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A HIT LIST FOR THE COFFEE CRISIS CZAR

A HIT LIST FOR THE COFFEE CRISIS CZAR



coffee price

The former Executive Director of the Specialty Coffee Association, Ric Rhinehart, stepped down late last year in order to lead a coffee price crisis response effort. As Dr Peter Baker reports, he has his work cut out

Ric Rhinehart has stepped down as CEO of Speciality Coffee Association (SCA) to head a Coffee Price Crisis Response Initiative. There can be few better qualified to guide such an investigation than Ric, who has very extensive knowledge of the coffee industry and an inquiring, unquiet mind.

And anyone who doubts his ability to speak directly might want to watch his presentation last year’s Re:co meeting.ⁱ But his will not be an easy task – previous attempts to investigate and proffer remedies over the industry’s deficiencies have resulted in many reports with little lasting impact. Nearly 20 years after the previous crisis, we are back where we started, but in some ways in a worse position. Here we summarize some pieces of the puzzle that Ric may be pondering.

What happened?

“It was Brazil”: yes, the country has just delivered a record 60+ million bag harvest and can be fingered as the proximate cause of the slump to a US$1/lb NYC price. But wait: Brazil’s contribution to global coffee output has not greatly changed in recent years, maintaining its contribution at about one third of the total (Figure 1).

Perhaps of more relevance is why prices have been so low for so much of the recent past, well below total costs for many coffee farmers. Especially this, since there seems to have been no major supply surplus in recent years. Indeed, in early 2017, the broker Marex Spectron confidently predicted a fourth year of production deficit for 2017/18.ⁱⁱ

“So how reliable is the data?” ICO estimates of recent production from April and December 2018 differ markedly (Figure2) and it is well known that the organization struggles to get accurate and timely data from its members.

Indeed, four different production estimates (ICO, FAO, USDA and NKG) sometimes show significant differences (Figure 3), so who is most accurate? Is this the best that can be done? How useful is the data? Is there another way? “It was the speculators”: they were blamed for bullishly driving the price up after the Colombian rust crisis and now bearishly driving the price down. How much effect are they having? Is this but a transient and uncoordinated activity, or is there something more sinister behind it, as some have hinted?

“It was the development bankers”: after the previous crisis the World Bank got roundly criticized for financing Vietnam’s massive and unexpected production increases in the 1990s. The bank robustly defended itself against this charge and evidence never emerged to contradict their defence.

This time around, the bank has indeed been helping Vietnam rehabilitate coffee plantations to the tune of US$117 million. This has included a renovation project aimed at 62,000 coffee growers over 69,000 ha.ⁱⁱⁱ

Compared to the size of the country’s production this is admittedly a fairly small intervention, but it raises a number of questions: why fund a very successful sector in a country that has won massive export earnings? How much of the funding has gone to improving yields which were already very impressive by global standards – around four to five times more than Indonesia for instance? And was there due diligence regarding where to renovate, considering that some lands may no longer be well suited to coffee production and use substantial groundwater irrigation?

More generally it would be extremely useful to know the extent of global finance for coffee, the countries involved and the extent to which such finance might encourage expansion. A recent report calculated that US$1.2 billion has been spent on renovation and renewal over the past 20 years, about a half of it in Colombia and Vietnam, but what effect has that had on overall prices? ͥᵛ

“It’s the producer countries’ fault”: trade economists often state that when four or five entities have more than 40% of the market, a cartel opportunity exists. If Brazil, Vietnam, Colombia and perhaps Indonesia colluded, they might be able to establish quotas since they comprise about two-thirds of global production.

When producer countries meet, such as at the recently formed World Coffee Producers Forum, this possibility is not discussed. Neither do they mention the ‘elephant in the room’ – the fact that some of them are aggressively expanding their coffee area. If we add together production in Vietnam, Indonesia, Honduras, Peru and Ethiopia, these countries’ production increase has been about 50 per cent faster than Brazil since 1990 and unlike the latter, much of this rise has been due to deforestation rather than intensification (Figure 4).

