Newsweek
June 25, 2001
By Kevin Peraino

Drinking exotic coffee may be the new national pastime, but producers are fighting off one serious caffeine headache. In the past year, overproduction has caused the price of unroasted coffee to plunge more than 40 percent, devastating the small farmers who produce most of the world's crop. In Colombia, some predict destitute farmers will turn to growing coca or poppies, and the plight has even created coffee refugees. The 14 Mexican migrants who died crossing the Arizona border a few weeks ago were mostly failed coffee pickers. "This thing is a disaster for these countries," says Starbucks president and CEO Orin Smith.

But as suppliers suffer, Starbucks is having a blockbuster year, recording $629 million in sales in the second quarter. In fact, while the price of unroasted coffee beans fell, Starbucks raised its rates. "Why in the hell aren't farmers getting more if we're paying four bucks for a cup of coffee?" asks Robert H. Bates, a coffee expert at Harvard. According to Starbucks, the answer is simple: coffee beans account for only a minuscule fraction of the price. The biggest expenses are paying salesclerks and rent bills. Still, some say big coffee companies like Starbucks, which has aggressively sought to position itself as a socially conscious firm, should do more to make sure small producers share its good buzz.

Blame the weather for the crash in prices. In Brazil, a major frost in the mid-1990s cut supply and encouraged runaway planting. At the same time, Vietnam and Indonesia have undertaken ambitious development programs, flooding the market with cheap coffee. "In a lot of poor societies they think coffee will be their salvation," says Judy Ganes, a coffee analyst at InterCommercial Markets. "But it just drives the prices lower." Meanwhile, consumption has been relatively flat. A Starbucks on every corner doesn't mean people are drinking more coffee; the proliferation of gourmet offerings has come mostly at the expense of instant brands. And tastes are continuing to get more rarefied. One coffee retailer in Atlanta sells something called "luwak" coffee, which it claims is picked by a civet, an Indonesian bobcat-like animal. The beans ferment in the civet's stomach, and then are collected from its droppings. The price: $300 per pound.

Starbucks is eager to avoid the impression that it's shortchanging farmers. In October the company began selling "Fair Trade" coffee, the product of a network of suppliers that guarantees farmers a good price. And Starbucks' Smith points out that the company has never paid less than a dollar for a pound of coffee (current futures price: about 60 cents). Yet producers in some countries are already starting to rip out their coffee plants and replace them with other crops, which would eventually prop up price