Economics of coffee

Top Ten Green Coffee Producers - 2006
(millions of metric tons)
 Brazil 2.59
 Vietnam 0.85
 Colombia 0.70
 Indonesia 0.65
 Mexico 0.29
 India 0.27
 Ethiopia 0.26
 Guatemala 0.26
 Honduras 0.19
 Peru 0.17
World Total 7.80
Source:
UN Food & Agriculture Organisation (FAO)
[1]

Coffee is an important commodity and a popular beverage. Over 2.25 billion cups of coffee are consumed in the world every day.[1] Over 90% of coffee production takes place in developing countries, while consumption happens mainly in the industrialized economies.[1] Worldwide, 25 million small producers rely on coffee for a living[citation needed]. For instance, in Brazil alone, where almost a third of all the world's coffee is produced, over 5 million people are employed in the cultivation and harvesting of over 3 billion coffee plants[citation needed]; it is a much more labour-intensive culture than alternative cultures[citation needed] of the same regions as sugar cane or cattle, as it is not subject to automation[citation needed] and requires constant attention.

Coffee is also bought and sold as a commodity on the New York Board of Trade. This is where coffee futures contracts are traded, which are a financial asset involving a standardized contract for the future sale or purchase of a unit of coffee at an agreed price. The world's largest transfer point for coffee is the port of Hamburg, Germany.[citation needed]

Economics-of-coffee

Contents

Consumption

In the year 2000 in the US, coffee consumption was 22.1 gallons (100.468 litres) per capita.[2] More than 150 million Americans (18 and older) drink coffee on a daily basis, with 65 percent of coffee drinkers consuming their hot beverage in the morning. In 2008, it was the number-one hot beverage of choice among convenience store customers, generating about 78 percent of sales within the hot dispensed beverages category.[3]

Pricing

According to the Composite Index of the London-based coffee export country group International Coffee Organization the monthly coffee price averages in international trade had been well above 100 US cent/lb during the 1970s and 1980s, but then declined during the late 1990s reaching a minimum in September 2001 of just 41.17 US cent per lb and stayed low until 2004. The reasons for this decline included a collapse of the International Coffee Agreement of 1962-1989 [4] with Cold War pressures, which had held the minimum coffee price at USD$1.20 per pound. Moreover, the expansion of Brazilian coffee plantations and Vietnam's entry into the market in 1994 when the United States trade embargo against it was lifted added supply pressures. The market awarded the more efficient Vietnamese coffee suppliers with trade and caused less efficient coffee bean farmers in many countries such as Brazil, Nicaragua, and Ethiopia not to be able to live off of their products, which at many times were priced below the cost of production, forcing many to quit the coffee bean production and move into slums in the cities. (Mai, 2006).

A coffee plantation on a hill near Orosí, Costa Rica.

The decline in the ingredient cost of green coffee, while not the only cost component of the final cup being served, occurred at the same time as the rise in popularity specialty cafés, which sold their beverages at unprecedented high prices. According to the Specialty Coffee Association of America, in 2004 16% of adults in the United States drank specialty coffee daily; the number of retail specialty coffee locations, including cafés, kiosks, coffee carts and retail roasters, amounted to 17,400 and total sales were $8.96 billion in 2003.

Specialty coffee, however, is frequently not purchased on commodities exchanges—for example, Starbucks purchases nearly all its coffee through multi-year, private contracts that often pay double the commodity price.[5] It is also important to note that the coffee sold at retail is a different economic product than wholesale coffee traded as a commodity, which becomes an input to the various ultimate end products so that its market is ultimately affected by changes in consumption patterns and prices.

The market for soft drinks has been steadily climbing, passing the consumption of coffee in terms of mass of product consumed in the early 2000s.

In 2005, however, the coffee prices rose (with the above-mentioned ICO Composite Index monthly averages between 78.79 (September) and 101.44 (March) US Cent per lb). This rise was likely caused by an increase in consumption in Russia and China as well as a harvest which was about 10% to 20% lower than that in the record years before. Many coffee bean farmers can now live off their products, but not all of the extra-surplus trickles down to them, because rising petroleum prices make the transportation, roasting and packaging of the coffee beans more expensive.

