Danish Institute for International Studies The Coffee Paradox: Commodity trade and the elusive promise of development Stefano Ponte Senior Researcher Danish Institute for International Studies spo@diis.dk

The coffee paradox Presentation based on forthcoming book co-written with Benoit Daviron of CIRAD, Montpellier (Zed Books, 2005) TOC Preface Ch.1: Commodity trade, development and global value chains Ch.2: What’s in a cup? Coffee from bean to brew Ch.3: Who calls the shots? Regulation and governance Ch.4: Is this any good? Material and symbolic production of coffee quality Ch.5: For whose benefit? ‘Sustainable’ coffee initiatives Ch.6: Value chains or values changed? Ch.7: Conclusion

What is the ’Coffee Paradox’? Contemporary presence of: a ‘coffee crisis’ in producing countries (lowest international prices in a century in real terms) a ‘coffee boom’ in consuming countries (specialty coffee, coffee bar chains, coffee is a ‘cool’ drink again) How can this happen?

The coffee crisis Factors: (1) Oversupply End of ICA (1989) ’Grow more coffee’ campaigns + structural adjustment Technical innovation (Brazil, Vietnam) Is that the whole story?

Is it really the case that oversupply plays such an important role? For decades, the dynamics of world coffee production has followed cycles that are determined by the alternation of long periods of overproduction and short periods of shortage. A statistical analysis of long-term data shows that, until 1970, coffee production followed repeated cycles around an average growth rate of 2.3% per year. From 1880 to 1972, four cycles of booms and busts can be identified: 1889-1921, 1922-1945, and 1945-1972. But the behaviour of world coffee production started to change in the 1970s. First of all, in the 1970-2004 period, the average growth rate decreased to 1.6% on average.

More importantly, the differences between actual values and the trend are much more limited – less than 10% as opposed to 20% during the previous cycles.[1] The ‘boom and bust’ cycle has almost disappeared. This change can be interpreted in relation to new technologies used in coffee production. With the introduction of new varieties, it takes only two years for new trees to be productive. Furthermore, input-intensive production systems provide better capacity to adjust the level of production to the level of price through changing the quantity of inputs employed. What is important to underline here is that the current crisis of the coffee market is not a classical ‘overproduction crisis’ similar to one of the 1930s, when Brazil was burning coffee to run locomotives. It is not similar to the one of the 1960s either – when world production ‘boomed’ with the expansion of coffee cultivation in Brazilian state of Parana and in Africa. The reason of the current crisis must find somewhere else. [1] The objective in this calculation is to eliminate the long-term trend in order to compare different cycles from one ‘boom’ to the next.

The Coffee Crisis Factors: (1) Oversupply (2) Oligopoly (market power) Market liberalisation in developing countries + end of ICA Government agencies do not control exports anymore Few global players controlling the market Buyer-driven value chain

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

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

Additional explanations: Stock-price relation (1) Impact of stocks on price depends on ownership Which stocks are readily mobilizable? ICA period: producing country governments controlled stocks – not mobilizable (or strong uncertainty) Stocks owned by roasters are also ’taken out of the market’ – not mobilizable

Since 2000, the international coffee market has been experiencing a deep crisis. To measure the extent and the specificity of this crisis, Figure 3.3 presents the evolution of international coffee prices from 1880 to 2002. The price indicator used in this figure is the unit import value of green coffee in the US. This indicator gives the possibility to measure a synthetic green coffee price taking into account the diversity of geographical origins and the diversity of coffee varieties. The unit import value is given in constant USD. This means that current values, the ones we can calculate dividing the value of the US imports by the volume of imports, have been deflated by a wholesale price index (now a production price index) provided by the US administration. This indicator provides an evaluation of the long-term evolution of the purchasing power of one unit of green coffee. It indicates that the international price for green coffee is at its lowest level for more than one century, a level even lower than the one reached in the previously worst conjuncture, i.e. after World War I and before World War II. Figure 3.3 also presents a long-term evolution of world coffee stocks. To take into account the growth of the coffee market, stocks here are measured in months of world coffee imports. The simultaneous representation of worlds stocks and international prices will also help us understand the recent transformations in governance and regulation of the coffee value chain and the current crisis. On the international coffee market, like on any primary commodity market, the evolution of international prices is closely related to the evolution of world stocks. The evolution of world stocks is itself the result of the succession of disequilibria between world production and consumption. Figure 3.3 clearly shows the opposite dynamics of world stocks and international prices. It also shows that the relation between these variables has not been stable in the course of history. The huge stocks of the 1950s and 1960s did not cause a price fall in proportion to their scale, even more compared to the beginning of the 20th century or to the 1930s. On the contrary, the dramatic price fall of after 1989 appears totally disproportionate compared with the evolution of stocks. Although several years of production surplus accumulated in the 1980s, the level of stocks was much lower than during the previous crisis and much inferior to the one prevalent in the 1960s (the equivalent of eight months of world imports against 22). Furthermore, it has almost stabilized after 1982. Moreover, since the mid-1990s, stocks have been decreasing from an average of eight months of world imports to an average of four. In a first period, between 1994 and 1998, prices reacted attaining relatively high levels, but then fell again after 1999 in spite of minor changes in the level of stocks. Since 1999, the market has been characterized by historically low levels of prices and of stocks – a radically new situation.

