Global Policy Forum

Depressed Coffee Prices Yield Suffering in Poor Countries


by Paul Jeffrey

National Catholic Reporter
February 7, 2003

Marí­a Ramos doesn't understand why she works so hard and earns so little. A single mother in the village of Tauquil, high in the rugged mountains of northern Nicaragua, Ramos works her hillside farm with her two children. She produces organic coffee, for which she earns a higher price than she would if she produced it by other methods, yet world coffee prices have fallen so low in recent years that she cannot earn enough to make ends meet. "It's a disgrace. I produce good coffee, yet what I get paid for it barely keeps us alive," Ramos said. "I get up every morning and listen on the radio to hear the price of coffee in New York. It's always low these days. I could get depressed, but what good would that do me? I can cry, but crying won't help me buy shoes or food for my children."

Ramos and millions of coffee farmers around the world, poor in the best of times, are having an even harder time surviving today because the price paid for the coffee they produce has fallen to historic lows. It's not just fickle markets that are generating their suffering, however. What's wrong with coffee is what's wrong with globalization.

Coffee is the most heavily traded commodity in the world after petroleum. Seventy percent of the world's coffee is grown on farms smaller than 10 hectares (less than 25 acres), many of them family-run operations. When prices for coffee are stable, farm families earn money to feed their kids and send them to school. Steady coffee prices contribute to social stability. In war-torn Colombia, for example, mountainous areas where coffee is produced have been less perplexed by violence. Yet coffee prices have plummeted spectacularly in recent years, leaving children starving and endangering precious progress made toward justice and democracy in many Third World countries.

The coffee agreement

Until 1989, coffee prices were guaranteed under the International Coffee Agreement, a Cold War mechanism designed, so the thinking went, to maintain stable coffee prices and thus avoid the social turmoil that communists could exploit. Although the agreement was cumbersome, it worked. Between 1975 and 1989, although coffee prices fluctuated dramatically, they almost never fell below the agreement's minimum price of $1.20 per pound. Yet the United States abandoned the coffee agreement at the end of the Cold War, contributing to its collapse. Coffee prices plummeted. Except for two temporary spikes caused by worries about frost in Brazil, prices remained low for most of the 1990s, usually below the cost of production. In the last two years, the price paid to coffee producers has averaged well under 50 cents per pound. Adjusted for inflation, it's the lowest wholesale price for coffee in 100 years.

Much of the cause for this is simple: There's too much coffee out there. Vietnam often gets much of the blame. The Asian nation produced 1.5 million 60-kilogram sacks of coffee in 1990, yet by 2000 it had kicked its way into the global economy by producing 15 million sacks. Vietnam's production is today surpassed only by Brazil, which in the last decade dramatically boosted coffee yields through increased mechanization and other technological improvements.

Consumption also increased in the '90s, yet didn't grow apace with production. One of the principal factors in this widening breach between production and consumption has been a shift in what Northern consumers drink. In 1970, the average U.S. consumer drank 36 gallons of coffee and 23 gallons of carbonated soft drinks. By the year 2000, the situation was almost the reverse: The average U.S. consumer drank 17 gallons of coffee and 53 gallons of soft drinks. That's good news for Coke and Pepsi, bad news for the 25 million families around the world that grow coffee.

Yet besides this increasing imbalance between supply and demand, there's something else at play. A decade ago, coffee-producing countries earned $10 billion from coffee that retailed for about $30 billion. Retail sales today exceed $70 billion, but coffee-producing countries receive less than $6 billion. Clearly, the benefits of globalization have been shared unequally. On average, those who produce coffee receive less than 1 percent of what a Northern consumer pays for a cup of coffee in a restaurant or coffee shop, and roughly 6 percent of the retail price of coffee purchased in a grocery store. The remainder goes to those who market the coffee. As anyone who bought stock in Starbucks in the last decade knows, business has been good. Starbucks' share price has risen almost tenfold in 10 years, and the company has steadily raised retail prices while wholesale prices fell.

In a September report, Oxfam International claimed farmers in poor countries are paid roughly 24 cents a pound for coffee beans, while the four transnational corporations that buy nearly half of the world's coffee -- Sara Lee, Kraft, Procter & Gamble and Nestlé -- sell those beans at an average price of $3.60 a pound. Fermí­n Pérez, president of an association of coffee growers in Honduras, accurately sums up the international coffee market: "We coffee farmers are subsidizing those giant companies."

