1994 was a turbulent coffee year. Prices doubled compared to the year before, but after a peak in September, they gradually fell. This sharp movement of prices had several causus: an attempt by the coffee exporting countries to exercise some control over the supplies; rumours of poor crops - especially in Brazil; and the speculations which tend to accompany such rumours. After years of low prices which failed to even cover production costs, the higher prices will benefit coffee growers. This higher price level, however, means that the middlemen have also thrown themselves into the coffee trade again. They offer the producers tempting amounts in hard cash. As small producers' co-operatives usually lack the working capital to do so, their existence is threatened. But as soon as coffee prices start to fall again - which, according to experts, is only a matter of time - the coffee growers will need their co-operatives very badly.
After several years of extremely low coffee prices, prices rose to an unprecedented level in 1994. Because traders expected demand to outstrip supply in the 1994/95 season, they were willing to offer higher prices. Their expectations were primarily based on reports of frost damage in Brazil, which is by far the most important coffee producer. In mid 1995 coffee prices are still relatively high. Estimates for the 1995/96 season are that overall coffee production will remain below the average for the preceding years. A 'mini-harvest' is expected, particularly in Brazil. The continuing high prices will invite renewed investment in coffee bushes. This means that, in due course, supplies will increase and prices will fall accordingly. Things will have come full circle.
The world market price for coffee is basically a sort of weighted average of the prices of various coffee types. One can distinguish, for instance, between 'Robusta' and 'Arabica'. Theoretically therefore it is impossible to speak of the world market price. But it can be used to indicate general trends. In the 1960s, overproduction of coffee kept the price very low. This situation changed in the early 1970s, when production and consumption balanced each other fairly well. In the second half of the 1970s, the coffee price was high, sometimes even extremely high. This upswing was caused by the frost in Brazil.
Prices remained relatively high after 1980, and in 1986 the price peaked again, this time due to a period of drought in Brazil. This peak was followed by a sharp drop in prices. The coffee price did not recover until 1993, when a price increase was initially brought about by an agreement between a number of exporting countries, which had finally agreed to restrict coffee exports. Even before the commitments of this agreement had been met, it led to different patterns on the coffee market. Traders felt that the climate was going to change. By starting to buy up coffee, they ran ahead of the expected situation and thus actually created it, which gave a great boost to the prices. In mid 1994 this effect was reinforced by two successive night frosts in Brazil. Rumours spread and made the coffee market highly attractive to speculators, whose 'demand' actually set off these price increases. The amount of coffee sold was many times larger than the supplies available. In September the prices reached a peak, 'other mild arabica' being sold at 489,43 US cents/kg. Prices began to show a modest decrease in the last three months of 1994, and speculators shifted their attention to other commodities. At the end of December, the price for 'other milds' had dropped to 371,57 cents/kg. The situation in the first half of 1995 is that all coffee sold is actually available for immediate delivery. The more speculative trading in futures seems to be over for a while. (1)
(1). In July 1995, speculators were back in business. The prices on the futures market are considerably lower than those on the physical market. This price movement on the futures market seems unrelated to the supplies of coffee expected to be available in the long term.
The sharp price increase in 1994 was in fact accompanied by an actual drop in production. According to the International Coffee Organisation (ICO), coffee production in 1992 amounted to 95.8 million bags (of 60 kg) worldwide. One year later, it had decreased to 91.0 million bags, and last year's production is estimated at 89.0 million bags. Consumption fell from 96.7 million bags in 1993 to 96.4 million bags in 1994. The ICO production estimates for the current (1994/95) and the next (1995/96) crop year are 91.9 and 85.2 million bags respectively. Assuming a consumption of some 95 million bags, this might result in a considerable shortage, but shortages will certainly not be lasting. The higher coffee prices in 1994 have had a positive effect on the planting of new coffee trees and on the attention being paid to the existing ones. Moreover, other cash crops offer hardly any better perspectives, and coffee production in Asia is still expanding. In the long term there is a real danger of overproduction unless producing countries reach effective agreements on the total size and distribution of production.