Prices have risen from 2005 to 2009 and sharply in the second half of 2010 on fears of a bad harvest in key coffee-producing countries, with the ICO indicator price reaching 231 in March 2011[6]

Classification

Shade trees in Orosí in Costa Rica. In the background (red) shade trees and in the foreground pruned trees for different periods in the growth cycle.

A number of classifications are used to label coffee produced under certain environmental or labor standards. For instance, Bird-Friendly [2]> or shade-grown coffee is said to be produced in regions where natural shade (canopy trees) is used to shelter coffee plants during parts of the growing season. Organic coffee is produced under strict certification guidelines, and is grown without the use of potentially harmful artificial pesticides or fertilizers; conventional coffee is grown with more pesticides than any other agricultural crop—cotton comes second.[citation needed] Fair trade coffee is produced by small coffee producers who belong to cooperatives; guaranteeing for these cooperatives a minimum price, though with historically low prices, current fair-trade minimums are lower than the market price of only a few years ago. TransFair USA is the primary organization currently overseeing Fair Trade coffee practices in the United States, while the Fairtrade Foundation does so in the United Kingdom.

Commodity chain for the coffee industry

World Map based on Coffee imported by country in 2005.
Map shows gross imports, not how much coffee stays within the country or how much is consumed.
Some countries re-export significant portions of their coffee imported.


The coffee industry currently has a commodity chain that involves producers, middlemen exporters, importers, roasters, and retailers before reaching the consumer.[7] Middlemen exporters, often referred to as coffee "coyotes," purchase coffee directly from small farmers.[7] Large coffee estates and plantations often export their own harvests or have direct arrangements with a transnational coffee processing or distributing company. Under either arrangement, large producers can sell at prices set by the New York Coffee Exchange.

Green coffee is then purchased by importers from exporters or large plantation owners.[7] Importers hold inventory of large container loads, which they sell gradually through numerous small orders. They have capital resources to obtain quality coffee from around the world, capital normal roasters do not have. Roasters' heavy reliance on importers gives the importers great influence over the types of coffee that are sold to consumers.

In the United States, there are around 1200 roasters. Roasters have the highest profit margin in the commodity chain.[7] Large roasters normally sell pre-packaged coffee to large retailers, such as Maxwell House, Folgers, and Millstone.

Coffee reaches the consumers through cafes and specialty stores selling coffee, of which, approximately, 30% are chains, and through supermarkets and traditional retail chains. Supermarkets and traditional retail chains hold about 60% of market share and are the primary channel for both specialty coffee and non-specialty coffee. Twelve billion pounds of coffee is consumed around the globe annually, and the United States alone has over 130 million coffee drinkers.

Coffee is also bought and sold by investors and price speculators as a tradable commodity. Coffee futures contracts are traded on the New York Mercantile Exchange (NYMEX) under ticker symbol KC with contract deliveries occurring every year in March, May, July, September, and December.[8]

Fair trade coffee

According to the World Fair Trade Organization and the other three major Fair Trade organizations (Fairtrade Labelling Organizations International, Network of European Worldshops and European Fair Trade Association), the definition of fair trade is "a trading partnership, based on dialogue, transparency and respect, that seeks greater equity in international trade". The stated goal is to offer better trading conditions to marginalized producers and workers. Fair trade organizations, along with the backing of consumers, campaign for change in the rules and practice of conventional international trade. However, not all coffee producers are happy with the methods or results.

Fair Trade organizations promote a trade environment in which the coffee importer has a direct relationship with the coffee producer, excluding the middlemen. Coffee importers provide credit to certified farmers to help them stay out of debt with coffee traders so they can develop long-lasting trade relationships. Producer organizations are paid a floor price (Fairtrade Minimum Price) of US$ 125 cents per pound for Fairtrade certified washed Arabica and US$ 120 cents for unwashed Arabica, or the market price, if higher.[9] The free trade price of coffee rose above this minimum in September 2007, but due to recent economic events, the free trade price dropped back below this minimum in October 2008.[10] The fair trade price for (conventional natural robusta) coffee has been $1.01 since June 2008 [11] The price of conventional commodity coffee was also over $1 in 2008, but about $0.70 in 2009.[12]

Fairtrade certification is not free; there is an application fee, initial certification fee, membership dues, annual audit fees and more. Certification can cost thousands of Euros for a single plantation.[13] Large corporate farms can often handle the paperwork and recuperate the cost of certification more easily than small, independent farms. As a result, there are plenty of small, independent farms that are not Fairtrade certified even though they meet or exceed the Fairtrade standards.

