Thursday, October 25, 2007
THE ROOT CAUSE OF THE COLLAPSE OF THE COFFEE SECTOR
THE COFFEE CRISIS…
The root (economic) causes behind the collapse of the coffee sector
The coffee sector in sub-Saharan Africa and throughout coffee producing nations has collapsed due mainly to a structural over-supply of coffee on the world market, which has resulted in dramatic, unprofitable and unsustainable decreases in the world prices of coffee. In fact, over the last seven years, coffee prices have decreased by over 70%, reaching their lowest 30-year low in 2002/2003 ($US 0,50 cents/kg) (see graph 1 below)
Graph 1) World market coffee prices (1989-2003) ($US/Ib)
As a direct result, millions of small-scale coffee farmers across the world have been thrown deeper into poverty as the low world price does not allow them to profitably produce and market their coffee. Meanwhile, however, coffee Multinationals generate billions of dollars annually from coffee sales…
Multinational monopoly power in the coffee sector
• 4 multinational corporations control over 70% of the coffee trade in the world.
• Through this concentration of monopoly power, they control the world supply of coffee and set prices on the world market.
• While millions of small coffee farmers are struggling to survive by growing coffee for their subsistence, these multinational corporations are generating profits in the billions each year.
The “4” coffee multi-national corporations: Revenue 2001-2002
1) Phillip Moris/USA. : $US175billion
2) Nestle/Switzerland.: $US65billion
3) Procter & Gamble/USA: $US40 billion.
4) Sara Lee/USA: $US 30billion.
Coffee trade statistics demonstrating results of unfair world trade practices in the coffee sector in favor of foreign multinational corporations
source: International coffee organization
• Coffee market value 1992: $US 30 billion
• Producers’ share 1992: $US 12 billion.
• Coffee market value 2002: $US 50 billion
• Producers’ share 2002: $US 8 billion.
• While the global market value for coffee in the world has increased from $US 30 billion to $US 50 billion in the last ten years, the value share to producers has decreased from 40% to 16% respectively, as a direct result of unfair world trade practices biased in favor of foreign multinational corporations.
• Furthermore, since 1970, the value of commodities produced in the South has declined in relation to the cost of manufactured goods. In 1975, 8 tons of African coffee could buy 1 tractor; by 1990, it took 40 tons of the same coffee to buy one tractor*.
*source: Crowley Sarah, Teaching about Fair Trade, May 1998.
FACTORS LEADING TO FARMERS’ IMPOVERISHMENT
• Declining commodity prices on the world market resulting from structural over-supply and from biased and exploitative terms of global trade.
• Continuous increases in the price of (imported) farm inputs (seeds, fertilizers, etc.), resulting from IMF’s liberalization policies (infamous Structural Adjustement Programs) & from biased, unfair and exploitative terms of global trade ( illegal, unfair and trade-distorting agricultural subsidies paid to so-called “farmers” (multinational disguised as ‘farmers”) in the G8, market entry barriers ( escalating tariffs) applied to processed commodities originating from the so-called “Third World”, etc. keeping “poor developing” nations trapped in the “Colonial Pact”…
• Widespread corruption and mismanagement in so-called farmers’ organizations or cooperatives.
• Massive local and global exploitative trade practices and inefficiencies along the supply chain.
• Failure of farmers to organize themselves and failure of (illegitimate and criminal States) to develop and implement intelligent and coherent economic development policies in favor of farmers.)
• Low commodity prices, no access to credit, no technical assistance, no logistical support (transport, processing, storage) and no direct access to export markets.
Small-scale coffee farmers
• Over 50% of the world’s coffee is grown by small family farmers. Most small farmers who are not organized into marketing cooperatives are at the mercy of middlemen or processing plants to sell their coffee, earning a mere 1%-2% of the retail price of coffee on the export market.
• Low prices and lack of control over the storage, transport, processing, marketing and exporting of coffee beans trap both the farmers and the countries for whom cash crops such as coffee constitute a major export commodity, into a vicious circle of poverty, “aid”, and debt.
