The Coffee Crisis

by on February 8, 2006

The “coffee crisis” inevitably comes up in any talk of the coffee industry, especially Fair Trade issues. Here’s a summary of what it’s all about.

Prior to 1989, coffee prices were controlled by a cartel, much like OPEC for oil. The International Coffee Agreement (ICA) imposed quotas and controlled prices between major coffee producing and consuming countries. This resulted in fairly stable prices for coffee (known as the “C” price on the commodity market) of between US$1 and $1.50 a pound.

The ICA was renegotiated every five years by member countries. In 1989, the ICA collapsed when it was not renewed. In part this was due to a lack of support by the U.S., which had a great deal of power as the largest importing member nation. The U.S. had less political motivation to help major producing nations. Further, the Reagan administration was strongly free market and opposed the ICA on those grounds. These factors played a key role in the demise of the ICA.

Under the free market, prices plummeted, down to $0.49 per pound in 1992. Remember that this is the commodity price, and the farmers themselves receive only a fraction of the “C” price; in this case far below production costs.

Small farmers are extremely vulnerable to this market volatility. Experiencing up to a 70% drop in their incomes, many were devastated. Many abandoned their land, migrated north, or cleared their land for more profitable crops, including drugs. Child malnutrition climbed.

Although the initial price crash was an immediate response to the disintegration of the ICA, another cause contributed to subsequent crashes and sustained low coffee prices: oversupply. World development banks, promoting export-led development as a way to decrease poverty, funded increased production in many nations, most notably Vietnam. This country increased production over 1100% in the decade beginning in 1991. In addition to the development organizations, multinational corporations played a large role encouraging an increased coffee supply. They are typically known as the “big four” — Nestlé, Proctor and Gamble, Kraft, and Sara Lee (here are the brands these companies own).

Much of this coffee glut was cheaper robusta beans (Coffea canephora). Because they are bitter and considered low-quality, robusta has historically only been used as filler in blends or in cheap coffee. Now methods have been developed by the large coffee corporations to process green robusta beans to make them more palatable. These companies now use a much higher percentage of robusta in their coffees rather than buying arabica from smaller growers in Latin America, where production costs are much higher than in Vietnam. In this way, the oversupply of robusta also depressed arabica prices.

The big four are making tremendous profits while lowering the quality of the world’s coffee. Over ten years, the profit retained by coffee-producing nations went from about 30 percent of the purchase price to 8 percent.

The investments made by these corporations in the growing of cheap coffee and the development of a process in which to make it drinkable are important factors in precipitating the coffee crisis.  An excellent, highly recommended article from Fortune magazine notes,

“Of course, without a market for cheap, low-grade robusta, there would never have been a coffee boom in Vietnam. And that’s exactly what the Big Four, along with other large European roasters, provided. They took advantage of new steam-cleaning technology to eliminate the coffee’s harsh flavor. They introduced flavored coffee — hazelnut, Irish cream–to disguise robusta’s inferior taste.”

A very good overview of the coffee crisis is over at CoffeeGeek, with recommendations for consumers.  It also touches on another aspect of the crisis, which is that higher quality coffee beans are becoming rarer, because the small farmers that grow it cannot compete and are going out of business.  As the Fortune article says,

“But the short-term economic advantages of robusta are overshadowed by long-term costs — for growers, drinkers, even the Big Four themselves. In the past ten years, as the global coffee market swelled from $30 billion to $70 billion, the revenues of growers have dwindled. Coffee drinkers, meanwhile, have had to contend with declining quality: The java at your local grocery store or deli now contains more robusta, and gourmet purveyors, which rely exclusively on the high-quality arabica growers in Latin America and Africa most damaged by the crisis, are having a tougher time sourcing beans. When quality drops, people tend to drink less coffee.”

The International Coffee Organization has proposed destroying the worst (lowest quality) 5% of the crop, helping to alleviate the surplus.  The big four are opposed to this plan.

More information:

Photo of Colombian coffee farmers by, ironically, Nestlé, under a Creative Commons license.

Print Friendly
Revised on March 23, 2014

Posted in Corporate coffee

M Coulter August 30, 2006 at 12:26 pm

What is the contact info for http://www.coffeehabitat.com? It does not seem to be on the website.

Timotheo Tappani December 1, 2007 at 12:20 pm

I really appreciate the breadth of info you offer. I am sure you would appreciate some work I came across a year or so ago. The author was a prominent World Bank Strategist (I understand he developed or managed their agribusiness portfolio a long time ago) and he discovered the impact of conservation and sustainability and began to research it with a pretty critical eye.

That is what I like about him, he does not get rabid about a position but uses sound data to make a rational argument. A friend at the UN turned me on to him and said that he had quietly done more to convince the development groups, scientists, and academics than anyone about agricultural sustainability. For instance, that number about how many million coffee farmers there are I first found in his writing in the 1990s (researching my PhD) he's the guy that actually counted the co-ops and farmer associations in every producing country.

He has a lot of things out and most are hard to find (Gov of Vietnam, World Bank websites, etc) but the ones I think really hit the nail on the head are "The State of Sustainable Coffee" and "Coffee Markets – New Paradigms in Global Supply and Demand". One of them is put out by the INternat'l Institute for Sustainable Development.

Anyway, thanks for your great service and keep it up,
Timotheo
PS: I wrote him for a book when I could not find it and he said he never charges for any books or info – if they are sold (ICO was selling some) he asks the profits go to Coffee Kids.

BirdBarista December 1, 2007 at 6:28 pm

Timotheo, thanks for bringing up these publications. They are available online, and it's been some time since I read the first one, "The State of Sustainable Coffee" and this is a good reminder to take a second look. For interested readers, here's the link to "Coffee Markets: New Paradigms in Global Supply and Demand."

Comments on this entry are closed.

Previous post:

Next post: