By WeBuyItGreen: promoting green living and fair trade
This is the first in a five-part series of articles that compare three alternatives to the traditional coffee trade industry: fair trade, direct trade, and Starbucks’ C.A.F.E. program. However, before we compare these three alternatives to one another, let’s take a look at why fair trade coffee was created in the first place. What conditions in the traditional coffee industry have created the need for fair trade, or some alternative that resembles it?
Over the past fifteen years, prices paid to the small farmers who produce coffee have dropped precipitously. In 2002, Oxfam reported that in real dollars, prices paid to coffee growers had reached a 100-year low, with prices dropping throughout Latin America and Africa. For example, the average price paid to Mexican producers in 1994 was $1.49 per pound. By 2000, the price had dipped to 47 cents per pound. These price declines were not affecting roasters in consuming countries in the same way that they were affecting the producers. In 1970, an average of 20% of total income generated along the coffee chain was retained by producers, with an average of 53% going to consuming countries. By 1995, the proportion of income going to producers had fallen to 13%, while consuming countries were retaining 78%. As green coffee prices on the international market declined by half from 1999 to 2001, the average U.S. retail price dropped by less than 4% (Ponte, 14-15).
Nearly three-quarters of the world’s coffee is grown by small farmers on plots of 25 acres or less. They have born the brunt of the decline in falling prices. The Wall Street Journal reported that this collapse in coffee prices paid to producers was contributing to "societal meltdowns affecting 125 million people" (Fritch, 2002).
What caused this drop in prices and increasing disparity in income generated in producing and consuming countries? From 1962-1989, the production and sale of coffee was regulated under the International Coffee Agreements (ICA’s), to which most consuming and producing countries had agreed. Under this system, target prices were set and export quotas allocated to producing countries. When prices rose above a certain agreed-upon target, quotas (coffee supplies available for trade) were increased to bring the price down, and when prices fell below the agreed-upon standard, quotas were decreased in order to raise prices. The system provided price stability, but was not without problems. Money from coffee had to be spent on state regulatory institutions, quota allocations were sometimes based on politics, corruption was common, and growers often received only a small portion of the export income. However, when the ICA’s were eliminated in 1989, this did not improve the situation for farmers.
Rather, the removal of the ICA’s meant the removal of limitations upon supply. Vietnam entered the coffee producing market in the 1990's, creating a dramatic increase in supply. Prices have dropped, price instability has increased, and there has been a shift of power and wealth from governments and regulatory bodies in producing countries to a small number of transnational corporations that import and roast the coffee in consuming countries.
During the 1980’s, mergers and acquisitions in the coffee industry were encouraged by deregulation under the Reagan administration. By the 21st century, a few major manufacturers controlled over 60% of coffee sales: Nestle’, Philip Morris, Sara Lee, and Procter and Gamble (Talbot, 220-224). Similarly, fewer trading companies acquired greater shares of the business of importing coffee to the consuming countries, with Neumann, Volcafe, ED&F Man, Cargill, and Goldman, Sachs controlling over 40% of world imports by the early 1990’s.
These large corporations have distinct advantages over smaller companies. During the banking deregulation of the 1980’s, the line between large traders and banks became increasingly blurred. Traders became more involved in the commodity futures market and added financial services to their trading practices, while some banks, such as Goldman, Sachs, became importers of commodities like coffee. The resulting large trading/financial institutions were able to quickly move funds from one commodity to another in response to price changes, protecting themselves against volatility and quickly taking advantage of profit opportunities.
During the 1990’s, the price of coffee was increasingly driven by speculators investing in coffee futures based on market movement rather than projections of future supply and demand. Access to accurate information and expertise in analyzing data became critical for coffee investors. Success increasingly depended upon rapid interpretation of information about crop forecasts, political conditions in producing countries, trade policies, exchange rates, and market analysis of alternative investment opportunities. The large transnational corporations that now manufacture and trade coffee have distinct advantages in accessing the expertise and information needed to accurately predict changes in price (Talbot, 234-236). Their resources enable them to foresee and profit from temporary price increases, and to predict and hedge against future declines.
However, local farmers who produce the coffee do not have access to these resources for profiting from the commodities market and hedging against price declines. Their cooperatives have difficulty competing with the local subsidiaries of large trading firms (Ponte, 31). The free trade market that now exists in the coffee industry is a system in which a few, large companies can compete and win. But the farmers who produce the coffee are losing badly and cannot hope to succeed without fundamental change. In our next article, we will examine the pros and cons of fair trade as an alternative for improving the livelihood of coffee growers.
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Fritch, Peter. 2002. "Bitter Brew: An Oversupply of Coffee Beans Deepens Latin America's Woes." Wall Street Journal, Vol CCXL, No. 5: A1, July 8.
Murray, Douglas, Raynolds, Laura T., Taylor, Peter Leigh. 2003. "One Cup at a Time: Poverty Alleviation and Fair Trade Coffee in Latin America." Colorado State University: Fair Trade Research Group.
Ponte, Stefano. 2001. "The 'Latte Revolution'? Winners and Losers in the Restructuring of the Global Coffee Marketing Chain." CDR Working Paper 01.3. Copenhagen: Centre for Research Development.
Talbot, John. 2002. "Information, Finance and the New International Inequality: the Case of Coffee." Journal of World-Systems Research, VIII, 2, Spring 2002, 214-250.