• Processing of coffee is generally carried out on large farms or in coffee mills.
• Most coffee mills are privately owned, though occasionally they may be owned by small farmer cooperatives.
• Middlemen are intermediary traders who buy coffee beans from small farmers. They take advantage of the farmer’s lack of access to credit, marketing tools, and access to export markets.
• The farmers’ weaknesses are his strength!
• They often act as bankers to the desperate farmers and provide loans on condition that farmers sell them their coffee at the lowest price and repay their loans at the extremely high rates of interest.
• This strategy not only allows the middlemen to maximize profits at the expense of the farmer, but also plunges the farmer into the vicious circle of loan-debt-poverty.
• Exporters are either independent companies or subsidiaries of multinational corporations that export coffee beans to importers in the export markets.
• The primary goal of the conventional exporter is to buy coffee beans at the lowest possible price and to resell it at the highest possible price so as to maximize profit.
• Brokers buy and sell coffee on commission without ever owning the coffee that they trade. They act as intermediaries between the exporters and the importers.
• Multinational corporations have their own brokers and have enormous buying and selling power which allows them to speculate and to influence the supply of coffee on world markets ( New York and London Coffee Exchange).
• Importers purchase raw green coffee beans either from brokers or exporters, which they subsequently sell to roasters.
· Most roasters buy their coffee from importers. After roasting and packaging the coffee, roasters then sell the processed coffee either to distributors or directly to retail and institutional accounts at phenomenal profits. Some roasters have their own retail outlet chains and sell coffee directly to the consumer.
• Distributors are sometimes involved in channeling processed coffee to retail and institutional accounts (ie; schools, universities, hotels, airlines, etc…)
• Retailers are supermarket chains, grocery stores, restaurants, cafes, etc… that sell coffee directly to the consumer.
• Consumers are the final link in the coffee trade.
• They are usually unaware of the unfair conditions under which the coffee was produced and traded.
Ex: The crisis within the coffee sector
• In the last three years, coffee prices on the world market have drastically fallen by over 70%.
• This is a direct result of unfair world trade practices enforced by the WTO and supported by both the IMF and the World Bank in favor of the G8 countries and their multinational corporations.
World price of cash crops
• In more than fifty so-called “third world” countries, more than fifty percent of export earnings depend on three cash crops, among them coffee. Moreover, agriculture exports account for more than 50% of foreign exchange revenue in Kenya and more than 70% of the total population in Kenya depends on agriculture for their livelihood*. (*Exporting in East Africa, Francois Alland)
• Thus, a substantial decrease in the world price of any of these leads to severe economic crisis for both the farmers and for the countries producing these crops, and throws them into a vicious cycle of poverty, “aid” and debt.
“ Structural over-supply in the commodity market lies at the heart of global poverty and instability.” Brandt Report, 1980
Paradox of coffee trading : Highly Lucrative trade that creates mass poverty among coffee farmers around the world.
Let’s consider and reflect on the following figures:
Average world market price for coffee beans over the last 7 years: $US 1.2/kg
Average share of world market price paid to farmers: 30%-50% = $0,36-$0,60 depending on quality, type, stages of processing, region, etc.
Average price paid by consumers for regular (i.e. not organic or Fair Trade certified) processed (roasted) coffee: $US 10/kg
Average minimum price paid for a regular cup of coffee in a (i.e. not organic, (so-called) “Fair Trade” or cappuccino, espresso, etc…): $US 1 –Euro 1 per cup.
Note: 1kg of coffee makes on average 40 cups of coffee; thus, the market retail price paid by consumers for a cup of coffee ($US 1/cup) works out to $US 40 per kg!
However, the small-scale coffee farmers who grows the coffee only gets 1% to 1.5% of the minimum market retail price! Thus, these numbers clearly reveal that the coffee farmers are MASSIVELY exploited by the multinationals and all those working within the coffee supply chain and MASSIVELY profiting from the MASSIVE exploitation of coffee farmers from around the world.
