Two weeks back from my trip, I got a reverse price shock, this time at a grungy-looking caf in San Francisco’s Sunset district. A six-cup-a-day addict, I have sipped the elixir in places as varied and as pricey as Bedouin tents in the Arabian Desert and coffee shops atop Japan’s fanciest hotels. But at this modest Sunset caf, a latte cost $5–the highest price I could remember. Recalling that only two weeks earlier I had bought pounds of fine Lao beans for pennies, I could not justify spending five bucks on an espresso drink with milk, and I searched for another shop, only to find that the caf next door also charged nearly $5. I bought a Diet Coke.
My experience was hardly unique. Over the past decade, the global coffee industry has gone through a transition that, at first glance, seems to defy the fundamentals of economics. Since the early 1990s, coffee production, centered in developing Latin American, Asian, and African countries, has soared. Yet at the same time, prices for specialty blends at supermarkets and cafs have risen, and even the price of mainstream coffee brands like Folgers has not dropped that much. Call it Economics 102–a new paradigm in which both producers and consumers lose.
The plight of Third World coffee-growers has not gone unnoticed by high-end java drinkers like me. Many of us socially conscious, even guilty, types have wondered if our own dainty, $5-latte habits are contributing to the problem. The fair-trade/fair-price movement, which bets on getting liberal coffee drinkers to shell out a little bit extra per pound for high-end coffee purchased through a consortium so that Third World growers can feed their families, has been getting more visible: Anyone who’s gone into a Starbucks has seen the “Fair Price” signs. Such efforts are laudable, even helpful. But for once, the real problem isn’t us elites. It is, in a sense, our parents–or whoever continues to drink low-grade, supermarket-bought, pre-ground coffee. The quickest way to help the poor Third World grower–and maybe make our own Starbucks cheaper, too–may very well be to fancify the tastes of the average American coffee drinker.
Until the early 1990s, global coffee-bean production was controlled under a deal called the International Coffee Agreement, a kind of cartel, which, unlike OPEC, required both exporters and consuming countries to submit to quotas. (The United States is the world’s biggest coffee consumer–more than half of American adults drink coffee every day.) During the Cold War, as Fortune’s Nicholas Stein has noted, American officials viewed stable prices as a means of preventing farmers from becoming so destitute they turned to communism. But with the fall of the Berlin Wall, the increasing openness of world financial markets in the early 1990s, and the growing allure of deregulation for all industries, the cartel began to lose its power; its member-states no longer could agree on quotas, and the cartel eventually folded.
Into the breach, improbably, stepped Vietnam, a still communist-controlled poor country whose ambitious government had started aggressively opening its economy in the late 1980s. Vietnam had produced small amounts of coffee for years. But now, Hanoi began using subsidies to encourage farmers to plant vastly more acres of beans, and employing the state’s coercive apparatus to see that its requests were heeded. Vietnamese coffee production grew from 2 million bags per year in the early 1990s to more than 15 million by the early 2000s, making it the second-largest coffee producer in the world. “Vietnam went from being a small producer to a major producer extraordinarily fast–too quickly,” says Robert Nelson, president and CEO of the National Coffee Association, a trade group of American companies. Vietnam didn’t do this all on its own–the IMF and World Bank encouraged grower countries to bulk up production as a natural source of hard currency.
Most of Vietnam’s new production was robusta, the less flavorful, more acrid (some experts compare the taste to that of burnt rubber), and less expensive type of bean, as opposed to arabica, the milder, more flavorful, more expensive variety. Arabica was simply much harder to grow in Vietnam’s harsh climate and rough topography; robusta–as its name suggests–is a tougher plant that can grow in a wider variety of terrains. As Vietnam has boosted production, other exporters, most of them focused on robusta, have copied its strategy. It makes economic sense: Because robusta is much less picky about where it can grow and needs less care, it can yield a profit margin substantially higher than arabica. Brazil, the world’s biggest producer, and another major robusta exporter, upped its output: Brazil’s share of the global coffee market rose from 19 percent in 1996 to nearly 25 percent in 2001, according to the Brazilian press. Indonesia, another major producer to receive significant IMF and World Bank assistance, followed suit. Just in South America, the International Coffee Organization estimates that production rose by nearly 25 percent in 2001-02. The massive increase in production has led to a vast, and deeply troublesome, surplus. Oversupply is particularly pronounced in robusta, although there is some slight oversupply in arabica as well. According to a comprehensive report on the crisis released last year by Oxfam International, there are now more than 40 million excess bags of coffee on the market–more than double the excess coffee in previous gluts–and perhaps the worst coffee glut in history.
