Who's Really to Blame for Low Coffee Prices?


By Kendra Okonski *

International Policy Network
June 4, 2003

Behind closed doors in late May, representatives of the World Bank, Oxfam, Greenpeace and the International Coffee Organization met to plot the future of 25 million poor farmers. These groups are ballyhooing the fact that world-wide coffee prices have fallen to a 30-year low. The culprit? According to these groups, it is profiteering by multinational companies, who purchase 50% of the world's coffee, and overproduction of poorer-quality coffee by Vietnam.

The ICO and Oxfam recommended that the lowest-quality coffee should be purged from global markets to drive up coffee prices. So without coincidence, the Vietnam Coffee and Cocoa Organization announced that it plans to cut 20% of the country's production capacity by 2005. If they follow through with this, 100,000 hectares of coffee bushes will be destroyed. The obvious victims of this scheme will be Vietnam's poor farmers, who continue to be the victims of market fluctuations caused by government mismanagement and broken schemes to "fix" the world's coffee market.

In the past decade, Vietnam has entered the stage as the world's second-largest producer of coffee, generating five million jobs in the process. The country has climate and soil conditions that are well suited to growing a variety of coffee called "robusta," which is a poorer-quality bean. When Vietnam was encouraged by multilateral groups to reform its economy, it pursued an agricultural agenda largely focused on coffee production. It subsidized farmers, and even more farmers jumped on the coffee train when coffee prices were high six years ago. Poor farmers saw this as an opportunity to escape subsistence agriculture, to grow coffee for export and generate income.

Coffee markets are not fluid, because the bushes take five years to mature, and coffee is almost exclusively grown in poor, corrupt countries. Almost all coffee producing countries lack infrastructure (both physical and financial), property rights and contract laws, which are fundamental institutions for markets to operate efficiently. Small farmers around the world do not experience the benefits of futures markets for agricultural commodities. As a result, Vietnam's small farmers are contributing heavily to the world-wide glut of coffee.

Meanwhile, multinational companies have developed new steam-cleaning technologies that eliminate the bitter taste of poorer-quality robusta beans. Such investments are a major portion of their costs, while the price of coffee beans is only a small part. This is why consumers have not noticed a reduction in coffee prices. The reality is that government intervention in various forms is causing the global coffee crisis, and companies are not.

First, Vietnam's own subsidies to its coffee farmers have led to a coffee glut. French, German and Swiss government aid agencies lent money to Vietnam to subsidize its agricultural production through low-cost loans to farmers. It focused on promoting coffee, because at the time coffee prices were high. But these subsidies led to overproduction of coffee and contributed to the current coffee crisis.

But a bigger problem is highly subsidized farmers in wealthy countries. Huge subsidies to farmers in parts of the West mean that farmers in poor countries cannot diversify their production, because they cannot access these markets. Poor farmers choose to produce coffee, cocoa and other commodities because they have few other options with which to generate income. Adding insult to injury, the EU floods world markets with cheap, unwanted produce, which drives down the world price for commodities such as sugar.

Likewise, high tariffs and restrictive quotas in the EU and U.S. keep out processed agricultural goods from other countries. Consequently, multinational companies do not invest in processing facilities in poor countries, which could add value to coffee and other agricultural products. Instead, companies continue to import and process raw coffee beans in Europe.

The ICO, Oxfam, and World Bank rightly call attention to the genuinely unfair support that wealthy farmers receive, and this is also a subject of huge contention in the European Union and at the World Trade Organization. Eliminating these subsidies would be the best way to make global markets work, for poor farmers and consumers.

In the meantime, what will be the long-run effects of destroying coffee production in Vietnam, and governments intervening in global coffee markets? Neither Vietnam's government nor anyone else know what demand for robusta coffee will be in 2005. It may become a more popular drink in emerging markets, so Vietnam's plans could be very short-sighted, to the detriment of poor farmers. Secondly, temporarily higher coffee prices may induce farmers in other countries to again invest in coffee production, leading to similar problems of oversupply and low prices down the road. Third, almost all consumers purchase coffee on the basis of price, not on the basis of how it is produced. Many people consume the instant varieties produced by Nestle, Kraft and other companies. Higher prices for instant coffee will induce consumers to switch to alternatives, like soft drinks.

Ignoring the realities of the market will make poor coffee farmers even worse off. Blaming multinational companies for the coffee crisis is sexy, but its real cause lies in government aid, subsidies and regulations. More of the same will only prolong and worsen the problems of the coffee market.

About the Author:Ms. Okonski is the sustainable development project director for the International Policy Network in London.

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