There is a crisis destroying the livelihoods
of 25 million coffee producers around the world. The price of coffee has
fallen by almost 50 per cent 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 per cent of production costs in Viet Nam'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
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 per
cent. Over the last five years the value of coffee exports has fallen by
US$4bn; compare this with total debt repayments by Honduras, Viet Nam, 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 per cent profit margin on instant coffee. Sara Lee's coffee profits are
estimated to be nearly 17 per cent - 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
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, Viet Nam has made a dramatic entry into the
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 per cent 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 per cent per year in demand is easily
outstripped by a more than two per cent 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 standardised 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
backup, 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 and 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 liberalise 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
Even within the free coffee market, these institutions can be
charged with dereliction of duty. Where was the sound economic
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
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 speciality
coffees - are important, but only for some farmers. They can help poverty
reduction and the environment. However, a systemic, not a niche solution,
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 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
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 Organisation, should result in:
Roaster companies paying farmers a decent price
(above their costs of production) so that they can send their children to
school, afford medicines, and have enough food.Increasing the price to farmers by reducing supply and stocks of coffee on the market through:
Roaster companies trading only in coffee that meets basic quality standards
as proposed by the International Coffee Organisation (ICO).
> The destruction of at least five million bags of coffee stocks, funded by rich-country governments and roaster companies.The creation of a fund to help poor farmers shift to alternative livelihoods, making them less reliant on coffee.Roaster companies committing to increase the amount
of coffee they buy under Fair Trade conditions to two per cent of their volumes.
The Rescue Plan should be a pilot for a longer-term
Commodity Management Initiative to improve prices and provide alternative
livelihoods for farmers. The outcomes should include:
Producer and consumer country governments establishing
mechanisms to correct the imbalance in supply and demand to ensure reasonable
prices to producers. Farmers should be adequately represented in such schemes.Co-operation between producer governments to stop more commodities entering the market than can be sold.Support for producer countries to capture more of the value in these commodities.Financed incentives to reduce small farmers' overwhelming dependence on agricultural commodities.Companies paying a decent price for all commodities,
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