very slim indeed – as the flood of coffee and other primary agricultural commodities onto global markets shows. These countries are stuck selling raw materials that fail, utterly, to capture the value added by the time the product hits the supermarket shelves.

Even within the free coffee market, these institutions can be charged with dereliction of duty. Where was the sound economic advice to developing countries on overall global commodity trends, and their likely impact on prices? What urgent steps are donor governments taking to ensure that efforts to create a more manageable debt burden for the poorest countries are not undermined by commodity shocks?

Until now, rich consumer countries and the huge companies based in them have responded to the crisis with inexcusable complacency. In the face of human misery, there have been many words yet little action. Existing market-based solutions – Fair Trade and the development of specialty coffees – are important, but only for some farmers. They can help poverty reduction and the environment. However, a systemic, not a niche solution, is needed.

The challenge is to make the coffee market work for all. The failures of previous efforts at intervention in the market must be understood and lessons learned. But so too must the lessons of the moment. The low coffee price creates a buyers’ market, leaving some of the poorest and most powerless people in the world to negotiate in an open market with some of the richest and most powerful. The result, unsurprisingly, is that the rich get richer and the poor get poorer. Active participation by all players in the coffee trade is needed to reverse this situation. The next year is critical. Coffee-producing governments have agreed to a plan that aims to reduce supply by improving the quality of coffee traded. This will only work if it is backed by the companies and by rich countries and is complemented by measures to address long-term rural underdevelopment.

Oxfam is calling for a Coffee Rescue Plan to make the coffee market work for the poor as well as the rich. The plan needs to bring together the major players in coffee to overcome the current crisis and create a more stable market. Within one year the Rescue Plan, under the auspices of the International Coffee Organization, should result in :