Coffee price drop hurts farmers

The Mercury News – Tue, May. 28, 2002
By S.L. Bachman

Whether you drink $3 lattes from a coffee kiosk or brew your own from cheaper canned grounds, the retail price of coffee has not changed dramatically for several years.

But that placid picture masks a market in utter turmoil.

Prices paid to many coffee growers around the world have reached 100-year lows when adjusted for inflation, and some 600,000 people are out of work, according to the World Bank. In country after country, coffee farmers and the people who work for them are struggling not just to stay in business but simply to survive.

People who want their coffee money to help the farmers face a confusing raft of labels, logos and statements about charitable giving. Meanwhile, the major coffee companies—from Starbucks to Folgers—are under pressure to do more. And even those most dedicated to finding solutions can’t agree on what makes the most sense.

Here’s a guide to what’s going on.

For now, most of the efforts to help farmers involve specialty coffee—higher-priced beans that are often sold bagged rather than canned, at supermarkets, gourmet shops or specialty coffee retailers such as Starbucks. Specialty coffee overall is a small part of the U.S. market but the fastest-growing segment. While it is only 10 percent to 15 percent of the total market by volume, it’s about 30 percent when measured in dollars, according to Daniele Giovanucci, a consultant who studied specialty coffees for the World Bank.

The two most common designations for what could be termed “concern coffees” are fair trade, which makes up about 2 percent of the specialty market, and organic, which is about 6 percent, according to TransFair USA, an Oakland-based non-profit group that certifies fair-trade products, and the Organic Coffee Association.

Fair-trade coffee involves a private price-support system.

To participate, farmers join a cooperative. The cooperative sells beans to buyers who agree to pay a so-called floor price that a group such as TransFair has determined is sufficient to allow the farmers to survive. What a living wage is to a janitor, fair-trade plans are to the farmer.

Here’s a comparison:

The price of green, unroasted beans on the commodity markets has been about 50 cents a pound recently, said Judith Ganes-Chase, a New Jersey-based analyst of commodity markets, citing statistics that are a composite of the prices of the two main types of coffee beans: arabica and the cheaper robusta. (During the 1990s, the commodity price was as high as $1.80 per pound.) Companies pay more than $1 a pound for high-quality green beans. But most farmers receive only half or even less of the market price. Middlemen get the rest.

In contrast, the current fair-trade price certified by TransFair is $1.26 per pound for raw beans that meet certain standards. Add to that a premium for growing the beans organically, and the price comes to $1.41 per pound. Because the cooperatives take the place of the middlemen, farmers receive a larger share of the proceeds.

Although fair-trade certification originated in Europe almost 15 years ago, the campaign did not begin to gain visibility in the United States until 1998. Fair-trade coffees are now sold by Safeway and other supermarkets and retailers such as Peet’s and Starbucks, as well as mail-order companies.

In 1999, Emeryville-based Peet’s refused to sell fair-trade coffee because it was not up to Peet’s quality standards, said Jim Reynolds, a longtime buyer and roastmaster for the company.

Peet’s changed its mind as quality improved. “They are—I would say largely at our insistence—working on the quality issue,” Reynolds said.

Organic and other environmentally friendly coffees—the categories include shade-grown and songbird—also claim to pay the farmer more of what the consumer pays per pound. Unlike fair-trade coffee, organic coffee does not offer farmers a guaranteed price. But proponents say the results are similar.

“Retailers of organic products cannot fully guarantee that organic farmers are getting a livable wage, but the co-op or the estate definitely is getting the funds,” said Mark Inman, president of the Organic Coffee Association. Prices paid by association members for non fair-trade organic coffee are about $1.20 to $2.50 a pound — equal to or higher than the fair-trade floor price.

And because the industry is so closely knit, it’s easy to find out how the farmers are doing. “If my farmers are not getting the funds I am sending, I will hear about it either by e-mail or when I am down there,” Inman said.

Bulk market

Although the fair-trade and organic markets are fairly well established and are growing, they are much smaller than the so-called bulk market — the huge quantities of beans that are sold for non-specialty, branded, canned coffee such as Folgers or Maxwell House.

In the bulk market, solutions to help the farmers are more complex. Pro-farm groups have had some success in persuading large coffee-buying companies such as Folgers to donate money to help farmers or to sell fair-trade coffee. Last year, Sara Lee — the third largest coffee seller in the United State — became the first major company to sell fair-trade coffee, though only to some institutional customers. Other big companies have not yet followed suit.

Other proposals aimed at the bulk market include:

Adopting industry standards for coffee imported to the United States (there now are none); diversifying crops in coffee-producing countries; disposing of some low-quality beans before they reach the international market; and increasing coffee consumption in coffee-producing countries such as Brazil as well as in the United States and other developed countries.

A February meeting of the New York-based National Coffee Association, which says its members conduct “90 percent of the coffee business in the United States,” explored additional solutions such as helping coffee farmers diversify their crops, creating long-term contracts between roasters and growers; improving marketing; and establishing a relief fund.

Coffee-industry insiders and social activists argue over which of these ideas will do more to help farmers. Even some fair-trade and organic proponents disagree over which of their plans is more stable in the long run.

Boom-and-bust cycles

For their part, economists wonder if any of the well-intended efforts to soften the blows of the international market will make enough difference to revive the fortunes of coffee farmers.

Some farmers will not survive the current slump in coffee prices, while others will learn from painful experience to plant and harvest less, said Lovell Jarvis, a professor of agriculture and resource economics at the University of California-Davis.

Even then, Jarvis and other economists and analysts said such boom-and-bust cycles are endemic to markets in agriculture commodities—especially orchard crops such as coffee, cocoa and oranges.

“You always have more of that in agriculture than in other industries,” Jarvis said. “It’s very hard to get around the market.”

With all the turmoil in the markets, why have prices at the supermarket, or the coffee kiosk, remained steady or even risen?

Coffee companies believe that is the way consumers prefer it. “The coffee industry has learned, through experience, to keep retail prices stable,” said Ted Lingle, executive director of the Specialty Coffee Association of America.

Congressional hearings

When retail prices rose and fell with green coffee prices, angry shoppers complained to their representatives in Congress. Three times—in 1955, 1977 and 1987—Congress held hearings in which coffee executives were asked to explain the price swings.

Among specialty coffee purveyors, one solution voiced repeatedly is to try to turn coffee into the wine of the 21st century.

The idea is to sell more, better-quality, better-for-the-earth or better-for-the-farmer coffee at higher prices. But success will depend on persuading coffee drinkers to think more with their taste buds and pay more for the opportunity.

Will they?

The hopes rest on consumers like John Mansperger, a sales engineer for a computer hardware vendor who was drinking a venti non-fat two-pump-caramel macchiato at a Santa Clara Starbucks.

Mansperger figures he downs about seven cups of coffee a day, including two macchiati at $3.50 a pop. Mansperger had not heard that wholesale coffee prices had dropped to historic lows. As for what he pays per cup, he said, “I’ve only seen it go up; I’ve never seen it go down.”

Nevertheless, he said he is ready to pay a little bit more to help farmers—up to a point. “Unless it got too crazy, then I might think about it,” he said.