Big players are the winners during surplus or scarcity Special report: globalisation
Charlotte Denny and Alex Bellos in Rio de Janeiro Tuesday May 15, 2001 The Guardian
Torching nearly a million tonnes of surplus coffee beans is a radical way of solving the crisis in the world's coffee markets. But with prices at 30-year lows and farmers already burning their crop for fuel because it is uneconomic to sell it, the world's coffee producers may have to start thinking the unthinkable. This week in the plush surroundings of the Hilton - where a cup of coffee costs £3.50 - producers and consumer countries will be discussing the crash in prices which has halved the incomes of the 10m farmers dependent on the crop.
Tomorrow Oxfam will suggest a mass destruction programme of excess coffee beans funded by a windfall tax on the big coffee grinding companies, Nestlé, Kraft and Sara Lee. They estimate 15m bags of low grade coffee would need to be burnt to get the market back into balance and push prices above $1 a lb. The cost of the programme and compensation for the farmers would be $250m - which would be paid by the coffee roasting companies.
Wholesale prices have collapsed over the last three years from nearly $2.40 per lb to just under 50 cents, the lowest levels in thirty years. Allowing for the effects of inflation, coffee has never been so cheap.
Not that the consumer would have guessed. In the supermarket, a 100g jar of Nescafé Gold Blend has risen in price from £1.56 to £2.14 since 1994.
Even at the best of times, coffee farmers receive a fraction of the price western consumers pay. Three years ago, when coffee prices were twice present levels, farmers received 14% of the retail price of a jar of instant. Today that figure is 7%.
Somebody is making money from coffee, and it is not the farmers. Developing countries captured less than a third of the $43bn generated globally by coffee in 1997. The lion's share is captured by the big coffee processing groups such as Philip Morris and Nestlé.
For the producing countries, the situation is getting desperate. Coffee growing isn't economic at these prices.
"The crisis in coffee markets is producing record profits for some and mass poverty for others," says Celine Charveriat, policy adviser at Oxfam, the international development charity.
In Tanzania, farmers can no longer afford school fees, in Chiapas state, south Mexico, seasonal labourers already on the poverty line have had their wages dramatically cut. Many have migrated to cities rather than starve in the countryside.
For Uganda, which depends on coffee for more than half its export earnings, the price slump has cost it $190m - the equivalent of half the amount of debt relief it has received from the West.
Agnaldo Jose de Lima, president of the association of coffee producers of Patrocinio, in the Brazilian state Minas Gerais, says the price is less than the cost of production.
"In my area you are seeing harvests abandoned. There is no point cultivating on weaker parts of land. You cannot recoup your investment. The farmer gets into a vicious circle. He cannot afford any fertilizer so the size of his crop falls, which means that he has even less money to invest."
Last May, the Association of Coffee Producing Countries (ACPC) hammered out an agreement to withhold up to 20% of its production from export to lift prices. This is the third such attempt to control the coffee market, but like the previous two it has been a dismal failure.
The problem is that the planned cuts are dwarfed by the size of the stockpiles built up by previous years of oversupply. The global coffee mountain stands at 56m bags - 3.12m tonnes of surplus beans.
Coffee consumption has remained relatively static for 20 years as production has exploded. The world grinds its way steadily through 103m bags of coffee a year on average, and unless coffee drinking takes off in a big way in populous countries like India and China, that looks unlikely to change. The International Coffee Organisation estimates production for 2000-1 will be 113m bags. Coffee exports have increased by 15% since 1990 because of new plantings by established producers and the arrival of newcomers to the market. Desperate for dollars to pay off western loans, developing countries have seized on coffee as an ideal cash crop.
Ten years ago, Vietnam was an insignicant producer of coffee. Today its industry, founded with World Bank loans, is the second largest after Brazil. In Colombia and Brazil, farmers were encouraged to switch from growing coca - the raw ingredient for cocaine - to coffee.
Unless coffee producers drastically change their policies, Oxfam says they are heading for a collective disaster. Rivalries between producing nations are hamper ing their attempts to tackle the crisis. Many of the Asian countries have raised production as prices have fallen to try to increase their revenues, but instead have contributed to the oversupply.
The Latin American countries back a renewed effort to make the export retention plan stick. The retention plan demands tough actions since coffee cannot be kept forever, and farmers are reluctant to see their harvest rot. Most of the producing countries lack anywhere to store the sur plus. The ACPC's poorer African members have very little choice but to sell all their crop because they need the money.
"What none of them wants to bite the bullet on is the fact that a huge amount of coffee needs to be destroyed," says Oxfam policy adviser Kevin Watkins. "The coffee mountain has to go, just moving it isn't the solution."
Oxfam says the big players have failed to pass on falling prices to consumers. "Indeed these trends have strengthened their market power along the supply chain, as they can pick and choose suppliers in Asia, Africa and Latin America, taking full advantage of lower prices and exercising their market power against vulnerable suppliers," says Ms Charveriat.
David Nahum, secretary general of the Brazilian Coffee Industry Associ ation, agrees that there is a crisis, but says the solution is to increase consumption, not destroy coffee. "Other producer countries should take Brazil's example. Ten years ago we consumed 6.8m bags. Now we consume 13.4m a year. The consumption in places like Indonesia and Central America is still very low."
The radical solution may become more appealing to western governments when they consider the alternatives. Faced with falling prices, farmers in Latin America may decide that it makes sense to go back to growing drugs.