Speculation on the commodity market and the interests involved make the coffee market highly susceptible to rumours, which may have the character of a self-fulfilling prophecy. It is certain that it is not the coffee growers who benefit from the profits earned through speculation. It is also true that the coffee market seems to show fluctuations almost 'by nature'. High prices inspire producers to take greater care of their coffee bushes and plant new ones. After a few years, their investments will lead to greater supplies, putting pressure on the prices. When prices are low, producers will tend to neglect their coffee bushes, which will lead to a gradual decrease in supplies and the resumption of the same cycle. Brazil plays a significant role in this context. The region where the coffee production is concentrated is vulnerable to night frost. Because Brazil is the biggest producer, a poor harvest (or a rumour of a poor harvest) has a direct effect on the coffee prices. However, for Brazil, coffee is just one of many export products. And the Brazilian economy is therefore not overly affected by fluctuations in the coffee price. This is totally different for a number of African countries, such as Burundi, Rwanda and Uganda. They have a small market share (and thus no influence), but their economies are largely dependent on coffee exports.
International arrangements The governments of exporting and importing countries have made various attempts to stabilise the coffee price. Since 1962, the ICO concluded four so-called International Coffee Agreements, the last of which collapsed in 1989. The principal instrument was the distribution of export quotas among the member states. This quota arrangement came into effect as soon as world market prices fell below a certain level. But the distribution of the quotas became a major problem, in particular when a number of Asian countries sought to increase their market share (2). Also to ensure observance of the quotas was far from easy. Under pressure of their debt obligations, ICO members exported excess supplies of coffee to non-ICO member countries. For the coffee roasters, the result of the quota arrangement was that they could not always obtain the types and qualities of coffee they needed for their blends. Forced by the low price level, a number of exporting countries reached an agreement on so-called voluntary export restrictions in 1993. This Association of Coffee Producing Countries (ACPC) started with 28 members, representing approximately 85% of total coffee production. One of the newcomers, Indonesia, joined at a later stage (April 1994). This association prompted the price increase at the end of 1993, as its members started to hold coffee back. When prices rose to a record high, partly as a result of the rumours about the Brazilian coffee production, this measure became superfluous. It should be added that not all coffee-exporting countries are members.
(2). Asian countries have stepped up their coffee production considerably in the past few years. The continent has surpassed Africa as the second exporting zone in the world after Latin America. This expansion posed a major obstacle in the discussion on the sharing out of quotas.
Mexico, for instance, is not among them, partly because its main business partner, the United States, is strongly opposed to this infringement on the market mechanism. In July 1995, when market prices were falling, Colombia and the Central-American coffee- producing countries decided to restrict their coffee exports. Brazil joined this initiative, followed by the main coffee-exporting countries in Asia and Africa. The countries involved intend to restrict their exports to 60 million bags, i.e. 10 million less than the amount consumed by the importing countries. The ACPC thus seeks to reduce the consuming countries' huge stocks from earlier years of overproduction to normal levels.
Higher (international) coffee prices seem to benefit the producers (3), because they receive a better price. However, although high prices are obviously preferable to low prices from the producer's point of view, they do involve a number of drawbacks. First, a higher world market price is not passed on directly to the producers. Governments take their share in the form of export duties. State buying agencies, mainly found in Africa, also get a piece of the pie. And finally, there are the (private) middlemen and export organisations. These have a bad name, especially in Latin America, because they take advantage of the fact that the farmers largely depend on them. Second, the benefits of a sudden rise in prices accrue primarily to organisations which have supplies in stock at that moment: traders, speculators, roasters - not usually the peasants. Especially after a long period of bottom prices, the peasants are likely to have neglected their bushes, if not torn them up altogether. Even if they could respond to higher prices by investing heavily in their coffee bushes, there would be a considerable time delay before they reaped any benefit. By no means all peasants can afford to invest. Countries and producers who are able and willing to do so will find that their joint efforts inevitably lead to overproduction and a new drop in prices. Third, the high coffee prices affect the functioning and survival of small farmers' cooperatives. Coffee has become an interesting commodity again. Supplies are limited, prices are high: coffee is in great demand. Local buyers offer the coffee growers tempting prices for their crops and pay them cash on the nail. Cooperatives lack the working capital to offer more at that stage; first they must sell the coffee themselves. Even though the price they eventually pay to the producers is higher, many producers find it hard to resist the temptation of the immediate cash payments offered by the middlemen. After years of low prices, the small farmers at last want to share in the benefits.
