Spilling the beans on a brewing crisis

Posted: 9 May 2002

Author: Kevin Watkins

Falling world coffee prices have created winners - and losers, writes Kevin Watkins.

If you're reading this over your morning cup of Nescafé, spare a thought for Tatu Museyni, a 37-year-old widow and coffee farmer living on the slopes of Mount Kilimanjaro in Tanzania.

In 2000, the coffee crop on her 0.2-hectare plot made enough money to keep two of her four children in school. Now an unprecedented slump in prices has forced her to keep them at home. "How can I pay for school fees when I can barely feed and clothe my children?" she asks, adding: "The price of coffee is destroying my family and our community."

Coffee is facing the deepest crisis in a global commodity market since the great depression of the 1930s. Not that you would have noticed it when you bought your last cup of designer latte, but the price of coffee on world markets has fallen in recent months to its lowest level in real terms. Two years ago it fetched almost $2 a kilogram. Today, traders are buying at less than $1 per kilo - and prices are still falling.

Price data cannot capture the scale of the human tragedy unfolding across the developing world. An estimated 20 million households depend on income from coffee to pay for food, clothing and education. The livelihoods of these households are collapsing, with devastating consequences for poverty and the environment.

Over the past year Oxfam has interviewed hundreds of coffee farmers in a global research project. The picture that emerges is uniformly bleak. In the Mexican state of Chiapas thousands of indigenous Indian farmers are migrating to find work picking fruit on commercial farms. In the Kafe region of Ethiopia, where coffee originated, falling prices are translating into food shortages. And women farmers in the Dominican Republic report that they are unable to meet the cost of treating childhood sickness.

The collapse of the coffee economy threatens whole environmental and agricultural systems. No other crop is so well suited for cultivation on the steep hillsides of Chiapas and Kilimanjaro, where its deep roots bind soil and prevent erosion. In both areas local communities have developed complex inter-cropping systems, where coffee is grown as a cash crop with food crops such as maize, bananas and beans. Take away coffee, and the entire system collapses.

Not that everyone involved in the coffee trade is losing out. Starbucks, the Seattle-based coffee shop chain, has posted a 40% increase in profits in the first quarter of 2001. Meanwhile for the transnational companies that dominate the global coffee economy, the slump in coffee prices is generating windfall gains. Nestlé, the world's largest coffee roaster, had profits exceeding $1bn last year from its beverage operations - and first-quarter results point to a 20% profit growth this year.

The company's last report to shareholders says: "Trading profits increased and margins improved thanks to favourable commodity prices." Taken from a different perspective, that could translate as: never mind the poverty, count the profit.

The underlying problem is simple. World production of coffee is increasing at twice the rate of consumption, leading to massive over-supply and an accumulation of stocks. Rising productivity and the emergence of east Asia as a major exporter have compounded the problem, as have World Bank programmes designed to expand cash crop production.

Coffee exporting countries have not helped their own cause. Instead of working together to restrict supply and boost prices, the main players have adopted a "beggar-your-neighbour" strategy of compensating for falling prices by exporting more. The upshot: they collectively export more for less revenue.

Short of praying for frost in Brazil, is there an alternative? Latin American exporters have taken the lead in pressing for a coffee retention plan, under which exporters withhold 20% of their production. The aim is to push prices back to around $1 per kilo. But even if it enjoyed universal support among exporters (which it does not), the plan would probably fail. Its effect would be to add to stocks without tackling the fundamental problem of over-supply.

What is needed is a one-off programme of stock destruction in exporting countries to remove about 1 million tonnes from the market - roughly equivalent to stocks in consuming countries. This would cost about $250 million, part of which could be financed by a windfall tax on coffee roasters such as Nestlé and Kraft Foods.

Looking to the future, exporters and importers need to develop a credible supply management programme to stabilise prices at more remunerative levels. Colombia, the world's second-largest exporter, has called for a return to the International Coffee Agreement, a system of export quotas that collapsed in 1989.

This remains anathema to Western governments - which spent most of the 1980s demolishing commodity agreements - and to politically powerful transnational companies. Their "business-as-usual" alternative is continued toleration of a system that creates profits for the few, and mass poverty and social instability for millions.

Kevin Watkins is Oxfam's policy adviser.Guardian logoSource: Guardian, May 31, 2001.Related links:
  • Mugged: Poverty in your Coffee Cup, The Oxfam report on the Coffee Crisis
  • ELDIS - Coffee Crisis Feature, ELDIS have produced a special feature to put the coffee crisis and Oxfam's recent coffee report in context. The feature includes an ELDIS interview with one of the big four coffee roasters, Proctor and Gamble, as well as links to relevant documents, organisations, news stories and other resources.
  • Make Trade Fair section on Coffee