The effects of this disparity between South and North can be witnessed throughout the coffee-producing regions of the world. In Central America, more than 540,000 part-time and permanent jobs have been lost. Unemployed coffee workers camp out in city parks and along roadsides, begging for food. Combined with a recurring drought, conditions in many poor villages are worse than during the violent civil wars of the 1980s. In Honduras, riot police in July beat coffee farmers -- including Pérez -- who came to the capital looking for assistance. In Guatemala, unemployed seasonal coffee pickers have invaded private farms, often with help from church lawyers. The country's Catholic bishops wrote President Alfonso Portillo on Nov. 12 asking that he declare a state of emergency because of the "difficult and anguished situation" of small farmers and laborers left without income by the fall in coffee prices.

Losing tax money

Yet governments have a harder time meeting needs when they lose tax income from exports like coffee. Local governments in coffee regions have been especially hard hit. In Jalapa, where municipal authorities charge a 1 percent tax on coffee production, the decline in income has left the town's streets an impassable labyrinth of potholes that can swallow whole trucks. This comes precisely at a time when international financial organizations are forcing cutbacks in central governments in the name of decentralization. With a downsized central government and no funding for local government, the country has become virtually ungovernable.

Some foreign governments have chipped in to help, but the money hasn't reached small farmers. "Taiwan gave the government $20 million to help out coffee producers, but it was just used to pay off the debts of big coffee farmers. It resolved the problems of the bankers, not the small farmers who never get credit," said Concepción Ponce, president of a coalition of coffee cooperatives in Jalapa.

The coffee crisis has undone much of the progress achieved by debt activists in recent years. Because of the initiative to lessen the burden on highly indebted poor countries, Ethiopia, for example, achieved the cancellation of $58 million of its debt payments in 2001. Yet in the same period the African nation lost almost twice that amount from the decline in coffee revenues.

Progress toward democracy may be a casualty as the coffee crisis exacerbates suffering and problems with governance. "People who are hungry are desperate people, and you can have lots of nice ideas about peace and democracy, but if people are hungry you won't achieve them. Hunger is worse than war," Pérez said.

According to Constantino Casabuenas, a regional policy adviser for Oxfam UK, the economic base of political democracy is eroding. "They promised 10 to 15 years ago that the free market was going to bring benefits to all. But what has really happened? Coffee is a good example of how the free market has produced a concentration of wealth, greater poverty and inequality, and contributed to greater ungovernability and crisis. If we don't attack the structural roots of the region's problems, we'll never find a solution," he said.

With oversupply part of the problem, having farmers diversify to other crops may be part of the solution. Yet to what? In Colombia, many desperate farmers are pulling up coffee plants and cultivating coca, the raw material of cocaine. Not only does this shift make the poor more susceptible to the violence that accompanies the production of illegal drugs, but it also damages the environment, since shade-grown coffee helps maintain natural diversity and conserve water sources.

"We'll experience the environmental impact of this crisis long into the future, because when peasants rip out their coffee plants and cut down their trees to sow corn and beans, they're taking a big step toward turning this into a desert," said Fr. Jack Moynihan, a Maryknoll missioner from the United States who works with coffee cooperatives in Jalapa. Moreover, while such a decision may produce some food in the short term, regional trade pacts and massive subsidies for U.S. producers have undercut local prices for basic grains, so the farmer in the global South is unlikely to sell the harvest for any profit. And should coffee prices rise in the future, it will take four to six years to get new coffee bushes producing, even longer to reestablish a suitable tree canopy on denuded slopes.

Decisions in the boardrooms

For many caught in the coffee crisis, the only alternative may be to go somewhere else. According to church activists who work with migrants, the coffee crisis has contributed to an acceleration in illegal immigration to the United States from Central America and Mexico. For Pérez, that's a direct consequence of decisions made in corporate boardrooms in the North. "We farmers who produce the coffee are just as much the raw material of their profits as the coffee beans we harvest. Yet if the coffee companies don't take better care of the raw material, don't share their profits with us, then in the long run their profits will dry up and we'll end up migrating North to the rich countries because we don't want to die here," he said.

According to a World Bank study last March, failure to deal quickly with the coffee crisis will generate "a broad social and environmental crisis." Yet even international financial institutions like the World Bank have done little to ameliorate the crisis, and their rosy commodity price predictions have seduced producing countries to hold out for better days that may not come.

One solution to the coffee crisis that has proved popular among church groups is purchasing fair trade coffee. Fair trade coffee guarantees a steady price to producers, currently about $1.26 per pound (even more for organic coffee), who in turn guarantee certain environmental practices and usually organize into cooperatives. Although fair trade represents only about 2 percent of the global coffee market, it grew by 12 percent worldwide in 2001, and was up 36 percent that year in the United States.

"Fair trade is a powerful response to the coffee crisis because it's not charity," said Paul Rice, director of the Oakland-based Transfair, which certifies fair trade products for U.S. companies. "The dominant model we've had for addressing poverty and powerlessness in poor countries, a model based on international aid, is clearly bankrupt. It failed to a large extent to help local communities develop their own capacity to resolve their own problems. And it particularly failed to help local communities find a way to insert themselves in the international market in a way in which they're not victimized."

According to Moynihan, what makes fair trade work is the emphasis on organization and education. "Left on their own, small farmers are cheated by loan sharks and bankers and coffee intermediaries and politicians, and they lack the resources to invest in improving the quality of their product. If they organize [into cooperatives], they can better defend their rights, learn together how to work more efficiently and improve the quality of their product, and then receive a more just price for their product," he said.

Fair trade coffee faces the same oversupply problem as the larger market, however. The half million farmers certified by Transfair produced 170 million pounds of coffee in 2001, according to Rice, yet only 40 million pounds could be sold under fair trade terms. The rest was sold at normal market prices. Marí­a Ramos in Nicaragua belongs to a cooperative that sells to a fair trade organization, but only 30 percent of her harvest receives the fair trade premium. If more people would buy fair trade in the North, she could get a better price for the other 70 percent of her harvest.

A bad rap

Fair trade coffee was initially plagued by complaints about bad quality, yet producers have made great strides in improving the quality of the brew and it has found a comfortable niche in the specialty coffee market, alongside organic coffee and other similar labels, such as "sustainable coffee." After years of public pressure from activists who singled it out because of its high visibility and yuppie clientele, Starbucks now sells fair trade coffee in all its stores and has given it prominent play in university markets. Rice, whose organization gets paid 10 cents a pound by Starbucks to certify its fair trade coffee, thinks it's time that activists turn their pressure elsewhere.

"I think Starbucks gets a bad rap. It's a mistake for people who support fair trade to target Starbucks because they are not doing enough, and not target Kraft or Nestlé or Proctor & Gamble who aren't doing anything and won't even return my calls," Rice said. "It's just not smart activism to target someone who is doing the right thing but you feel they're not doing enough, rather than target people who aren't doing the right thing at all."

According to Dennis Smith, president of an independent corporate monitoring group in Guatemala that has surveyed conditions in Guatemala's coffee fields, fair trade agreements are a positive development. Nonetheless, his group has found anecdotal evidence that fair trade-certified cooperatives and small holders have similar problems of child labor, less pay for women, inadequate medical care, use of dangerous chemicals, and nonpayment of minimum wages as do large coffee estates. Smith suggests that the expansion of independent external verification of working conditions, similar to what's begun in a small way in the maquila industry, as opposed to internal voluntary monitoring by the coffee industry and its allies, would address some of these problems.

In its September report, Oxfam praises fair trade, and encourages large companies to buy more fair trade coffee. Yet Oxfam recognizes that fair trade isn't enough to overcome the current crisis, and suggests additional steps to resolve the world's coffee crisis. These include the destruction of $100 million worth of low-quality coffee already in Northern warehouses, a campaign to improve quality in producing countries, the reinvention of a guaranteed pricing structure, and a fund to support diversification away from coffee, especially in low-altitude areas where it's difficult to grow good quality beans.

Oxfam also wants coffee companies to do what they do best, which is promote more consumption, including in producing countries. Mexico, for example, is a net exporter of coffee, yet Mexicans drink little coffee themselves. And when they do, it's likely to be imported Pérez, which contains low-quality coffee from more than a dozen countries. If every Mexican drank just one cup of coffee a day, the country would become a net importer of coffee and prices paid to producers would improve.

Paul Jeffrey is a free-lance writer who lives in Honduras.

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FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.