Cooperatives see with regret that their members turn to the middlemen. This situation places a heavy mortgage on the future of the cooperatives, in particular the weaker ones. If they break up, their members will be fully dependent on the middlemen again. That is a bleak prospect if prices drop again in a year or two. Investments in the expansion of production could create more employment for coffee pickers. However, it is unlikely that a plantation owner will use his increased revenues to pay higher wages, since the picker's wage is determined partly by the local labour market.
(3). Coffee is grown both on large plantations (over 500 ha.) and on small-scale farms with only a couple of bushes. In Latin America, production is concentrated in medium-sized businesses (between 5 and 30 ha.), whereas in Africa, Asia and the Pacific, it is mainly in the hands of smallholders. More than half of the world's production originates from small-scale businesses and the share of small producers in total production has increased since the early 1980s, due to government policies in many African and Asian countries.
Coffee does not have unimpeded access across the globe. Within the European Union (EU), for instance, a range of regulations are applied and periodically adjusted to control the coffee trade. Moreover, a new GATT Agreement (General Agreement on Tariffs and Trade) was concluded in 1994, the effects of which will gradually come to be felt in the coffee trade.
European Union and Lomé All coffee entering the EU is subject to an import duty. The higher the level of processing, the higher the tariff. This so-called 'tariff escalation' is to protect EU roasters against competitors outside the EU (other European countries, North America). By far the largest amount of coffee is therefore imported in an unprocessed state, i.e. in the form of unroasted green coffee beans. Under the recent GATT Agreement, the EU has committed itself to reduce its tariffs. Over the next five years, the tariff on unroasted green coffee will be lowered from 4 to 0 per cent, that on roasted coffee from 13.8 to 7.5 per cent, and that on roasted decaffeinated coffee from 16.5 to 9 per cent. Although this is a considerable reduction, it is far from an elimination of import duties, and the system of tariff escalation will remain effective.
The existence of import duties offers the possibility of granting tariff advantages to particular coffee-exporting countries. After all, a lower tariff is a source of competitive advantage for the countries concerned. This is a popular instrument in the EU. For example, within the framework of the Lomé Convention (an agreement between the EU and the former colonies of EU member states), coffee from the so-called ACP countries has free access to the EU market. Also the Least Developed Countries (LDCs, which to some extent overlap with the ACP countries) are exempt from import duties on processed and unprocessed coffee. The same goes for four South American countries (Bolivia, Colombia, Ecuador and Peru) and a number of Central American countries (Panama, Costa Rica, Honduras, Nicaragua, El Salvador and Guatemala). These are temporarily exempt from import duties to prevent coffee producers from succumbing to the temptation to switch to the production of cocaine. The effect of all these preferences is that a limited number of countries - Brazil, Mexico, Indonesia and Vietnam - are excluded from all special arrangements, which is in fact a form of discrimina-tion. The forthcoming reduction of the general import duties on coffee, and the 0% tariff on green coffee in particular, largely puts an end to this inequality.
Besides import tariff regulations, various EU member states levy a variety of (internal) taxes. Belgium and Germany impose stiff national tariffs on coffee. Such regimes are obstructions to free trade within the European Union, but it seems unlikely that they affect consumer demand for the product concerned. Within certain margins, the demand for coffee is relatively invulnerable to the price level.
