A bitter bean to swallow

BY SEAN HEALY

Drinking it in a wannabe-hip caf‚ in Newtown or Fitzroy, it smells of modern sophistication; hauling great bags of it down a steep hillside in East Timor or Colombia, it smells of age-old slavery.

It's just a little bean, but coffee is a killer.

Twenty million households in 50 countries worldwide depend on coffee. Seventy percent of the world's coffee crop comes from small farmers eking out a living on plots of less than five hectares, the rest from large plantations where the workers are hired for the harvest and then fired once it's in. Often, coffee harvesting is their only source of income.

Few have ever risen out of poverty on the back of the coffee bean. Few coffee farmers even have the money to drink their product: "Too expensive", Nganga Waweru, who lives 45 minutes north of Nairobi, Kenya, told the London Financial Times. "They sell Nescafe in the local shops, but most of our farmers cannot afford it."

But what was already a bad way to live has gotten a lot worse in the last year. The bottom has fallen out of the world coffee market: its average price has halved since the beginning of 2000, to around 50 cents a pound, the lowest in real terms for 100 years.

The impact has been little short of disastrous.

In the Kilimanjaro region of Tanzania, where coffee is the main cash crop, smallholders have had to take their children out of school, because they can't pay the fees.

Tatu Museyni, a 37-year old widow, lives in a mud hut, without electricity or running water, with her six children on a farm of 0.4 hectares. She had planned to send her third child, Isaiah, to primary school, she told an Oxfam researcher in December, but now she can't: school fees cost US$10 a year and her whole crop this year was only worth US$15.

In Chiapas, in southern Mexico, producer prices in indigenous communities are now as little as 50 US cents per kilogram, roughly a third of the average production cost.

The wages of coffee plantation workers have halved, and 500 families a week are fleeing the region, migrating north to the factory zone in search of work.

In East Timor, 40,000 families, a quarter of the population, rely on coffee as their only source of income. The country's coffee has lost up to 35% of its market value in the last year, farmers are being offered only 10 US cents a kilogram and desperation is growing.

"If we don't get 30 cents a kilogram, we'll burn your trucks and burn your warehouses", yelled one farmer at industry representatives during a village meeting in May.

In the Kafe region of Ethiopia, where coffee originated, more than 700,000 households are involved in its production. The slump in prices has meant the country, already one of the world's poorest, has lost almost US$300 million in export revenues over the last two years, an amount equivalent to half the country's annual export earnings. The people who actually grow the crop now receive as little as 6% of the final retail price, Oxfam estimates.

But it's not all bad news. Just because poor farmers aren't getting anything out of it doesn't mean no-one is.

Coffee is the world's second most traded commodity, behind only petroleum, with annual sales of US$18 billion. The coffee trade is the very model of the modern, "globalised" commodity market, its value chain — from grower, to intermediary, to exporter, to importer, to roaster, to retailer, to consumer — typically winding through many different countries on its way from hillside crop to streetside caf‚.

Coffee beans come in two main varieties: the lower-grade robusta, most frequently used in instant coffee, and the higher-grade arabica, which generally goes into specialty and high-quality blends.

Regardless of which kind they grow, most small farmers have little choice but to sell their produce to intermediaries (called "coyotes" in Latin America), who frequently pay below-market rates, keeps a substantial cut for themselves and then sells them on to an exporter, who cleans and processes them.

Large plantation owners usually pick, process and export their own harvests, and so skip the intermediaries. Importers then purchase bulk containers of green coffee from the exporters and plantations, store them in large facilities and sell them in small quantities to roasters.

The roasters, some big, many small, have the highest profit margin in the value chain: they gain some 30% of total profit. The roasters then sell the finished beans to retailers, like supermarket companies or coffee store chains who distribute and sell them to the final consumer. Many of the largest retailers, like Nestle, do their own roasting.

While there is little money at the bottom of the value chain, there is lots of it at the top.

Only four corporations — Proctor and Gamble, Philip Morris, Sara Lee and Nestle — account for almost 40% of worldwide sales. Their market domination means that they can dictate terms to their suppliers and to their consumers: while wholesale prices have fallen, retail prices on instant coffee and on "specialty" coffees have risen by 18% in the last three years.

The biggest of them all, Nestle, made more than US$1 billion profit in 2000 from its beverage operations, up 20% on the previous year. Its annual report commented "Trading profits increased and margins improved thanks to favourable commodity prices".

