The Coffee The Coffee Paradox:Paradox:

Commodity trade and Commodity trade and the elusive promise of the elusive promise of

developmentdevelopmentStefano PonteStefano Ponte

Senior ResearcherSenior ResearcherDanish Institute for International Danish Institute for International

StudiesStudiesspo@diis.dkspo@diis.dk

The coffee paradoxThe coffee paradox Presentation based on forthcoming book co-Presentation based on forthcoming book co-

written with Benoit Daviron of CIRAD, Montpellier written with Benoit Daviron of CIRAD, Montpellier (Zed Books, 2005)(Zed Books, 2005)

TOCTOC PrefacePreface Ch.1: Commodity trade, development and global value Ch.1: Commodity trade, development and global value

chainschains Ch.2: Ch.2: What’s in a cup? Coffee from bean to brewWhat’s in a cup? Coffee from bean to brew Ch.3: Who calls the shots? Regulation and governanceCh.3: Who calls the shots? Regulation and governance Ch.4: Is this any good? Material and symbolic production Ch.4: Is this any good? Material and symbolic production

of coffee qualityof coffee quality Ch.5: For whose benefit? ‘Sustainable’ coffee initiativesCh.5: For whose benefit? ‘Sustainable’ coffee initiatives Ch.6: Value chains or values changed?Ch.6: Value chains or values changed? Ch.7: ConclusionCh.7: Conclusion

What is the ’Coffee What is the ’Coffee Paradox’?Paradox’?

Contemporary presence of:Contemporary presence of: a ‘coffee crisis’ in producing countries a ‘coffee crisis’ in producing countries

(lowest international prices in a century (lowest international prices in a century in real terms)in real terms)

a ‘coffee boom’ in consuming countries a ‘coffee boom’ in consuming countries (specialty coffee, coffee bar chains, (specialty coffee, coffee bar chains, coffee is a ‘cool’ drink again)coffee is a ‘cool’ drink again)

How can this happen?How can this happen?

The coffee crisisThe coffee crisis

Factors:Factors: (1) Oversupply(1) Oversupply

End of ICA (1989)End of ICA (1989) ’’Grow more coffee’ campaigns + Grow more coffee’ campaigns +

structural adjustment structural adjustment Technical innovation (Brazil, Vietnam)Technical innovation (Brazil, Vietnam) Is that the whole story?Is that the whole story?

World coffee production : five year average

0

20

40

60

80

100

120

140

160

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Year

Mil

lio

ns

of

60

-Kg

ba

gs

World coffee production : trend difference

-30

-20

-10

0

10

20

30

40

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Year

The Coffee CrisisThe Coffee Crisis

Factors:Factors: (1) Oversupply(1) Oversupply (2) Oligopoly (market power)(2) Oligopoly (market power)

Market liberalisation in developing Market liberalisation in developing countries + end of ICAcountries + end of ICA

Government agencies do not control exports Government agencies do not control exports anymoreanymore

Few global players controlling the marketFew global players controlling the market Buyer-driven value chainBuyer-driven value chain

Green coffee market share by international trade company (1998) (%)

Neumann16%

Volcafe'13%

Cargill6%

Esteve6%Aron

5%

Man4%

Dreyfus3%

Mitsubishi3%

Others44%

Market share of roasting and instant manufacturing companies (1998) (%)

Philip Morris25%

Nestle'24%

Sara Lee7%

P&G7%

Tchibo6%

Others31%

Additional explanations:Additional explanations:Stock-price relation (1)Stock-price relation (1)

Impact of stocks on price depends on Impact of stocks on price depends on ownershipownership

Which stocks are readily mobilizable?Which stocks are readily mobilizable? ICA period: producing country ICA period: producing country

governments controlled stocks – not governments controlled stocks – not mobilizable (or strong uncertainty)mobilizable (or strong uncertainty)