The “voluntary” role and responsibility of consumers in the (massive) exploitation of coffee farmers…
Indirect participation in exploitation resulting from indifference is far worst than participation stemming from ignorance. In fact, coffee consumers are creating and sustaining – consciously through indifference or unconsciously by ignorance - the poverty of millions of coffee farmers around the world. The market responds to money, not to human needs; thus, if consumers are willing to buy and pay $US 10/kg for processed coffee beans or $US 1 or more for a cup of coffee without any concern or regard for the economic or social welfare of the coffee farmers and for the way in which the coffee was traded, then they are directly encouraging the exploitation of the coffee farmers and creating and sustaining their poverty – through indifference or ignorance.
So what can consumers of coffee do to put an end to the massive exploitation of coffee farmers resulting in their poverty…
Fair-Trade coffee: How “fair” is Fair Trade certified coffee…?
What is Fair Trade?
• Fair Trade is an alternative global trading network that ( officially claims to ) seeks to address structural inequalities resulting from unfair and exploitative world trading rules and practices under the current so-called “free market” global economy, by promoting grassroots development through “direct, equitable trade with farmers.”
• Furthermore, by educating consumers about the issues that affect global poverty, Fair Trade encourages them to use their purchasing power as a political and economic tool to change the prevailing current unfair and exploitative world trade practices which create and sustain poverty.
• To do so, Fair Trade:
1) Purchases coffee and other cash crops directly from farmers organized into cooperatives or other forms of democratic association representing the farmers.
This allows farmers to break free from dependence from the numerous exploitative middlemen along the classic supply chain…( to be replaced by exploitative economic actors working within the highly lucrative and profitable Fair Trade “business”)
2) Fair Trade purchases cash crops at a pre-determined (so-called) “fair” price, which is set as a percentage of the world market price. Furthermore, Fair Trade claims that member farmers are encouraged to invest in sustainable development projects within their respective communities using the income generated from Fair Trade prices… (ie; health, education, sustainable agriculture and environmental protection.)
3) Fair Trade further claims to provides access to export markets in the North (G8 countries) through its own vertically integrated infrastructure (ie; importers, processors, distributors, retailers: +10,000 fair trade retail outlets in Europe and USA; distribution network in over 50,000 supermarket chains; distribution network on the internet and through institutional, commercial and industrial accounts, etc.)
4) Fair Trade provides pre-harvest interest-free financing ( up to 60% of the FOB export contract) to local farmers to help them organize their production and to break free from dependence from exploitative sources of financing and individuals.
5) Fair Trade provides technical assistance to farmers to help them achieve optimal efficiency and productivity within their sector so as to maximize the return on their labor and investment.
6) Fair Trade organizations promote Fair Trade in the export markets (G8 countries) and educate consumers on the issues affecting global poverty so as to incite them to buy and consume fairly traded products so as to help the developing nations break free from the vicious circle of poverty, “aid” and debt caused by unfair global trade practices under the actual “free trade” global world market economy.
Consumers are educated and encouraged to use their purchasing power to change the current unfair global trading system which exploits resources and labor in the so-called “third world” and which is at the root of human poverty and suffering in a large part of the globe.
Table 1. Fair Trade vs World market coffee prices
Graph 1. Fair Trade coffee prices
Graph 2. Fair Trade vs world market price of coffee
• Importers of Fair Trade certified coffee pay the above set & so-called “fair” prices for coffee directly to farmers’ cooperatives.
• If the coffee is certified organic, there is a premium of $US0,15 or $US 0,33/kg = $US 3,10/kg
• When the world price exceeds the Fair Trade floor price of $US 2,77/kg, the Fair Trade price will be $US 0,11/kg higher than the world price for non-organic coffee and $US 0,33/kg higher for certified organic coffee.
How “Fair” is Fair Trade…
Now, let us objectively analyze and look more deeply beyond the impressive official rhetoric preached in the Fair Trade literature.
