Author: Geoff Riley Last updated: Sunday 23 September, 2012
Each day nearly 2.5 billion cups of coffee are consumed. It is one of the most widely traded commodities in the world and millions of people depend directly or indirectly on the production and sale of coffee for their livelihoods. The global market for coffee is characterised by volatile prices and production levels which impacts directly on the incomes and survival of producers.
The Coffee Paradox
Experts on the world coffee market often make reference to the “coffee paradox”.
A coffee crisis in producing countries with a trend towards lower prices, declining incomes and profits affecting millions of people in the world’s poorest countries.
A coffee ‘boom’ in consuming countries with rising sales and profits for coffee retailers and roasters
A widening gap between producer and consumer prices only partly offset by the influence of Fair Trade in the coffee industry.
The World Bank estimates that out of 140 developing countries, 95 depend on exports of commodities for at least 50 percent of their total export earnings. Coffee is an example of “commodity-dependency” representing, for example, 75% of the total exports of Burundi and 54% in Uganda. About 25 million families produce and sell coffee for their livelihood and most are small-scale farmers with limited financial resources and scope to diversify out of coffee.
Globally, coffee sales each year exceed $70 billion, but coffee producing countries only capture $5 billion of this value, with the bulk of revenues retained by developed countries. A recent Oxfam research report showed that Ugandan coffee farmers only get about 2.5 percent of the final retail price in the UK market.
Because the supply-side of the world coffee market is fragmented – with millions of small-scale producers – the market power lies with coffee roasting companies who buy raw coffee beans and process them into coffee-based products.
When buyers have power over the market price, this is monopsony, and this purchasing power over coffee growers can force down the price that farmers receive for their products – creating poverty and damaging the chances of sustainable development for regions dependent on coffee production.
There have been no price controls in the global coffee trade since 1989, when the buffer-stock system run by the International Coffee Agreement broke down. Since then prices have been determined by the market supply and demand. Over the last ten years coffee prices have been volatile.
Consumption of coffee and price elasticity of demand
Coffee demand has been stagnating in many of richer nations but consumption growth has been stronger in emerging market countries and especially in some of the former eastern Bloc countries most of whom are now part of the European Union.
The main buyers of raw coffee beans are the large multinational buyers, dominated by four firms: Nestlé, Kraft, Procter & Gamble and Sara Lee.
Employment in coffee producing countries
Coffee production employs a labour force estimated at around 25 million families by the ICO and accounts for more than 50% of export earnings in many countries
An increase in consumption favouring a gradual rise in world prices would be a positive factor for economic growth and increased per capita incomes in these countries.
In Brazil alone more than a million jobs are generated by the coffee industry
The International Coffee Organisation (ICO)
The International Coffee Organization (ICO) brings together producing and consuming countries to tackle the challenges facing the world coffee sector through cooperation.
Brazil is effectively the “swing producer” for the global coffee markets, in other words, since Brazil is the largest coffee producer, changes in Brazil's supplies of coffee account for a large portion of the change in the world total supplies of coffee which then directly affects the prevailing international price.