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The Coffee Crisis

In 2004, the governments of coffee producing countries were considering how to respond to the dramatic decline in coffee prices caused in part by a large increase in coffee production in Brazil and Vietnam. Coffee was the main source of income for roughly 25 million farmers, mostly small land holders, in Latin America, Africa, and Asia. Coffee prices had hit 40 year lows in 2001 and had remained low since, resulting in real hardship for many farmers. A variety of alternative solutions had been suggested. Gomez-Ibanez & Quinlan, 2004) The International Coffee Organization was advocating increasing demand through programs promoting coffee consumption; the Inter-American Development Bank supported promotion but also thought some high-cost countries should get out of coffee, while the non-governmental organization Oxfam was pushing fair trade pricing. The coffee crisis is worldwide. It is affecting farmers in Central America, South America, Africa, and Asia.

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While the Arabica farmers in Costa Rica may be getting 40 cents per pound for their coffee cherries, the Robusta coffee farmers in Viet Nam are only receiving 15 cents a pound for theirs. Even the low cost producers are not benefiting from the current situation. This condition is created because the market place does not view coffee as a true commodity. It places premiums and discounts on both coffee types and coffee grades. While both markets may move up and down in tandem, the arbitrage, or spread between one Arabica and Robusta, does not give one farmer an economic competitive advantage over another.

This fact tends to get glossed over in most economic discussions on the coffee crisis. Many analysts believe that oversupply is at the root of the present crisis. After the system of coffee export quotas (the International Coffee Agreement, or ICA), administered by the International Coffee Organization, collapsed in 1989, the regulation of coffee production and quality was left to each individual producer country. Almost immediately following the dissolution of the agreement, excessive quantities of coffee entered international markets, prices became quite volatile and the overall quality of the coffee began to decline.

Many of the coffee producing nations, including Mexico, were simultaneously in the process of deregulating, privatizing, and otherwise liberalizing agricultural production and national agricultural institutions. This had the effect of exacerbating the uncertainties faced by coffee farmers at the end of the 1980s. The coffee crisis is structural. It was not caused by the cyclical nature of coffee agriculture that has produced the “boom-bust” cycles of the past.

The change in the market place has been brought about by the concentration of buying power in the hands of a few firms that present coffee to the consumer as a “blended and branded” product, void of any links to type and grade. This has led to intense price competition for market share that has rewarded increased market share to low cost products in the short run at the expense of stability in the supply chain in the long run. Since the crisis is a structural problem and not a cyclical one, remedies are to be found by taking intervening actions.

These actions would include a strengthening of coffee institutions, a realignment of market forces, a creation of suitable financial tools, and a promotion of sustainable agricultural practices. It must be emphasized that any direct market intervention, such as quotas or subsidies, would only be short term in effect and would not correct the structural problems. It must also be emphasized that what is required is a series of steps in a number of different areas, as no single step will produce the desired structural changes that are needed.

The crisis in the coffee sector continues. Its impact cannot be understated, since coffee constitutes the livelihood of an estimated 25 million families around the world. In world trade, coffee is the second leading commodity, after petroleum. The worldwide coffee market spans some 71 countries, of which 51 are significant producers and 20 are key consumers. Prices have not kept up with production costs to the extent needed to make participation in the coffee business profitable for most producers, even though the crop year 2003-2004 witnessed a worldwide decrease in production. Central America – The Coffee Crisis: Effects and Strategies for Moving Forward, 1992) In coffee producing countries, which account for over 26% of world consumption, the situation is more diverse. In some countries, prices of coffee have fallen in local currency and consumption may therefore be stimulated. In Brazil, the largest coffee market among producing countries, the devaluation of the real has maintained prices of green coffee at pre-crisis levels. As a whole, consumption in these markets is not expected to suffer any major negative impact.

The root cause of the coffee crisis can be linked to three factors: over production; under consumption; and market oligopoly. In short, these are all problems associated with the economics of coffee farming. Without resolution, they will lead to both social and environmental breakdowns. (Central America – The Coffee Crisis: Effects and Strategies for Moving Forward, 1992) The crisis has been caused by a large increase in coffee production over the past several years by two countries – Vietnam and Brazil.

In the case of Vietnam, within ten years this country grew from a relatively insignificant producer to the world second largest – ahead of Colombia but behind Brazil, now producing well over 10 million bags annually and accounting for approximately 12% of world exports. (Central America – The Coffee Crisis: Effects and Strategies for Moving Forward, 1992) To conclude, without economic remedies to the crisis, it is difficult to promote sustainable agricultural practices in coffee farming.

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