Low Prices Don’t Drip Down to Coffee Drinkers

It would seem to defy capitalist logic. The international price of coffee beans has plunged 60% in three years to about 50 cents a pound, the lowest level in decades. Yet java drinkers are paying more per cup, as much as $3 for a latte grande in New York or $5 a cup at London’s Hilton Hotel, where the first World Coffee Conference is meeting.

Coffee lovers are spending more, coffee farmers are getting less. How can that be?

The short, skinny answer, according to experts at the International Coffee Organization’s three-day conference here, is that black coffee represents very little of the total value of each cup, whether brewed at home or bought in a designer cafe.

“There is the packaging, advertising and shelf space in a supermarket,” said Carlos Alfaro, a member of the Costa Rican Coffee Institute. “At Starbucks, the price of real estate and the price of labor are included in the cost of the product.”

But surely there is some savings from lower wholesale coffee prices resulting from a glut of beans on the world market?

“The other truth,” according to Alfaro, “is that there is a point where roasters feel they don’t gain anything by lowering the price. . . . There is a limit to the amount of coffee you can drink. If it is $3 a pound or $1.50 a pound, you will drink the same amount.”

The development and aid organization Oxfam noted in a report issued this week that Nestle, the world’s largest producer of instant coffee, expects a 20% rise in profits this year. Starbucks posted a 40% increase in the first quarter of 2001.

“Current trends in oversupply are clearly in the interest of the major players, who have conspicuously failed to pass on falling world prices to consumers,” the Oxfam report said.

Consumption is increasing around the world--from about 80 million bags in 1980 to 105.5 million bags last year, with each bag containing 132 pounds of coffee--helped in no small part by the spread of cafes and coffee boutiques to traditional tea-drinking countries such as Britain.

That increase, however, is not sufficient to absorb the glut of coffee beans caused by rising production. With World Bank aid, Vietnam increased its coffee production twelvefold during the last decade, to 12 billion pounds last year, and surpassed Colombia as the world’s second-largest coffee producer. Brazil is No. 1.

At the same time, United Nations and U.S. Agency for International Development programs encouraged Colombian, Bolivian and Peruvian farmers to switch from coca plants, used to make cocaine, to coffee production. And the International Coffee Organization funded the revival of Angola’s coffee production after a devastating war.

Other factors also have contributed to the steady growth of coffee supplies, according to the Oxfam report. “The pressure of debt has forced countries to expand exports in order to generate hard currency.”

Rather than work together to restrict supply and push up prices, coffee exporting countries have been compensating by shipping more, albeit for less revenue per pound.

Sergio Amaral, president of the Assn. of Coffee Producing Countries, wrote in the Financial Times on Thursday that the privatization of coffee federations in producing countries, and the concentration of coffee trading and processing in the hands of a few large multinational companies also have pushed down prices.

“In the meantime, producer countries have lost out as consumer countries have developed their own exports; last year, the United States imported 24.5 million bags and reexported 2.4 million, more than half of which were roasted and soluble [instant] coffees,” Amaral wrote.

All of this is bad news for the world’s coffee farmers, the vast majority of whom are poor and working small holdings. They are the biggest losers in the collapse of world coffee prices. With the glut expected to last another three years, their income is likely to continue shrinking unless something is done to change the situation.

To reduce their own costs, many small farmers can be expected to cut corners in picking, cleaning and sorting coffee beans, leading to lower quality at a time when the market for high-end, specialty coffee is growing and its supply is limited, experts said.

“We have to get a higher price back to the farm gate,” Ted Lingle, director of the Long Beach-based Specialty Coffee Assn. of America, said here. “There aren’t enough companies like Starbucks that are willing to pay a fair price for high-quality coffee.”

Although everyone at the conference Friday agreed on the problem, the solution to low prices was not so clear.

Oxfam proposes a one-time destruction of about 1 million tons of coffee, roughly the equivalent of stocks in consuming countries, to reduce supply. This would cost about $250 million, which the organization says should be financed by a “windfall tax” on coffee roasters such as Nestle and Kraft Foods.

But that does not address the long-term problem of oversupply, others countered.

Robert Thompson, director of rural development for the World Bank, said farmers need better access to technology and marketing systems to compete with the big producers.

Coffee industry spokesmen said new markets for coffee must be found in places such as Russia and China, as well as new coffee drinkers in the United States.

“We have to try to reach the consumer with products they can identify with,” said Henry Dunlop, a representative of the New York-based National Coffee Assn.

There were other ideas, but no one was heard suggesting that the solution was to lower the price of a skinny latte in Santa Monica.