To what extent do these escalating tariffs impede the emergence of a coffee-processing industry in the developing countries? From an economic point of view, the development of such an industry would mean a considerable step forward. However, a number of obstacles must be overcome to achieve that aim. The first is that whereas green unprocessed coffee can be stored for some time, processed coffee has a relative short 'shelf-life'. It is therefore preferable that processing be located as close to the consumers as possible, both in terms of time and distance. Secondly, most coffee brands are composed of various blends from a variety of countries. Roasting, grinding and blending in developing countries would therefore involve a substantial shift in trade flows. Lastly, blending requires a thorough knowledge of (varying) consumer preferences. Although these difficulties are not insurmountable, they do make things more complicated. Another important aspect is that trading and processing are strongly dominated by a small number of transnational companies and any significant relocation of processing from the 'North' to the 'South' will sooner or later come up against their interests and strategies. It is clear that tariff escalation is only one of various factors in the discussion. (4)
(4). Oever, S. van 't and D. Renkema: Stabex in motion. Dutch Ministry of Agriculture, Nature Conservation and Fisheries, 1994.
If there is any product with which fair trade in Europe (and elsewhere) can be identified, it is coffee. The fair trade organisations that form the European Fair Trade Association (EFTA) take the entire production chain into account. They do not only support the production and sale of coffee in the producing countries; they also lobby for more equitable international trade in coffee and are involved in the marketing of the end products in the consuming countries.
All trade requires quality products and constant supply. With this in mind, fair trade organisations have supported their coffee suppliers in the producing countries almost from the beginning. Their assistance can take on many different forms, such as technical assistance to improve the quality of the coffee, investment in a lorry to increase sales opportunities, or strengthening of cooperatives or other forms of partnership. A number of fair trade organisations have set up special support programmes, such as Traidcraft Exchange in Great Britain and Fair Trade Assistance in the Netherlands.
Fair trade marks A major incentive to the fair trade in coffee has been the introduction of fair trade marks or labels. By laying down their principles in a fair trade mark, fair trade organisations provide a concrete model that can be adopted by regular trading companies. Every coffee importer or roaster who satisfies the established criteria, e.g. in terms of price and prefinancing, is allowed to use the mark, thus enabling consumers to distinguish what coffee on the supermarket shelf has been traded fairly. The organisation which administers the mark monitors whether importers and roasters satisfy the conditions. In 1988, the first fair trade mark for coffee was introduced in the Netherlands under the name Max Havelaar. By now, fair trade marks are licensed to coffee in about ten European countries and even outside Europe. In addition to the Netherlands, the Max Havelaar coffee mark also exists in Belgium, France, Switzerland and Denmark. A similar initiative is the TransFair label, applied in Germany, Austria, Italy, Luxembourg, Canada and Japan. The UK has the Fairtrade Mark.
The three marks apply identical criteria. In terms of turnover, coffee has become the most important fairly traded product in Europe. The average market share of fairly traded coffee is 1.4%. Fair trading in coffee should not remain restricted to organisations specifically set up to that end. The final goal is that all international trade should stand the social and environmental test of criticism. To change these trade structures, one should turn to Brussels. It is the European Commission which fixes the import tariffs on coffee and can use its influence to reach a new International Coffee Agreement. In 1993 and 1994, the member organisations of EFTA campaigned for better trading conditions for coffee. They urged the European Commission to abolish import restrictions, to conclude a new International Coffee Agreement or at least a European Coffee Agreement, and to set up a diversification programme for coffee growers. Upon inquiry in the European capitals it turned out that there was insufficient support for the proposals. Nevertheless, the European Commission did emphasize the importance of fairly traded coffee and agreed to examine the possibilities for a diversification programme for coffee growers.