As Table 1 & graph 1 & 2 above clearly indicate, the Fair Trade price is set at a pre-determined ceiling price above the world market price for each respective type of coffee and processing stage. However, the inherent weakness and ineffectiveness of Fair Trade to “fight poverty” lies in the fact that the coffee (and all other Fair Trade labeled commodities) are then exported raw and processed abroad; thus, all the wealth created from the value addition (processing) of the coffee/commodities is carried out outside the country of origin and thus does not economically benefit the producing country in terms of local employment, export earnings, etc. The coffee is then processed, marketed and sold at Fair Trade and/or organic premium prices abroad under the Fair Trade “label” often using misleading and deceitful claims of poverty eradication among small-scale (coffee) farmers in the so-called “Third World” from whom the coffee has been purchased, while in reality it is the foreign economic actors working within the Fair Trade “business” who are profiting and prospering the most from this business model. Consider the percentage share of the “fair” price paid to coffee farmers under Fair Trade ( $US 2.33 -$US2.77/kg) verses the average final retail price ( $US/Euro 20/kg -$US/Euro 25/kg) paid by consumers for Fair Trade and/or Organic coffee beans; the farmers’ “Fair” Trade price is thus only around 10% of the final retail price; the balance ( 90% of the retail price) is pocketed by the (non-farmer) foreign economic traders ( exporters, transporters, local & foreign importing countries’governments, processors, packagers, wholesalers/distributors, retailers, etc.) working within the Fair Trade highly lucrative “business” supply chain…Thus, in this context one cannot but wonder who is helping who under “Fair Trade”…and thus question the real effectiveness of Fair Trade in “fighting poverty”…
Suggested effective alternatives to revive the coffee sector and to improve the economic welfare of small-scale coffee farmers around the world…
1) Addressing and resolving the root economic causes leading to low and declining prices of coffee on the world market, namely, short, medium & long-term market imbalance between supply and demand leading to structural over-supply of coffee on the world market which results in decline in the real price of coffee over the long-run.
2) Local processing and local marketing of coffee by coffee farmers.
A more effective (and sincere) solution to help coffee farmers break-free from the dictate and the vicious trap cycle of the world market – and all those prospering from the massive exploitation of coffee farmers - is to help farmers set up the processing and marketing infrastructure to locally process (roast, grind & package) and market their own coffee directly, thereby significantly adding-value to the coffee and significantly increasing their income in the process. Under this scheme, the coffee is grown, processed & marketed directly - on the local market - by the organization set up and managed by the farmers themselves. All sales proceeds – minus marketing costs - are then equitably redistributed directly to the individual member-farmers.
Under the current system, coffee farmers sell their non-processed coffee beans to exporters at exploitatively low and often unprofitable world prices; the coffee beans are then exported and processed abroad and then re-exported and resold on the local markets at high prices: average retail price for processed coffee beans $US 20/kg (sounds familiar…i.e. essence of the colonial economy and of the logic of the Colonial Pact with all the profits generated from the trade enriching the coffee processors and coffee traders, while leaving the impoverished farmers poor… and desperately struggling for survival…
The coffee sector in sub-saharan Africa and throughout coffee producing countries has collapsed due to massive exploitation of small-scale coffee farmers by coffee traders, Multinationals and (illegitimate) States in numerous coffee producing nations. As a result, millions of small-scale coffee farmers throughout the world have been thrown into further poverty and economic misery.
We all have a moral responsibility to help the weaker members of our society.
Survival of the strongest is the law of the jungle. Uplifment of the weakest is the law of humanity.
As Mahatma Gandhi clearly said:
“ You cannot build a non-violent society based on exploitation. Exploitation is the essence of violence.The extension of the Law of non-violence in the domain of economics means nothing else than the introduction of Moral Laws in regulating international commerce.” Mahatma Gandhi
" In a world surrounded by deceit, telling the Truth is a revolutionary act." George Orwell