“It’s the subsidies”: this is another subject rarely aired by the industry; the Colombian coffee crisis of 2008-2012 reportedly cost the Colombian government US$1.5 billion in farm subsidiesᵛ and new support has been announced in 2018.ᵛͥ

Some producer governments provide very favourable terms to coffee farmers. For example, the Brazilian National Programme for the Strengthening of Family Agriculture (PRONAF) for 2013/14 offered 10-year loans with as low as 0.5 per cent annual interest, including a three-year grace period and 44 per cent bonus for timely repayment.ͮⁱⁱ

Other countries have also provided favourable schemes; it is highly likely that China has done this to kick-start its export industry, whilst India subsidizes index-based weather insurance to coffee farmers.

Added to this are personal subsidies, in the form of remittances, especially perhaps by foreign-born workers in the US to their families in Latin America. A 2014 studyᵛⁱⁱⁱ found that around 45 per cent of smallholder coffee farmer households surveyed in El Salvador and Brazil were receiving remittance payments averaging US$240 and US$539/month respectively; remittances in Guatemala were about US$70/month.

So how much do all types of subsidy add up to and how are these distributed across countries? Surely some of the poorest farmers would be surprised to know what happens in other places. But we all need to know, including consumers, most of whom are drinking coffee subsidized by producer country citizens.

“It’s the system”: this year marks the 30th anniversary of the collapse of ICO’S ICA. Those were heady days of freemarket optimism, and coffee became a poster-child for the globalized neoliberal revolution. During the previous crisis, The Economist suggested that “… low prices should be seen as an ally: eventually they will drive out inefficient producers elsewhere, and Brazil will be able to increase its earnings through greater volumes.” ⁱˣ

Trump, Brexit, ‘les gilets jaunes’: isn’t this all somehow part of the same problem – the manifestation of a system that is now failing?

What next?

It will be hard enough as it is for Ric to explain the how and the why of the current crisis. But perhaps more important will be to throw some light on what might happen next.

A key step might be to learn about likelihood for future expansion in major producer countries. Brazil, for instance, has the land and capabilities to expand quite easily to 70 or 80 million bags/year, but will they do that?

Commentators suggest that the Bolsonaro government will be very favourable to large-scale agri-business and turn a blind eye to any environmental concerns. And would new areas such as Myanmar, Laos and Cambodia – already targets of Vietnamese companies and Chinese investment – now enter a phase of exponential growth?

Those of us who deal directly with smallholder farmers really need to know: do we tell them that this time the game is really up? Or that they should hold out once more for an eventual bonanza?

To unravel the complexities, Ric will have to confront central paradoxes of modern coffee production: a deteriorating environment but frequent surpluses; immiserated masses but growing corporate profits; a widely accepted sustainability trope but many, many unsustainable farm businesses.

Will the investigation remain in familiar territory and deal with proximate effects, or will it look more broadly at ultimate causes? And what could it promote: a reversion to quotas, or reaffirmation in belief in the invisible hand? Will it look at new ways to monitor the industry? And can it ignore the mounting global clamour about the failing neoliberal system, the dysfunctional food system, the many dimensions of the deteriorating environment and climate change?

What is clear is that simply doing nothing or repeating past suggestions won’t work. But however fearlessly Ric speaks truth to power, how likely are the captains of the industry to listen and how much power do they have anyway?

As Thomas Friedman once explained, “… the central truth of globalization today: We’re all connected and nobody is in charge. ˣ■ C&CI

This article first appeared in the March’19 issue of C&CI, click on subscribe now if you wish to read other informative articles in the current and future issues of C&CI.

i Source Ric Rhinehart’s speech at the 2018 Re;Co Symposium

ii Source Agrimoney

iii Jackson C. 2015 World Bank support for Vietnam’s Coffee Sector 

iv Source Conservation International

v Source Financial Times

vi  Source Federacion de Cafeteros de Colombia

vii Ruiz Cardenas R. (2013) A Step-by-Step Guide on how to Access Climate Financing Mechanisms Available to Smallholder Coffee Farmers in Minas Gerais, Brazil. Embden, Drishaus & Epping Consulting GmbH unpublished report pp 62.

viii Briggs E (2014). Trouble Brewing for Smallholder Coffee Farmers. Imperial College MSc thesis (unpubl.)

ix The Economist, Sept 9th 2000 p. 84

x Source The New York Times

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