Guatemala |
With 3.2% of the world's coffee production, Guatemala ranked eighth on the list of main coffee- producing countries in the 1994/95 season. The country, which supplies mainly Arabica coffee, is characterised by a dualist production structure. Some 10 per cent of the sector consists of large and medium-sized companies, which together account for about 80% of the total coffee production, whereas the remaining 20% comes from some 40,000 small-scale family businesses. Around one- fourth of the small producers belong to a cooperative.
The family businesses have witnessed a considerable drop in earnings from the coffee production over the past few years (until the rise in 1994). In the 1992/93 season, the only way to cover any of the production costs was to use traditional farming methods, without the application of chemicals, and to sell through the federations of small farmers' cooperatives (5). Capital investment in bushes or selling via the middlemen yielded only losses. The consequences are evident. The loss of income forced small-scale producers to cut back drastically on labour and agricultural production goods, so that their coffee bushes became neglected. The low coffee prices on the world market also put paid to the 'Small Farmer Coffee Improvement Project' of the Agency for International Development (AID), the US government's official development programme. This project was set up in the early 1990s with the aim of improving technical business management in small-scale coffee production. Credit facilities form an essential element of the programme as smallholder producers have hardly any opportunities to obtain loans from banks. In practice, however, the AID's strategy failed to improve the position of the small farmers. Due to low world prices, they had little interest in investing in the replanting of coffee bushes. Seasonal workers in the coffee sector were also hit by the low coffee price before 1994. When prices fell, labour was one of the first things cut back on by medium-sized and large coffee producers, and many temporary workers lost their jobs.
(5). Wyss, E.M., H. Thoma: Max Havelaar Kaffee. Institut für Agrarwirtschaft der ETH, Zurich, 1994.
The coffee price explosion of 1994 has changed the situation dramatically. Coffee has become a lucrative crop again, and investing in it is profitable, even for family businesses. The question is, however, how long this trend is going to continue.
Uganda |
Uganda and coffee are inextricably linked. Not only is the Robusta variety found in the indigenous forests of this country; coffee is also the main source of income for the peasants and forms the heart of the Ugandan economy. Three-quarters of the population earn money from the cultivation of or trade in coffee. Depending on the coffee price level, between 65 and 95 per cent of foreign exchange is obtained through this product. With some 3.2% of world coffee production, Uganda ranks tenth on the list of coffee-producing countries (1992/93 season). Cultivation is mainly in the hands of small-scale producers; Uganda has never had a plantation sector. In the past, the Coffee Marketing Board, a state organisation, used to have the exclusive right to the export of coffee. This monopoly was lifted in 1990, when four national unions of cooperatives also got permission to export coffee. Their share in total exports is steadily increasing and amounts to some 40% already. One of these federations is the 'Banyankole Kweterana Cooperative Union' (BKCU).
Through their local cooperatives, some 40,000 coffee producers, 10% of whom are women, are associated with this umbrella organisation. Through BKCU some hundreds of thousands of persons are now involved in the supply of coffee to Dutch and German roasters participating in fair trade. Between 1991 and 1994, the price they received for their product was on average three times higher than the world market price. The 1994 price explosion brought about a fundamental change in that situation. The world market price and the guaranteed price offered by the fair trade organisations are now better balanced. Because the Ugandan government has recently decontrolled the trade in coffee, the higher prices pose an indirect threat to the cooperatives. Private traders have started to travel round the villages to purchase the best coffee. They can afford to pay more than the cooperatives. The latter use the difference between their purchase price and sales price to fund a range of local community facilities, but find themselves now faced with the challenge of keeping the peasants tied to them. The higher coffee price does not only yield a better income for the small-scale coffee producers; it also has a positive effect on the country as a whole. The Ugandan government imposes a 19% tax on proceeds from the sale of coffee. and consequently government revenues have increased considerably. After a long period of civil wars, dictator-ship and chaos, Uganda has enthusiastically taken up its reconstruction in the past few years. That process is now beginning to bear fruit, partly as a result of the higher coffee prices.
