Financial Times
May 16 2001

The sector's problems will only be solved through concerted action by producer and consumer countries, writes Sergio Amaral

Today, more than ever, coffee has come to symbolise the asymmetries of global markets, the consistent decline in commodity prices and the persistence of poverty in some regions of the world.

A cup of coffee in London or New York may cost as much as $3, roughly the equivalent of the net weekly income of a small coffee farmer in some African countries. Clearly, such a disparity between the price for consumers and producers' income is unjustifiable. At the first World Coffee Conference today, producer countries, leading coffee companies and consumer nations must make a co-ordinated effort to provide long-term solutions.

Coffee prices have slumped to a 20-year low. There are four main reasons for this. The first is the liberalisation of coffee markets as a result of the collapse in 1989 of the agreement that established export quotas between consumer and producer countries. Second, there has been a clear trend towards privatisation of coffee boards and federations in many producing countries as well as a concentration of the trading and processing of coffee in the hands of a few large multinational companies. Third, gains in productivity and devaluations in response to financial crises have played an important role in undermining world coffee prices. Last, the expansion of coffee production in some countries and the appearance of many newcomers to the market have led to overcapacity.

The result is well known. In the past five years, average annual supply increased 3.6 per cent while consumption expanded by a mere 1.5 per cent. >From 1997 to 2000, stocks held by investors and traders in consuming countries doubled, while prices tumbled from 134 cents a pound to 50 cents. The retention plan adopted by the Association of Coffee Producing Countries last year has not lifted prices because oversupply has outstripped the retained crop.

In the meantime, producer countries have lost out as consumer countries have developed their own exports: last year, the US imported 24.5m bags and re-exported 2.4m, more than half of which were roasted and soluble coffees. The European Union imported 46m bags and re-exported 13m, half of which were roasted and soluble product. In the 1970s, the US imposed non-tariff barriers on soluble coffee imports; the EU raised a 9 per cent tariff on soluble coffee imports. These measures amount to import substitution: industrialised countries have created barriers to protect their industry, which now supplies their domestic markets and exports.

Another problem is the share of profits. According to Oxfam, farmers receive about 20 per cent of the retail value of coffee in supermarkets. In some cases, however, the figure can be as low as 6 per cent. Roasters in consumer countries, by contrast, capture about 30 per cent of the profit through reduction of costs and industry consolidation. In the case of soluble coffee, Nestle now controls about half of the world market.

There are no easy answers. The reduction of supply that would result from a further decline in prices would substantially affect poor countries, some of which derive 70 per cent of export revenues from coffee; it might increase unemployment and poverty for many of the 20m coffee-dependent farmers.

Less income means less fertiliser and less care, thus contributing to a deterioration in the quality of coffee, in the environment and in the social conditions of production. All of that with no benefit to consumers, since lower prices for producers have not translated into lower retail prices.

True, diversification in producer countries is a medium-term solution. But it may be partly hampered by protectionism in industrialised countries, which spend $1bn a day to subsidise their agriculture and thus reduce the access of alternative export items, such as orange juice, sugar, vegetable oils and meat. Adding value is a right approach but encounters tariff escalation, as is the case for soluble coffees.

Concerted action between consuming and producing countries is required. The coffee trade and industry also has an important role to play. We must join forces to promote consumption in new markets such as those of Russia and China; design new financial mechanisms to reduce the volatility of markets; work together to improve the quality of coffee as well as the environmental and social conditions of production; and further expand the positive experiments with fair trade.

One of the best ways to fight poverty is to provide workers and farmers in developing countries with an opportunity to sell their products in consumer markets, to the benefit of both producers and consumers.

The best response to the critics of globalisation is to show that a co-operative effort can lead to more balanced opportunities for producers in poor countries and to greater solidarity in a global world. If we cannot at least show this, anti-globalisation protesters may have a point after all.

The writer is president of the Association of Coffee Producing Countries. He is Brazilian ambassador in London.