Coffee is much more than just your morning ‘pick-me-up’. It is ‘black gold’, one of the most valuable and most traded commodities in the world, making a number of people incredibly rich. At the same time, millions of people in the developing world rely on the coffee industry for their livelihoods. The disparity in wealth between those at the bottom and those at the top is huge.
You might be tempted to shrug at this point. It might not be fair, but it’s nothing new. As Leonard Cohen sang, “The poor stay poor, the rich get rich. Everybody knows.” And anyhow, people are getting paid a fairly high price for coffee at the moment.
But what has happened with the coffee trade is happening across so many areas of our lives. Things that ‘should’ have some inherent value — things such as having homes to live in, having food to eat, the right of self-determination — are being hijacked by the demands of a kind of hyper-capitalism. Speculation on the financial markets and the desire for huge profits is putting everyone at risk, with people in the developing world particularly vulnerable to the potential fall-out. The futures of people who produce coffee, and who rely on its trade, depend on factors almost entirely outside of their control.
For 27 years, the supply and price of coffee was kept stable by the International Coffee Agreement, and when it failed in 1989, coffee prices plummeted. Prices did spike again, following a global shortage caused by bad harvests and frosts, but high prices only encouraged more people to grow more coffee — leading to oversupply and the accompanying low prices. By the year 2000, after more than ten years on the free market, the price of coffee was at an all time low and didn’t even cover the cost of production. It was a crisis for the farmers and the countries that relied on the coffee trade, and NGOs rushed to pick up the pieces.
The low prices and inherent unfairness in the coffee trade prompted many to be highly critical of the role of free trade in tackling poverty. NGOs, including Oxfam, also highlighted the culpability of the World Bank and the IMF in imposing free trade policies on developing countries as a condition for getting aid, concluding that poverty had been made worse by the bank’s ‘one size fits all’ approach. For one country, Bolivia, accepting the bank’s conditions resulted in per capita income dropping to less than it had been 25 years earlier, with 63 percent of the population living in poverty. One of the poverty reduction measures included privatising water. Desperate Bolivians, faced with escalating water prices, rioted. A number of the developing countries that took loans with the World Bank have since spoken out about the negative consequences and their unhappiness.
Other factors have conspired to increase farmers’ and developing countries’ vulnerability to price shocks in the market, including developing countries increasing their focus on growing crops for export and the selling of national resources to finance debts. The introduction of modern, large-scale farming methods (often insisted on as a loan condition) was another factor that reduced farmers’ self-sufficiency. Traditionally, many coffee farmers had a small second income, plus food, from the trees under which coffee plants grew. New methods enabled coffee plants to grow directly in the sun, increasing production, but they required large amounts of inputs including fertilisers, pesticides and farm machinery. In times of low coffee prices, farmers couldn’t afford the upkeep on their high maintenance farms, some going into debt, some losing their farms.
Prices are currently high, certainly compared to the coffee crisis of 2000. In May 2011, the price of coffee reached its highest level in 30 years, although it has fallen considerably since. It isn’t all good news for farmers. The higher coffee prices have also been accompanied by higher prices of oil, petrol, food and other commodities. Even more fundamentally, the higher price has been gained through changes in the financial markets — the knock-on effects of which make many producers and developing countries even more vulnerable to price fluctuation.
Damage and Instability
The Commodities Futures Modernisation Act (CFMA) passed in the United States in 2000 appeared to be an innocuous piece of legislation, slipped in with the budget. It has since been described by financial commentators as one of the most historically damaging pieces of legislation. TIME magazine, in a roll-call of those to blame for the economic meltdown, awarded it the dubious honour of the “single government move that did more than any other to muck things up”. Amongst other things, the CFMA spawned a new breed of coffee profiteer — the big investment banks and hedge funds, led by Goldman Sachs — and turned the commodities futures market into a giant money making machine.
In its original form, the commodities futures market was designed to give buyers and sellers a level of stability that made business possible in the uncertain world of agriculture and farming. It was a tightly regulated, slow moving vehicle for buyers and sellers of commodities, such as coffee, to agree on sales and prices for goods to be delivered the following year.
The CFMA blew the market wide open. Now anyone, with sufficient money, was allowed to trade commodities on the market without any intention of ever actually taking receipt of the goods. The money poured in. Prior to this deregulation, the trade in coffee futures, over one week, was in the region of 46,000 contracts (one futures contract = 37,500 pounds of green coffee/one shipping container). Post-deregulation that figure has reached as high as 284,000 contracts. There are now approximately ten times as many coffee ‘C’ futures being traded as there is actual coffee.