Twenty years ago, even if Vietnam, Brazil, and Indonesia had drastically upped their robusta production, many farmers in other countries would not have been that affected. Nestl, Kraft, Procter & Gamble, and Sara Lee–the Big Four mainstream companies (corporations like Starbucks that manage cafs, higher-end coffee retailers like Green Mountain Coffee, and smaller organic-oriented firms are known as “specialty companies”)–could only use a small portion of robusta in their blends, since it had such a lousy taste. Too much robusta would turn a can of Sanka or Taster’s Choice so sour that even the most desperate caffeine junkie could not stomach it.
As recently as 1997, prices remained as high as $3 per pound for arabica beans (they’re now hovering around 60 cents), according to Mark Prince, a columnist for coffeegeek.com, a leading Web site devoted to java. The high cost was due in part to the fact that the new robusta coming on the market in the early 1990s could not be effectively utilized by mainstream companies, which thus had to fill some of their cans with high-value arabica. But in the past five years, new roasting technologies–notably a steaming process that removes many of the unpleasant, acrid tastes from robusta beans–have allowed companies to use a higher percentage of robusta in their blends. Companies like Nestl have also come up with new ways of flavoring those robusta-intense blends to mask their taste. Since the late 1990s, dozens of new varieties of French Vanilla, Cappuccino, and other flavored versions of mainstream brands like Millstone and Taster’s Choice have appeared on supermarket shelves.
While the Big Four companies use more robusta than they used to, that increase is far outweighed by the vast expansion of worldwide robusta cultivation, which has flooded the market, driving prices to record lows. Other significant changes in the industry have also worked to the advantage of the Big Four and against robusta growers. New kinds of commodity-hedging contracts have allowed the companies to keep smaller stocks of beans at any one time, allowing them to do most of their buying only when the price is lowest.
Though robusta production has grown dramatically over the last 10 years, 75 percent of all beans grown are still arabica. But, alas, things have been difficult for arabica growers, too. In the best of times, raising arabica is a more difficult proposition than robusta–it can be grown in a much smaller range of altitudes and climates, and it needs much more attention, which means a significantly narrower profit margin. But the Big Four’s shift toward robusta-heavy blends has put thousands of arabica farmers out of business–the existing supply of beans was too large for the changed market. This conflict has brought prices back up again, and so Starbucks’ blends (derived entirely from arabica) have gotten more expensive. But the farmers who were forced out of business have stayed out, because the supply of coffee is inelastic (growing trees and cultivating a plot takes too long for farmers to easily slide back into production when the price improves) and the market has proved too volatile to be attractive, particularly with arabica margins so low.
Growers have begun to suffer terribly. Ethiopia, the birthplace of coffee, has seen its unemployment rates skyrocket, as have countries from Kenya to Guatemala. Manuel Orozco, a coffee expert at the Inter-American Dialogue, a Latin-American think tank, says the unemployment rate in coffee-growing regions of Nicaragua and Guatemala tops 80 percent, greatly amplifying disease and malnutrition. Meanwhile, the Los Angeles Times reports that 200,000 coffee jobs have been lost in Colombia in recent years. Colombia’s growers’ federation was forced to slash its advertising budget–even reportedly firing the actor who portrayed Juan Valdez and eliminating the Valdez campaign.