Coffee and the environment

Originally, coffee farming was done in the shade of trees, which provided natural habitat for many animals and insects, roughly approximating the biodiversity of a natural forest.[14] [15] These traditional farmers used compost of coffee pulp and excluded chemicals and fertilizers. They also typically cultivated bananas and fruit trees as shade for the coffee trees,[16] which provided additional income and food security.

However, in the 1970s and 1980s, during the Green Revolution, the US Agency for International Development and other groups gave eighty million dollars to plantations in Latin America for advancements to go along with the general shift to technified agriculture.[17] These plantations replaced their shade grown techniques with sun cultivation techniques to increase yields, which in turn destroyed forests and biodiversity.[18]

Sun cultivation involves cutting down trees, and high inputs of chemical fertilizers and pesticides. Environmental problems, such as deforestation, pesticide pollution, habitat destruction, soil and water degradation, are the effects of most modern coffee farms, and the biodiversity on the coffee farm and in the surrounding areas suffer.[14]

As a result, there has been a return to both traditional and new methods of growing shade-tolerant varieties. Shade-grown coffee can often earn a premium as a more environmentally sustainable alternative to mainstream sun-grown coffee.

References

  1. ^ a b Ponte, Stefano (2002). "The ‘Latte Revolution’? Regulation, Markets and Consumption in the Global Coffee Chain". World Development (Elsevier Science Ltd.). http://my.ewb.ca/site_media/static/attachments/threadedcomments_threadedcomment/42867/The%20Latte%20Revolution%20-%20Regulation%20markets%20and%20consumption%20in%20the%20global%20coffee%20chain.pdf. Retrieved 2010-10-18. 
  2. ^ "Bottled water pours past competition". DSN Retailing Today. 2003-10-13. http://findarticles.com/p/articles/mi_m0FNP/is_19_42/ai_109025996. 
  3. ^ Fact Sheets: Coffee Sales
  4. ^ Daviron, Benoit; Ponte, Stefano (2005). "3". The Coffee Paradox. Zed Books, London & NY. p. 86. ISBN 1842774573 
  5. ^ Rickert, Eve (2005-12-15). Environmental effects of the coffee crisis: a case study of land use and avian communities in Agua Buena, Costa Rica. M.Sc. Thesis, The Evergreen State College. http://www.archive.org/details/Rickert_EVE_MES_Thesis_2005. 
  6. ^ Template:Cite Website
  7. ^ a b c d "www.globalexchange.org". http://www.globalexchange.org/index.html. Retrieved 2007-05-17. 
  8. ^ NYMEX Coffee Futures Contract Overview via Wikinvest
  9. ^ "Minimum payment for coffee beans". http://www.fairtrade.net/coffee.0.html. Retrieved 2011-5-24. 
  10. ^ "Price of a pound of coffee delivered in November 2008". http://quotes.ino.com/chart/?s=NYMEX_KT.K08.E. Retrieved 2008-11-30. 
  11. ^ "FLO Fairtrade Minimum Price and Premium Table". http://www.fairtrade.net/fileadmin/user_upload/content/290310_EN_Price_and_Premium_table.pdf. Retrieved 13 April 2010. 
  12. ^ http://www.loansandcredit.com/commodity-price-fluctuations-by-industry/
  13. ^ "FLO-CERT Fairtrade Certification company". http://www.flo-cert.net/_admin/userfiles/file/Fees/aug2010/PC%20FeeSysHLSinglePlantation%20ED%2021%20en.pdf. Retrieved 2011-02-22. 
  14. ^ a b Janzen, Daniel H. (Editor) (1983). Natural History of Costa Rica. Chicago, IL: University of Chicago Press. ISBN 0226393348. 
  15. ^ Why migratory birds are crazy for coffee, Smithsonian Migratory Bird Center
  16. ^ Krigsvold, Marsha (Editor) (2001). Diversification Options for Coffee Growing Areas in Central America. Chemonics International Inc.. 
  17. ^ Coffee, Conservation, and Commerce in the Western Hemisphere, National Resource Defense Council
  18. ^ The grind over sun coffee, Smithsonian Migratory Bird Center

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