The Economics of Coffee

A close-up of coffee plant beans on a branch
A close-up of roasted coffee beans
A close-up of two plastic Starbucks cups, filled with coffee, being sipped from straws

The economy of the community is based on coffee production—nothing else. 
—Alemayehu Abrahim, school principal, Oromoia, Ethiopia

Coffee is not just a drink. It’s a global commodity. As one of the world’s most traded products—second in value only to oil—the coffee industry employs millions of people around the world through its growing, processing and trading. But while the coffee trade is vital to the politics, survival and economies of many developing nations, the industry’s pricing and futures are decided in conference rooms and on stock exchange floors in some of the world’s wealthiest cities.

The International Coffee Agreements

Coffee has been a valuable international trade commodity since the 1800s. Established in 1963, the International Coffee Organization (ICO) has operated under the International Coffee Agreements of 1962, 1968, 1976, 1983, 1994 and 2001. The agreements were negotiated under the authority of the United Nations.

The International Coffee Agreements were the most successful effort to control coffee supply to date. From the 1960s to 1989, they stabilized the market and stalled a decline in prices. The agreements included both importing and exporting countries, limited excess supplies using a quota system, implemented price controls and promoted an increase in coffee consumption. The first agreements helped to strengthen the economies of coffee-producing countries in Africa and Latin America.

The success of the International Coffee Agreements was owed in part to the United States, who helped to enforce the quota system in an effort to prevent communism from destabilizing poor Latin American countries. But when the U.S. pulled out from the agreement in 1989, serious repercussions ensued.

In 1989, the ICO extended the 1983 agreement to allow for more time for negotiation. It also suspended the quota system, plunging coffee prices to about half their previous levels and to record lows by the early 1990s. The ICO was unable to reach a consensus regarding price regulation and coffee prices plummeted.

The Coffee Crisis

Coffee accounts for nearly half of the total net exports from tropical countries and is representative of the economic and agricultural issues that developing countries face today. By 2001, coffee prices had fallen to their lowest levels ever, totaling less than one third of their 1960 levels. This fall in prices has impacted more than 25 million households in coffee-producing countries and has undermined the economic sustainability of countries in Latin America, Asia and Africa.

Several factors can be blamed for the decline in coffee prices: the dismantling of the International Coffee Agreements’ price regulation, a fluctuating market, the exploitation of market power by roasters and retailers, rapid supplier growth with not enough demand and policies implemented by the World Trade Organization (WTO) and the International Monetary Fund (IMF). In 2001 and 2002, world coffee production was estimated to be about 116 60-kilogram bags, while consumption only totaled five million bags. During the 1990s, Vietnam also became a major coffee producer and exporter, increasing its coffee production by 1,400 percent, at the expense of smaller coffee producers in other countries.

Economists posit that increased supply control, price regulation and fair trade initiatives could help solve the current coffee crisis. Fair trade guarantees farmers a fixed minimum price for their coffee, which can equal nearly two or three times the unsubsidized market price. Fair trade also eliminates the middlemen exporters involved in the coffee trade, who often pay farmers below market rates and then sell at the rates set by the New York Coffee Exchange, pocketing the excess money for themselves.

Coffee-producing countries must also lessen their export dependency on coffee and diversify into alternative crops. But this is far easier said than done. As BLACK GOLD demonstrates, poor African countries are particularly dependent on coffee: Burundi, Uganda and Ethiopia derive more than half their export earnings from coffee alone. Making coffee production more sustainable, like Tadesse Meskela’s co-operative is attempting to do, would grant small-scale family farmers, who produce 75 percent of the world’s coffee supply, a living wage. When coffee prices fall, the economic and social effects are profound.

A group of businessmen gathered on a stockroom floor, looking up

Price Control and World Trade

Coffee price declines can be devastating for farmers abroad, but in the United States, the world’s largest consumer of coffee, such fluctuations are barely noticed. The world coffee market is dominated by four multinational corporations: Kraft General Foods (owner of Maxwell House and other brands), Nestle, Proctor & Gamble (owner of Folgers and other brands) and Sara Lee (owner of Chock Full O’Nuts and Hills Brothers).

In an unregulated market, such large corporations were able to control the price of coffee—as they purchased more products, prices skyrocketed. Today, large-scale coffee importers and roasters purchase coffee futures and options in order to protect their stocks’ worth through the Coffee, Sugar and Cocoa Exchange in New York City (originally established as the New York Coffee Exchange in the 1880s), which sets coffee prices according to the New York “C” contract market. The price of coffee fluctuates dramatically. Weather is often a factor, as a forecast of droughts or frosts in Brazil might also forecast a coffee shortage, thus increasing the price. Most coffee is traded by speculators in New York City, who trade up to ten times the amount of coffee that is actually produced each year.

The World Trade Organization (WTO), with its policies of free trade and trade liberalization, has also had a significant impact on coffee prices. Created in 1995, the WTO is a global organization of 134 member countries that negotiates and regulates international trade agreements.

Free trade, or trade without taxes or other restrictions, is meant to benefit both importers and exporters. However, who benefits from trade depends on the prices, and wealthier economies—countries or corporations—often impose prices at the expense of poorer ones. With no restrictions on international investments, corporations force countries to compete against one another in a “race to the bottom,” lowering wages in order to maintain business. The corporate products that have the lowest price and highest profitability on the world market win out, often devastating the economies and communities in smaller, poorer countries. Corporate ownerships and monopolies are protected over labor, the environment and sustainability.

Rolling green hills and mountains against a wide blue sky

In countries such as Ethiopia, small coffee producers have suffered as a result of the WTO. The International Monetary Fund (IMF) and the World Bank, established to facilitate global trade and regulate an international monetary system, have privatized public businesses and removed restrictions on foreign ownership in many developing countries who sign the IMF agreements in order to prevent default on international loans. Signing the IMF also includes a pledge of new loans from private international lenders. As a result, the gross national income in sub-Saharan Africa countries has been devastated, and Africa’s share of world trade has decreased—over the last 20 years, Africa's share of world trade has fallen to one percent, and seven million people in Ethiopia are now dependent on emergency food aid every year. In opening up the global economy, local businesses, such as the coffee farmers portrayed in BLACK GOLD, pay the price.

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