When people go bust, they become desperate. Falling coffee prices are pushing many Colombian farmers towards coca production and are making it easier for guerillas to recruit unemployed youths, according to an April article by Gary Marx in the Chicago Tribune. Unemployed growers across Central America have begun torching their crops and invading large landholdings, threatening social chaos. As the Financial Times reported in May, so many farmers in Guatemala have burnt their coffee crops that the air has turned black. In Mexico, meanwhile, according to the St. Petersburg Times, growers are abandoning the country entirely, attempting to sneak illegally into the United States, and often perishing along the border.
Unfortunately, the glut has not taught international financial institutions, developed countries, and commodity-producing nations their lesson. According to Oxfam, the World Bank recently released reports on several African nations, including Ethiopia, that made little mention of how dangerously reliant these countries have become on coffee exports. Meanwhile, the World Bank, IMF, and other global institutions are encouraging developing countries to boost their production of tea, another commodity being touted as a source of export revenue, particularly for India and the Central American nations. Unsurprisingly, the consequences of this emphasis have been similar to the ramifications of overpromoting coffee production: As reported by The New York Times’ Saritha Rai, there has been an international glut in tea, a slump in tea exports, a drop in the market price of tea, and a wave of socioeconomic damage to tea growers in India.
Despite the glut, retail coffee prices have not fallen across the board. Just the opposite. Over the past decade, even as the cartel disintegrated, the decrease in regulation has allowed coffee companies to consolidate into a few large players. That has left the Big Four producers, which buy nearly 50 percent of the commodity, with a larger share of the market. “[The Big Four] have become price-setters in the retail market,” says Orozco, and they have been able to parlay their oligopoly into sizable profits. According to company documents, the Big Four’s coffee profit margins are as much as 25 percent–vastly higher than those for most other food products.
The Big Four have passed on to their customers some of the savings the companies have reaped from the collapse in raw bean values. Retail prices for cans of Folgers, Sanka, and other major brands have fallen in the past five years–just not as much as you might expect. As Los Angeles Times reporters noted last year, even as the price for a pound of raw coffee beans has fallen by more than 50 percent over the past five years, the retail price for a pound of mainstream coffee in American supermarkets has declined by only 25 percent.
In part, coffee experts say, the Big Four are not cutting prices steeply because they’re trying to squeeze out as much short-term profit as possible, since their growing reliance on low-quality robusta alienates those customers who expect better coffee. “The drop in quality in the mainstream coffee industry is sending more people to specialty coffee companies like Starbucks,” says Nelson, president of the coffee companies’ trade association. “Romanian wine is the cheapest on the market, but that doesn’t mean everyone wants to drink it, so after awhile they go looking for decent wine–the same thing is happening to the big coffee firms,” says Liam Brody, head of Oxfam’s coffee campaign. Indeed, according to an investigation this May by The Guardian, confidential documents from one of the world’s biggest coffee companies reveal internal concerns about the impact of Vietnam’s low-quality coffee on the market; many coffee experts believe that, despite these concerns, the largest companies have decided to focus on short-term profit margins. But numbers suggest Big Coffee’s long-term prospects may be dim: The Financial Times has noted that while world coffee consumption is growing at 1.5 percent per year, specialty coffee consumption is rising by nearly 15 percent annually. Overall, according to the National Coffee Association, the number of Americans who drank a specialty coffee drink every day rose by 10 million between 1999 and 2002.
And as the mainstream companies have kept prices comparatively high, Starbucks and other specialty outlets–including the cafs I visited in San Francisco–have also steadily upped the price they charge for a cup of joe. According to Business Week, Starbucks’ sales have risen by an average of 20 percent per year over the past decade, and the average price of its primary coffee drinks has outpaced inflation. In part, the specialty industry has been able to jack up prices because it has marketed itself well. “The specialty companies have made coffee cool, made it more than something your dad drinks in the morning,” says one industry source. And “cool” cuts across national borders. Outside the United States, where Starbucks and other specialty companies are expanding rapidly, they have been able to sell themselves as purveyors not just of coffee but of American-style luxury–plush chairs, expensive coffees, free time for casual conversations with friends. The strategy has worked. When one of the first Starbucks in Bangkok opened near my office, I visited the shop on the first day, just before it opened its doors. Bangkokians were camped out outside like Duke basketball fans before a game with North Carolina. When the doors opened, they rushed in and consumed massive amounts of joe. The outlet has remained extremely popular.