Stocks owned by roasters are also Stocks owned by roasters are also ’taken out of the market’ – not ’taken out of the market’ – not mobilizable mobilizable

STOCKS AND US COFFEE IMPORT VALUE

0,00

5,00

10,00

15,00

20,00

25,00

1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Sto

cks

(Mon

ths

of w

orld

impo

rts)

0,00

20,00

40,00

60,00

80,00

100,00

120,00

US

Im

port

Val

ue (

Cen

ts b

y po

und,

196

7 do

llar)

Stocks US Unit import Value

Brazilian Monopoly

Imperial fragmentation

International AgreementsAgreements

SMI

Stock-price relation (2)Stock-price relation (2) 1950s-1980s – ICA effect on prices; large 1950s-1980s – ICA effect on prices; large

stocks, but not available, thus relatively stocks, but not available, thus relatively high priceshigh prices

End of ICA – relation stock-price similar to End of ICA – relation stock-price similar to 1910s-1930s1910s-1930s

After 1997 (SMI) – very low levels of After 1997 (SMI) – very low levels of stocks, but much of this is available stocks, but much of this is available (moves from roasters to traders): no (moves from roasters to traders): no impact on pricesimpact on prices

Ownership of stocks counts, in addition to Ownership of stocks counts, in addition to oligopolitic positionoligopolitic position

The ’coffee boom’ (latte The ’coffee boom’ (latte revolution)revolution)

Increase in value-added Increase in value-added consumption of coffee and coffee-consumption of coffee and coffee-based beveragesbased beverages

Specialty coffee in the US: 17% in Specialty coffee in the US: 17% in volume, 40% valuevolume, 40% value

’’High quality’, single origins, High quality’, single origins, espresso based beverages, fair espresso based beverages, fair trade, organics, other ’sustainable trade, organics, other ’sustainable coffees’coffees’

’’Sustainable coffees’Sustainable coffees’

Globally, 16,000 tons of certified Globally, 16,000 tons of certified coffees in 2000coffees in 2000

Up to 52,000 tons in 2003 (approx Up to 52,000 tons in 2003 (approx 0.7% of total volume of traded 0.7% of total volume of traded coffee)coffee)

Except for fair trade, relatively low Except for fair trade, relatively low premium paid to farmerspremium paid to farmers

Table 5.9: Premium levels for certified ‘sustainability’ coffees

Market price* ($/kg, green)

Utz Kapeh premium** ($/kg green)

Organic premium ($/kg green)

Fair trade premium ($/kg green)

Shade-grown premium ($/kg green)

Mild Arabica 1.47 0.15 0.35 1.30 0.12 – 0.40

Natural Robusta 0.68 0.00 0.23 1.65 n.a.

Equity issues: Distribution of value Equity issues: Distribution of value added along the coffee chain – added along the coffee chain –

mainstream marketmainstream market

0,0

50,0

100,0

1971-80 1981-88 1989-99

value added inconsumingcountries

transport costsand weight loss

value added inproducingcountries

price paid togrowers

Unit import value for green coffee and gross margin for roasted coffee in the US

(1980-2002) (USD/pound).

0

0,5

1

1,5

2

2,5

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Do

llar

pe

r p

ou

nd

Gross margin for roasted coffee

Unit import Value of greencoffee

A different way of telling A different way of telling the storythe story

Tanzania-Italy value chain for espresso blends

0,00

10,00

20,00

30,00

40,00

50,00

60,00

70,00

80,00

90,00

100,00

farm-gate auction export harbour import harbour roaster retail

value chain node

% o

f co

nsu

mp

tio

n p

rice

home, low-end

home, mid-range

home, high-end

bar, mid-range

bar, high-end

Are specialty and Are specialty and sustainable coffees scoring sustainable coffees scoring

any better?any better? Specialty (as ’high quality’)Specialty (as ’high quality’)

R&G sale at Starbucks, USA (Kilimanjaro R&G sale at Starbucks, USA (Kilimanjaro peaberry)peaberry)