Support for organic farming |
"For us, Indians, the earth has a very special meaning. God has given us the earth to sow and reap, thus allowing us to live. That is why our coffee cooperative is changing over to organic farming." These are the words of Andrés Quic Ramos. He is both a coffee farmer and an environmental instructor at La Voz que clama en el Desierto ('The Voice that Sounds in the Desert'), a coffee cooperative in Guatemala. With support from Fair Trade Assistance, Andrés and twelve colleagues from other cooperatives have been trained as environmental instructors. They, in turn, can teach the coffee growers methods of organic cultivation. "The prospects for the Guatemalan environment are not too bright", is Andrés's opinion. "The large cotton and coffee plantations use a lot of chemicals. The plants have become less resistant and carry a lot of diseases. The earth is being destroyed...".
The starting point of organic farming is to preserve the soil", says Andrés, "to prevent fertilizer and earth washing away. Therefore we build terraces. Shady trees shield the soil and the coffee bushes from the sun. And, finally, we use organic fertilizer, made of coffee pulp, leaves and earth. That prevents the soil from being exhausted. The earth is our life. That's why we call it Mother Earth." The first results of Andrés's instruction work are encouraging: many farmers are adopting the new techniques. Organically grown coffee is also gaining ground elsewhere. The 1000 members of the cooperative 'Indigenas de la Sierra Madre de Motozintla' (ISMAM) in the Mexican state of Chiapas grow coffee organically. These peasants are seriously worried about the damaging health effects of pesticides. Protective clothing is expensive or not available, and the chemical industry hardly bothers to provide labels in the local language. Residues of pesticides build up in the soil and the drinking water and are thus harmful to both people and animals. Changing over to organic coffee production is therefore of major importance. A manual on organic coffee production has been published with funding from fair trade organisations and distributed among farmers in Chiapas and many other places.
| Brazil | 28% |
| Colombia | 13% |
| Indonesia | 7% |
| Mexico | 5% |
| Ethiopia | 4% |
| Ivory Coast | 4% |
| Vietnam | 3% |
| Guatemala | 3% |
| Uganda | 3% |
| India | 3% |
| Year | Price | Year | Price |
| 1950 | 110,50 | 1983 | 291,10 |
| 1960 | 92,40 | 1984 | 318,90 |
| 1970 | 114,70 | 1985 | 323,10 |
| 1975 | 144,00 | 1986 | 429,30 |
| 1976 | 314,70 | 1987 | 250,50 |
| 1977 | 516,90 | 1988 | 303,40 |
| 1978 | 359,00 | 1989 | 238,73 |
| 1979 | 382,10 | 1990 | 197,22 |
| 1980 | 346,60 | 1991 | 187,34 |
| 1981 | 286,90 | 1992 | 141,19 |
| 1982 | 308,80 | 1993 | 156,02 |
| 1994 | 330,77 |
| Uganda | 69 |
| Burundi | 64 |
| Rwanda | 52 |
| Ethiopia | 49 |
| El Salvador | 27 |
| Nicaragua | 21 |
| Guatemala | 20 |
| Colombia | 18 |
| Tanzania | 15 |
| Honduras | 13 |
| Kenya | 13 |
| Brazil | 3 |
| 1995 | 2000 | |
| not roasted | 4,0 | 0 |
| not roasted decaffeinated | 12,2 | 8,3 |
| roasted | 13,8 | 7,5 |
| roasted decaffeinated | 16,5 | 9,0 |
| substitutes (containing coffee) | 16,9 | 11,5 |
| Switzerland | 5,0% |
| United Kingdom | 2,8 |
| Netherlands | 2,4 |
| Germany | 2,0 |
| Luxemburg | 1,4 |
| Belgium | 1,0 |
| Austria | 0,8 |
| Denmark | 0,1 |
| France | 0,1 |
| Italy | 0,1 |