The big retail coffee chains also rake it in, especially if they sell the higher-grade, more expensive arabica beans: global chain Starbucks posted a 40% increase in profits in the first quarter of 2001. The company's chief and founder Howard Schultz paid himself US$2.1 million in 2000, not including stock and options.

One farmer's misery is one corporate executive's luxury.

This is not just "good fortune" on the part of the industry's powers, nor just a result of them leaving the least profitable, primary operations to others and going straight for the cream. This is a result of calculated strategy, and not just by the companies but also by rich country governments and multilateral institutions.

The quoted international price of coffee is the price set on the New York "C" contract market. Most coffee is traded by professional speculators — they trade roughly 8-10 times the amount of actual coffee produced each year — and the market is highly volatile, rising and falling on the chances of frost in Brazil and the number of Nescafe drinkers in China.

But the single greatest influence on price is the sheer volume of supply. This is why the price has fallen so dramatically in the past year — like many other primary commodities, the international coffee market is totally saturated.

In the past decade, Oxfam estimates, production has increased at twice the rate of consumption. Stocks held by traders doubled between 1997 and 2000 and now stand at over one million tonnes.

Part of the increase in supply is the result of greater productivity, new machinery and more sophisticated techniques. The world's largest supplier, Brazil, for example, has planted vast, mechanised fields of low-grade robusta, the kind used to make instant coffee, in the country's interior. But possibly more influential is the growing number of poor countries supplying coffee to the world market.

Since the Third World debt crisis began in the 1970s and early 1980s, the World Bank, the International Monetary Fund and other multilateral financial institutions have encouraged, even pushed, poor countries into ever-greater reliance on cash crops, which can generate export earnings and in turn pay off the debt.

Coffee is a natural candidate for cash cropping: it takes root easily, cohabits well with other crops and is labour-intensive, thereby generating jobs.

In the 1970s, the US government's Agency for International Development gave US$80 million to big growers in Latin America to replace traditional shade-grown farming techniques with massive plantations, boosting production (albeit at massive environmental cost).

In the 1990s, the World Bank and the Asian Development Bank extended concessional loans to Vietnam to plant huge fields of robusta. From being an insignificant force in the coffee market, the south-east Asian nation has overtaken Colombia to become the world's second largest exporter. Its sales have doubled in the last year alone — few of its competitors have been able to match US$1 a day wages.

Even now, in East Timor, the World Bank is advising the country to move away from agricultural self-reliance and instead rely on exports of coffee to pay for imports of other foodstuffs.

By shoving every country which came to them into the primary commodities markets, the international financial institutions have created chronic oversupply and thrown their debtor-countries into a vicious "beggar thy neighbour" competition for market share — an entirely predictable outcome.

Even this, though, wouldn't be an irretrievable situation if producer countries were able to band together to exercise some collective control over supply and therefore price. For decades, they did exactly that. Under the International Coffee Agreement, producer countries were able to gain for themselves up to 33% of consumer spending on coffee, compared to 15% now. Price volatility was also contained: fluctuations were in the order of 10-15% a year, compared to up to 50% now.

But the ICA was not popular with the multinational companies, for obvious reasons — and in 1989 the US government was able to destroy it. The US has since succeeded in torpedoing similar international agreements regulating sugar, cocoa, tin and rubber, to similar effect.

In the past 12 months, the Association of Coffee Producing Countries has attempted to resurrect some sort of market regulation. In May, it agreed to try to again implement a scheme whereby producers would retain 20% of their stock from market until the price rises to around US$2.09 a kilogram. It has also canvassed other options, including stock destruction and phasing out low-grade coffee altogether.

But the retention scheme has failed miserably, in the face of opposition from the companies and First World governments and reticence from producer countries. Many of these countries are too poor to hold back from a chance of gaining export earnings; some, like Vietnam and most African countries, don't even have the storage facilities to keep beans in good condition.

In May, the International Coffee Organisation held a World Coffee Conference, where industry representatives and government bureaucrats could rub shoulders and discuss "solutions". Attendance at the conference, held in London's Hilton Hotel, cost £1000 a head — roughly what Tatu Museyni will earn over the next four years back in her hut in Tanzania. It was part-sponsored by Nestle, coincidentally enough.

Industry speakers dismissed talk of retention schemes and stock destruction out of hand. "Ultimately, the price paid to growers depends on the balance between supply and demand", said the British Coffee Association in a statement released during the conference, clearly revelling in the realities of the "free market".

Instead, senior executives from Nestle and Philip Morris argued that the way to lift the world coffee market out of its current crisis was for people to buy more of their coffee.