Stock-price relation (2) 1950s-1980s – ICA effect on prices; large stocks, but not available, thus relatively high prices End of ICA – relation stock-price similar to 1910s-1930s After 1997 (SMI) – very low levels of stocks, but much of this is available (moves from roasters to traders): no impact on prices Ownership of stocks counts, in addition to oligopolitic position After ICA: stock moves from producing to consuming countries; part of stock is immobilized by roasters, but part becomes available through traders overall stock levels decrease after 1994;

The ’coffee boom’ (latte revolution) Increase in value-added consumption of coffee and coffee-based beverages Specialty coffee in the US: 17% in volume, 40% value ’High quality’, single origins, espresso based beverages, fair trade, organics, other ’sustainable coffees’

’Sustainable coffees’ Globally, 16,000 tons of certified coffees in 2000 Up to 52,000 tons in 2003 (approx 0.7% of total volume of traded coffee) Except for fair trade, relatively low premium paid to farmers

Market price sept 2003

Equity issues: Distribution of value added along the coffee chain – mainstream market In the 1970s, an average of 20 per cent of total income was retained by producers, In the 1980s, producers still controlled almost 20 per cent of total income; After the collapse of ICA in 1989, the situation changed dramatically. Between 1989/90 and 1994/95, the proportion of total income gained by producers dropped to around 13 per cent: this is before the coffee crisis kicked in The share of income retained by producers in the early 2000s (the coffee crisis started in late 1999) is likely to have dropped further due to the current situation of oversupply and low prices for green coffee and the ability of roasters to maintain retail prices at relatively stable levels.

Unit import value for green coffee and gross margin for roasted coffee in the US (1980-2002) (USD/pound).

A different way of telling the story

Are specialty and sustainable coffees scoring any better? Specialty (as ’high quality’) R&G sale at Starbucks, USA (Kilimanjaro peaberry) 4% goes to the farmer Coffee cup at Starbucks, USA (same kind of coffee) 1% goes to the farmer Organic: same as above Fair trade Supermarket sale, espresso blend, Italy 21% goes to the coop (same % as in old ICA system) Specialty shop, Kili single origin, USA 11% goes to the coop

What is quality? Material attributes Symbolic attributes In-person services

Material attributes Quality in producing countries mainly relates to material attributes Market liberalisation: one price for all coffee – no incentive to farmers ’Material quality crisis’

Symbolic attributes and in-person services This is what is sold to consumers in the North Branding and packaging Ambience of consumption Esoticism, good stories Lifestyle In-person service (bar, restaurant, specialty shop) This is where the value added comes from As long as producers do not control part of this value addition, there will be no way out of the ’commodity problem’ in developing countries

Solutions? (1) Supply management – I am skeptical Failure of ACPC cartel Failure of the ICO CQP to have regulatory bite Competition policy (to break the abuse of oligopolistic position) – legally tricky Diversification – difficult to impose as a ’policy’; also, in some areas, there are no alternatives Improve material quality Yes, if there are financial incentives (premium) or positive returns – not at present for smallholders Coordination mechanisms need to be re-established in producing countries

Solutions? (2) Sustainability certifications? Improve transparency Still small, but growing BUT, premium is needed at farm-gate Lower costs of certification Consumers need to pay more for getting more Improve transparency Labelling rules (indicate type of coffee used, %, origin)

Solutions? (3) Cultivate consumers, not more coffee The ’wine route’ Sell lifestyle, not poverty or development message, to mainstream consumers Producers need to sell ’symbolic’ quality and control returns from it Location, esoticism, origin, combination with crafts/music Limited inroads in in-person service provision (agro-tourism) Direct marketing, internet auctions Key: Appellation systems with legal backing; IPR protection Producer associations built around appellation areas