What’s more, the fact that many growers of high-quality arabica have quit the business is beginning to raise prices for purchasers of quality beans like Starbucks. Indeed, arabica production has dropped by more than 10 percent worldwide since 1996. “Specialty coffee companies are now paying above-market price for high-quality arabica, in a world where the average cost of a pound of coffee has dropped to 50 cents,” Brody says. Price agrees: “With the alarming rate of quality coffee’ producing farms disappearing…we could wind up with a scenario where there simply isn’t enough coffee of any quality to go around. That would drive the prices of remaining [quality] coffee production way, way up.”
The current coffee situation is clearly dire. Robusta growers and some arabica planters are receiving pitiful returns. Several of the mainstream companies appear to have staked their business on lower-quality, cheaper beans, and are offering customers worse-tasting coffee. The Big Four won’t discount their retail products much, because they know that, ultimately, relying on low-quality beans will cost them consumer loyalty, so they must boost their profit margins while they can. Meanwhile, specialty companies also are charging higher retail prices, because they are winning customers from the Big Four and are marketing their product effectively, and because their high-quality suppliers have diminished. It’s a bewildering set of circumstances, straight out of a globalization nightmare: The growers can’t feed their families, the consumers are getting soaked for their lattes and $10-per-pound bags of gourmet beans, and the big coffee companies, bent on selling lousy blends to a market that is becoming more discriminating, are making out like bandits.
A lot of well-meaning ideas have been offered to help fix the problem. Many in the industry hope that the United States will rejoin the International Coffee Organization (ICO), giving the cartel the muscle it would need to preside over a short-term reduction in acreage devoted to coffee-growing (Vietnam has announced it will voluntarily slash its robusta acreage by 20 percent) and to develop a long-term strategy to address the crisis. A broader worldwide destruction of coffee-growing acreage would help reduce the supply and boost the price for robusta and arabica beans, preventing more arabica growers from leaving the business, and helping stabilize the price of specialty coffee. But thus far, the market-oriented Bush administration has shied away from rejoining the ICO. There are more options: the ICO and its Western member countries could reduce trade barriers to processed coffee, and the World Bank could encourage producer-nations to diversify their crops. And we could hope for the Fair Price/Fair Trade movement to catch on or for the success of efforts to popularize particular nations’ arabica–Lao coffee or Ethiopian coffee–as brands known for particularly high quality.
But the crisis will only truly begin to ebb if the Big Four companies use higher-quality coffee and pay more for their beans. “If Procter & Gamble committed to higher-quality coffee, it would have a much greater impact than Starbucks’ decisions,” says Valerie Orth, head of the coffee campaign at the non-profit Global Exchange. Higher prices could help keep growers at work, preventing arabica prices–and thus retail prices–from going through the roof. It would help out Third World farmers by shifting them out of the already flooded robusta market and into arabica production. Such a shift would help creative-class sophisticates keep their coffee bills down: The consequent decrease in the price of arabica would mean a cheaper Starbucks latte. If there’s a better flag for yuppies to rally around, I don’t know what it is.
But if the goal is to wean the market from robusta and force it to buy more arabica, the real battle for Third World growers may lie in the food aisles of Middle America, and may hinge on whether mainstream coffee drinkers are willing to demand a better tasting product than they’ve been getting from Folgers, Maxwell House, and the other cheap brands. There’s a certain culture gap at work here. Mainstream, robusta-based stuff makes the face of a good coffee snob seize up with distaste, but provides what the average coffee drinker needs: a quick rush of caffeine and a familiar taste. In the long run, as the proportion of the coffee-drinking population reared on Starbucks’ grows, it may be nearly inevitable that mainstream coffee drinkers demand better joe. In the short run, while most Americans are perfectly happy with the cheaper stuff, it might not be so easy.
