Collapse of the Association of Coffee Producing Countries

Coffee price slump puts producers on the spot

John Madeley

The Guardian, Thursday February 22 2001 Article history

An international plan by coffee-producing countries to hold back 20% of exports seems to have done nothing to persuade coffee traders that world prices could soon be back on the boil.
The prices of the best coffee bean, arabica, halved on world markets in the year to January, from 126 US cents to 63 cents a pound, slipping to 59.80 cents last week, the lowest for a generation. Robusta beans, used for blended and instant coffees, have fared much the same and now stand at around 30 cents.

Last October members of the Association of Coffee Producing Countries (ACPC) agreed to retain a fifth of exports in order to raise prices, which they say are too low to provide an economic return. Vietnam, the world's second-largest producer,has backed the plan and will hold back 2.5m 60kg bags - the standard measure for coffee and amounting to 150,000 tonnes - from the market.

In real terms world coffee prices are less than a quarter of 1970 levels. Vietnam's emergence as a major producer, accounting for a tenth of global output, is a chief factor behind a rise in world production and a slump in prices. The fall has been catastrophic for countries such as Ethiopia and Uganda, which rely on coffee for foreign exchange earnings.

After an ACPC meeting in London in January, the association's secretary-general, Roberio Silva, predicted that the retention plan would raise prices "within a month". Brazil, the largest producer, accounting for more than a quarter of world output, has so far retained 2.2m 60kg bags, more than 10% of its exports last year, Colombia 600,000 bags and Mexico 90,000 bags.

Yet, despite the mushrooming of coffee bars in the high streets of Western countries, supply still exceeds demand. The International Coffee Organisation estimates that production in 2000-2001 will be 113m bags, of which nearly 11m will remain unsold. A total of 88.5m bags were exported in 2000, and the retention by the producers of 20% of that - 18m bags - means demand should run ahead of supply, swinging the price back in the producers' favour.

This happened in the mid-70s, when frost in Brazil and disruptions to supplies from other countries reduced world output by a quarter. The price more than tripled as a result. A cutback of 20% could be expected to at least double the world price.

But the retention plan requires discipline from producers. Holding back exports leaves unsold coffee in producing countries, which growers may be tempted to dispose of in "back door" deals at low prices rather than see it rot. Burning the surpluses is one option. The other is for producers to cut acreages. But production quotas would be even more difficult to enforce than export quotas.

The low prices are, however, likely to mean "natural" cutbacks in output. Mexico, which last year harvested 6.3m bags, is this year expected to produce only 3.5m as growers find the crop uneconomic.

The tragedy for most of the 10m people who grow coffee is that, although higher world prices will benefit the ACPC, on the ground they could make little difference. Most coffee is traded down a line of dealers before export and can change hands 150 times. The growers' returns will stay meagre. A period of low prices in the early 90s left many destitute.

But around half a million coffee growers are now receiving more than three times the world price in an alternative market. They are those who formed farmers' organisations to sell directly to coffee roasting companies awarded the "Fairtrade Mark". The companies must pay a price that gives growers a guaranteed return, including a premium for social investment. Sales of Fairtrade coffee in the UK are booming - they rose by an average 47% a year between 1994 and 1999.

Fairtrade roasters such as Edinburgh-based Café Direct, which buys from 17 farmers' organisations in nine countries, pay arabica growers 126 cents a pound and robusta growers 106 cents, whatever the world price.

Although the world price has halved in the past year, there has been little change in shop prices. "The price of the beans is a very small part of the cost of a jar of coffee," said a Nestlé spokesman. That so much is spent on packaging, marketing and distribution can be of little comfort to those at either end of the chain. The Observer