4% goes to the farmer4% goes to the farmer Coffee cup at Starbucks, USA (same kind of Coffee cup at Starbucks, USA (same kind of

coffee)coffee) 1% goes to the farmer1% goes to the farmer

Organic: same as aboveOrganic: same as above Fair tradeFair trade

Supermarket sale, espresso blend, ItalySupermarket sale, espresso blend, Italy 21% goes to the coop (same % as in old ICA system)21% goes to the coop (same % as in old ICA system)

Specialty shop, Kili single origin, USASpecialty shop, Kili single origin, USA 11% goes to the coop11% goes to the coop

What is quality?What is quality?

Material attributesMaterial attributes Symbolic attributesSymbolic attributes In-person servicesIn-person services

Material attributesMaterial attributes

Quality in producing countries Quality in producing countries mainly relates to material attributesmainly relates to material attributes

Market liberalisation: one price for Market liberalisation: one price for all coffee – no incentive to farmersall coffee – no incentive to farmers

’’Material quality crisis’Material quality crisis’

Symbolic attributes Symbolic attributes and in-person servicesand in-person services

This is what is sold to consumers in the NorthThis is what is sold to consumers in the North Branding and packagingBranding and packaging Ambience of consumptionAmbience of consumption Esoticism, good storiesEsoticism, good stories LifestyleLifestyle In-person service (bar, restaurant, specialty shop)In-person service (bar, restaurant, specialty shop)

This is where the value added comes fromThis is where the value added comes from As long as producers do not control part of As long as producers do not control part of

this value addition, there will be no way out of this value addition, there will be no way out of the ’commodity problem’ in developing the ’commodity problem’ in developing countriescountries

Solutions? (1)Solutions? (1) Supply management – I am skepticalSupply management – I am skeptical

Failure of ACPC cartelFailure of ACPC cartel Failure of the ICO CQP to have regulatory biteFailure of the ICO CQP to have regulatory bite

Competition policy (to break the abuse of Competition policy (to break the abuse of oligopolistic position) – legally trickyoligopolistic position) – legally tricky

Diversification – difficult to impose as a Diversification – difficult to impose as a ’policy’; also, in some areas, there are no ’policy’; also, in some areas, there are no alternativesalternatives

Improve material qualityImprove material quality Yes, if there are financial incentives (premium) or Yes, if there are financial incentives (premium) or

positive returns – not at present for smallholderspositive returns – not at present for smallholders Coordination mechanisms need to be re-Coordination mechanisms need to be re-

established in producing countriesestablished in producing countries

Solutions? (2)Solutions? (2)

Sustainability certifications?Sustainability certifications? Still small, but growingStill small, but growing BUT, premium is needed at farm-gateBUT, premium is needed at farm-gate Lower costs of certificationLower costs of certification Consumers need to pay more for getting moreConsumers need to pay more for getting more

Improve transparencyImprove transparency Labelling rules (indicate type of coffee used, Labelling rules (indicate type of coffee used,

%, origin)%, origin)

Solutions? (3)Solutions? (3) Cultivate consumers, not more coffeeCultivate consumers, not more coffee

The ’wine route’The ’wine route’ Sell lifestyle, not poverty or development message, to Sell lifestyle, not poverty or development message, to

mainstream consumersmainstream consumers Producers need to sell ’symbolic’ quality and control Producers need to sell ’symbolic’ quality and control

returns from itreturns from it Location, esoticism, origin, combination with crafts/musicLocation, esoticism, origin, combination with crafts/music Limited inroads in in-person service provision (agro-Limited inroads in in-person service provision (agro-

tourism)tourism) Direct marketing, internet auctionsDirect marketing, internet auctions Key: Appellation systems with legal backing; IPR protectionKey: Appellation systems with legal backing; IPR protection

Producer associations built around appellation areasProducer associations built around appellation areas