The Coffee Paradox: Commodity trade and the elusive promise of development

1. The Coffee Paradox:Commodity trade and the elusive promise of development Stefano Ponte Senior Researcher Danish Institute for International Studies spo@diis.dk

2. The coffee paradox • Presentation based on forthcoming book co-written with Benoit Daviron of CIRAD, Montpellier (Zed Books, 2005) • TOC • Preface • Ch.1: Commodity trade, development and global value chains • Ch.2: What’s in a cup? Coffee from bean to brew • Ch.3: Who calls the shots? Regulation and governance • Ch.4: Is this any good? Material and symbolic production of coffee quality • Ch.5: For whose benefit? ‘Sustainable’ coffee initiatives • Ch.6: Value chains or values changed? • Ch.7: Conclusion

3. What is the ’Coffee Paradox’? • Contemporary presence of: • a ‘coffee crisis’ in producing countries (lowest international prices in a century in real terms) • a ‘coffee boom’ in consuming countries (specialty coffee, coffee bar chains, coffee is a ‘cool’ drink again) • How can this happen?

4. The coffee crisis • Factors: • (1) Oversupply • End of ICA (1989) • ’Grow more coffee’ campaigns + structural adjustment • Technical innovation (Brazil, Vietnam) • Is that the whole story?

7. The Coffee Crisis • Factors: • (1) Oversupply • (2) Oligopoly (market power) • Market liberalisation in developing countries + end of ICA • Government agencies do not control exports anymore • Few global players controlling the market • Buyer-driven value chain

8. Green coffee market share by international trade company (1998) (%)

9. Market share of roasting and instant manufacturing companies (1998) (%)

10. Additional explanations:Stock-price relation (1) • Impact of stocks on price depends on ownership • Which stocks are readily mobilizable? • ICA period: producing country governments controlled stocks – not mobilizable (or strong uncertainty) • Stocks owned by roasters are also ’taken out of the market’ – not mobilizable

12. Stock-price relation (2) • 1950s-1980s – ICA effect on prices; large stocks, but not available, thus relatively high prices • End of ICA – relation stock-price similar to 1910s-1930s • After 1997 (SMI) – very low levels of stocks, but much of this is available (moves from roasters to traders): no impact on prices • Ownership of stocks counts, in addition to oligopolitic position

13. The ’coffee boom’ (latte revolution) • Increase in value-added consumption of coffee and coffee-based beverages • Specialty coffee in the US: 17% in volume, 40% value • ’High quality’, single origins, espresso based beverages, fair trade, organics, other ’sustainable coffees’

14. ’Sustainable coffees’ • Globally, 16,000 tons of certified coffees in 2000 • Up to 52,000 tons in 2003 (approx 0.7% of total volume of traded coffee) • Except for fair trade, relatively low premium paid to farmers

16. Equity issues: Distribution of value added along the coffee chain – mainstream market

17. Unit import value for green coffee and gross margin for roasted coffee in the US (1980-2002) (USD/pound).

18. A different way of telling the story

19. Are specialty and sustainable coffees scoring any better? • Specialty (as ’high quality’) • R&G sale at Starbucks, USA (Kilimanjaro peaberry) • 4% goes to the farmer • Coffee cup at Starbucks, USA (same kind of coffee) • 1% goes to the farmer • Organic: same as above • Fair trade • Supermarket sale, espresso blend, Italy • 21% goes to the coop (same % as in old ICA system) • Specialty shop, Kili single origin, USA • 11% goes to the coop

20. What is quality? • Material attributes • Symbolic attributes • In-person services

21. Material attributes • Quality in producing countries mainly relates to material attributes • Market liberalisation: one price for all coffee – no incentive to farmers • ’Material quality crisis’

22. Symbolic attributes and in-person services • This is what is sold to consumers in the North • Branding and packaging • Ambience of consumption • Esoticism, good stories • Lifestyle • In-person service (bar, restaurant, specialty shop) • This is where the value added comes from • As long as producers do not control part of this value addition, there will be no way out of the ’commodity problem’ in developing countries

23. Solutions? (1) • Supply management – I am skeptical • Failure of ACPC cartel • Failure of the ICO CQP to have regulatory bite • Competition policy (to break the abuse of oligopolistic position) – legally tricky • Diversification – difficult to impose as a ’policy’; also, in some areas, there are no alternatives • Improve material quality • Yes, if there are financial incentives (premium) or positive returns – not at present for smallholders • Coordination mechanisms need to be re-established in producing countries

24. Solutions? (2) • Sustainability certifications? • Still small, but growing • BUT, premium is needed at farm-gate • Lower costs of certification • Consumers need to pay more for getting more • Improve transparency • Labelling rules (indicate type of coffee used, %, origin)

25. Solutions? (3) • Cultivate consumers, not more coffee • The ’wine route’ • Sell lifestyle, not poverty or development message, to mainstream consumers • Producers need to sell ’symbolic’ quality and control returns from it • Location, esoticism, origin, combination with crafts/music • Limited inroads in in-person service provision (agro-tourism) • Direct marketing, internet auctions • Key: Appellation systems with legal backing; IPR protection • Producer associations built around appellation areas