The Story of Coffee
By Xuan Thanh and Bui Van
Demand, Supply, and Price
2001 was an alarming year to the countries producing coffee in the world. Following a downward trend for the last three years, the coffee price has droped below its cost of production. The average price of green coffee in September 2001 was only 32% of that in January 1998, as shown in Figure 1. What caused the coffee price to fall so sharply?
Source: The
International Coffee Organization (ICO).
Eight years ago (1993), the Association of Coffee Producing Countries (ACPC) was formed by the large countries producing coffee in the world so as to control the coffee price by adjusting the supply of coffee like the OPEC’s mechanism for oil price.[1] Since the beginning of 90s, however, many countries that have never produced coffee previously has started growing and exporting it. In particular, Vietnam has become a country producing coffee at the highest growth rate and the lowest cost. Its output of robusta coffee increases to 15 million bags in 2000/01 from only 1.2 million bags in 1990/91.[2] With the existing output, Vietnam is the second country all over the world behind Brazil in producing coffee, over Colombia, and Indonesia.[3]
Figure 2: The output of crude coffee for Vietnam (1000 bags)
Source: ACPC, “Review of the market
situation”, 10/2001.
In addition, the programs of output restriction by ACPC are usually not complied by its members. In fact, the ACPC’s plan to cut down 20% of the total coffee output is only complied by Brazil and Colombia. However, Brazil has made an announcement to give up this plan and started selling its reserved coffee by August of 2001. As a result, many countries have been expanding their coffee output while the demand for coffee is nearly constant. As estimated by ACPC, the supply of coffee increases 3.6% per year on average, while the demand for coffee only increases by 1.5% per year. Consequently, the price of crude coffee plunges into the lowest level for the last 30 years.
Figure 3: Difference of supply-demand in the world (1000 bags)
Source: ACPC, “Review of the market
situation”, 10/2001.
The coffee growers and the processing firms
Coffee is the second most major commodity after oil, and it is one of the main exports for many poor countries in the world. The value of exported coffee amounts to three fourth of the total value of exports for a lot of countries. Around 7 to 10 million farmers get a living by growing coffee. Thus, as the coffee price falls, persons who get directly worse off are coffee growers, especially in the poor countries. Many of them grow coffee tree in a small scale. Hence, they are not able to get over difficulties as the price goes down, and catch at an opportunity as the price goes up.
In the middle of May of 2001, only a few days before the World Coffee Conference in London, the Oxfam, a non-governmental organization, published a report saying that millions of coffee growers have been living in difficulty while the processing firms (such as Nestle) get benefit. It argues that in spite of a sharp decrease in the price of crude coffee, the price of processing coffee remains nearly unchanged. Oxfam is concerned that the poor-rich gap within the coffee industry is increasing with the constant decreases in crude coffee price.
A decrease in the coffee price obviously leads to a fall in the growers’ income. However, the questions are why the price of processing coffee does not decrease in line with the crude coffee price, and whether there is collusion between the food multinational companies, restaurants, and coffee shops to trade on farmers’ arduousness for their own profit. To answer these questions, let us consider the cost of production of processing coffee.
The cost of exported crude coffee takes only 7% of the final production cost of processing coffee. The remaining components of the production cost are the cost of processing, transportation, inventory, the retailer price, and taxes. A lot of taxes, such as export duty, retailer taxes, and labor cost are fixed expenses, but they take a high proportion of the cost of production. Furthermore, some kinds of expenses such as transportation cost, inventory cost, and insurance fees have been recently increasing. Consequently, although the price of crude coffee has sharply fallen, the price of processing coffee has not.
Take a simple calculation. The price of crude coffee decreases to 41.17 cents/pound in September 2001 from 71.94 cents/pound in September 1999 on average, or by 43% for two years. With the other costs being equal, the price of processing coffee would reduce by 3%.[4] If the transportation cost, inventory cost, and insurance fees take 15% of the production cost of processing coffee, and if they all increase by 20% for the last two years, the price of processing coffee would remain unchanged.