Speculation amplifies price fluctuation and divorces price from physical factors such as supply and demand. The norm is for high-frequency trades to be calculated by algorithms and triggered by small fluctuations in the price. After all, when there is ten times the number of bets as physical goods, the way the market goes is dictated by what people think is going to happen. A reported fear of bad harvests, even entirely groundless, will move the market. What the big players do or say becomes of prime importance.
The levels of risk and potential reward have risen with the increased market volatility, but access to large amounts of money is a prerequisite of being able to ride out the price changes. Rather than protecting farmers, exporters and others involved in the industry from risk, the market now makes them increasingly vulnerable.
Price instability is also potentially very dangerous for coffee producers. As the World Bank recognised in a recent report, instability means coffee farmers can’t plan crops, allocate resources or even simply recover costs. Similar problems were identified for governments of developing countries. In the past, even the threat of future price shocks forced farmers to take their children out of school, cancel improvements to their farms, and go without basic necessities because of the worry about where next year’s income was going to come from.
Supachai Panitchpakdi, Secretary General of the UN Conference on Trade and Development (UNCTAD), has spent years warning world organisations about the huge risk of tying in free trade and unregulated financial industries with poverty alleviation. In a recent report, he stated clearly that “the financial markets and institutions have become the masters rather than the servants of the real economy, distorting trade and investment, heightening levels of inequality, and posing a systemic threat to economic stability.”
Current high coffee prices are reliant on the continued boom in the commodities futures markets. And as recent economic history tells us, from the failure of megalithic banks supposedly too big to fail and the ensuing economic meltdown, there’s no such thing as a safe bet.
The International Coffee Organisation offers support to help buffer farmers against the impact of unstable processes. They recommend that coffee growers diversify their crops, specialise in and market different niche coffees and also try to climb up the coffee value chain. Farmers also benefit from joining co-operatives. All of these steps help move coffee from a purely financial commodity back to one that has value away from the commodities markets. This helps protect the growers from the fallout of price changes, and returns the small but stable margins earned along traditional avenues.
Award-winning Vietnamese company Trung Nguyen Coffee is an excellent example of how following this kind of model works. In 2001, 2003 and 2004 the company’s founder, Mr. Dang Le Nguyen Vu, won young entrepreneur awards from the Vietnamese Young Enterprises Association and the Asian Success Young Entrepreneur Award. In 2007, having successfully established over 10,000 franchise cafes, the company was a finalist in the Franchise Licensing Show Asia. In 2010 they were one of two finalists in Franchisor of the Year Award in the Franchise Awards. Trung Nguyen Coffee, as well as offering franchises, makes a range of specialist coffees that are sold internationally. The company is involved in every step of the process and their coffee growers have been certified by Eurepgap as using safe and sustainable growing practices. The motivation for Mr. Dang to specialise in gourmet coffees was for his business to “become more independent of the world commodity markets and regain control of its own destiny”. Mr. Dang has also talked in recent interviews about how key the Eastern view of the world is for his business, of thinking about the interrelations between people and culture. He maintains that business has responsibilities beyond pure economics, it has a responsibility to its nation, to the industry and to the world.
Local Hanoi company Betterday were the first business based in a coffee growing country to gain Fair Trade accreditation. Unfortunately, due to the high cost of the certificate, their coffee is no longer accredited. Yet owner Nguyen Tuyet Minh remains strongly committed to the Fair Trade values and works closely with growers as part of their ethical co-operative. Betterday roasts and packages their coffee and have a retail outlet on Xuan Dieu, Tay Ho district, Hanoi.
Vietnam itself is in a much stronger position than many other producing countries. It looks after its coffee trade by maintaining control in some areas, including the export sector. When prices are considered too low, Vietnam can act as a competitor in the market by keeping back stock until the prices are high enough again. The Vietnam Coffee and Cocoa Association (VICOFA) has also been able to act for the collective health of the industry, tackling the issue of quality, which can push down price. VICOFA is taking steps to increase quality, such as introducing a VND42,000 per tonne export fee for Vietnamese companies which will be put back into improving plant quality. Another current proposal is to ensure that all companies gain an agricultural management and environmental certification from Good Agriculture Practice (GAP), UTZ, Rainforest or 4C.
These are examples of ways that some individuals, companies and countries can regain control, but there is a deep flaw in the system itself. The world is moving rapidly in one direction, away from group responsibility and away from regulations and rules. Freedom is the goal. But freedom comes at a very high price, as we’re finding out.