Economics of coffee
Encyclopedia
| Top Ten Green Coffee Producers - 2006 (millions of metric tons) |
|
|---|---|
| 2.59 | |
| 0.85 | |
| 0.70 | |
| 0.65 | |
| 0.29 | |
| 0.27 | |
| 0.26 | |
| 0.26 | |
| 0.19 | |
| 0.17 | |
| World Total | 7.80 |
| Source: UN Food & Agriculture Organisation (FAO)http://faostat.fao.org/site/567/default.aspx |
|
Coffee
Coffee
Coffee is a brewed beverage with a dark,init brooo acidic flavor prepared from the roasted seeds of the coffee plant, colloquially called coffee beans. The beans are found in coffee cherries, which grow on trees cultivated in over 70 countries, primarily in equatorial Latin America, Southeast Asia,...
is an important commodity
Commodity
In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....
and a popular beverage. Over 2.25 billion cups of coffee are consumed in the world every day. Over 90% of coffee production takes place in developing countries, while consumption happens mainly in the industrialized economies. Worldwide, 25 million small producers rely on coffee for a living. For instance, in Brazil
Brazil
Brazil , officially the Federative Republic of Brazil , is the largest country in South America. It is the world's fifth largest country, both by geographical area and by population with over 192 million people...
alone, where almost a third of all the world's coffee is produced, over 5 million people are employed in the cultivation and harvesting of over 3 billion coffee plants; it is a much more labour-intensive culture than alternative cultures of the same regions as sugar cane or cattle
Cattle
Cattle are the most common type of large domesticated ungulates. They are a prominent modern member of the subfamily Bovinae, are the most widespread species of the genus Bos, and are most commonly classified collectively as Bos primigenius...
, as it is not subject to automation
Automation
Automation is the use of control systems and information technologies to reduce the need for human work in the production of goods and services. In the scope of industrialization, automation is a step beyond mechanization...
and requires constant attention.
Coffee is also bought and sold as a commodity on the New York Board of Trade
New York Board of Trade
The New York Board of Trade , renamed ICE Futures US in September of 2007, is a wholly owned subsidiary of IntercontinentalExchange . It is a physical commodity futures exchange located in New York City. It originated in 1870 as the New York Cotton Exchange...
. This is where coffee futures contracts are traded, which are a financial asset involving a standardized contract for the future sale or purchase of a unit of coffee at an agreed price. The world's largest transfer point for coffee is the port of Hamburg
Hamburg
-History:The first historic name for the city was, according to Claudius Ptolemy's reports, Treva.But the city takes its modern name, Hamburg, from the first permanent building on the site, a castle whose construction was ordered by the Emperor Charlemagne in AD 808...
, Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
.
Consumption
In the year 2000 in the US, coffee consumption was 22.1 gallons (100.468 litres) per capita. More than 150 million Americans (18 and older) drink coffee on a daily basis, with 65 percent of coffee drinkers consuming their hot beverage in the morning. In 2008, it was the number-one hot beverage of choice among convenience store customers, generating about 78 percent of sales within the hot dispensed beverages category.Pricing
According to the Composite Index of the London-based coffee export country group International Coffee OrganizationInternational Coffee Organization
International Coffee Organization was initiated in collaboration with UN to enhance cooperation between nations that consume, distribute and produce coffee....
the monthly coffee price averages in international trade had been well above 100 US cent/lb during the 1970s and 1980s, but then declined during the late 1990s reaching a minimum in September 2001 of just 41.17 US cent per lb and stayed low until 2004. The reasons for this decline included a collapse of the International Coffee Agreement
International Coffee Agreement
The International Coffee Agreement is an international commodity agreement aimed to achieve a reasonable balance between the supply and demand of coffee at a higher price than would otherwise be the case. Export quotas are the principal instruments used...
of 1962-1989 with Cold War pressures, which had held the minimum coffee price at USD$1.20 per pound. Moreover, the expansion of Brazilian coffee plantations and Vietnam
Vietnam
Vietnam – sometimes spelled Viet Nam , officially the Socialist Republic of Vietnam – is the easternmost country on the Indochina Peninsula in Southeast Asia. It is bordered by China to the north, Laos to the northwest, Cambodia to the southwest, and the South China Sea –...
's entry into the market in 1994 when the United States trade embargo against it was lifted added supply pressures. The market awarded the more efficient Vietnamese coffee suppliers with trade and caused less efficient coffee bean farmers in many countries such as Brazil
Brazil
Brazil , officially the Federative Republic of Brazil , is the largest country in South America. It is the world's fifth largest country, both by geographical area and by population with over 192 million people...
, Nicaragua
Nicaragua
Nicaragua is the largest country in the Central American American isthmus, bordered by Honduras to the north and Costa Rica to the south. The country is situated between 11 and 14 degrees north of the Equator in the Northern Hemisphere, which places it entirely within the tropics. The Pacific Ocean...
, and Ethiopia
Ethiopia
Ethiopia , officially known as the Federal Democratic Republic of Ethiopia, is a country located in the Horn of Africa. It is the second-most populous nation in Africa, with over 82 million inhabitants, and the tenth-largest by area, occupying 1,100,000 km2...
not to be able to live off of their products, which at many times were priced below the cost of production, forcing many to quit the coffee bean production and move into slums in the cities. (Mai, 2006).
According to the Specialty Coffee Association of America
Specialty Coffee Association of America
The Specialty Coffee Association of America is a civilian trade organization for the specialty coffees industry, founded in 1982. The SCAA seeks to set standards for growing, roasting, and brewing premium coffees. Members of the SCAA include coffee retailers, roasters, producers, exporters and...
, in 2004 16% of adults in the United States drank specialty coffee daily; the number of retail specialty coffee locations, including cafés, kiosks, coffee carts and retail roasters, amounted to 17,400 and total sales were $8.96 billion in 2003.
Specialty coffee, however, is frequently not purchased on commodities exchanges—for example, Starbucks
Starbucks
Starbucks Corporation is an international coffee and coffeehouse chain based in Seattle, Washington. Starbucks is the largest coffeehouse company in the world, with 17,009 stores in 55 countries, including over 11,000 in the United States, over 1,000 in Canada, over 700 in the United Kingdom, and...
purchases nearly all its coffee through multi-year, private contracts that often pay double the commodity price. It is also important to note that the coffee sold at retail is a different economic product than wholesale coffee traded as a commodity, which becomes an input to the various ultimate end products so that its market is ultimately affected by changes in consumption patterns and prices.
The market for soft drinks has been steadily climbing, passing the consumption of coffee in terms of mass of product consumed in the early 2000s.
In 2005, however, the coffee prices rose (with the above-mentioned ICO Composite Index monthly averages between 78.79 (September) and 101.44 (March) US Cent per lb). This rise was likely caused by an increase in consumption in Russia
Russia
Russia or , officially known as both Russia and the Russian Federation , is a country in northern Eurasia. It is a federal semi-presidential republic, comprising 83 federal subjects...
and China
China
Chinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...
as well as a harvest which was about 10% to 20% lower than that in the record years before. Many coffee bean farmers can now live off their products, but not all of the extra-surplus trickles down to them, because rising petroleum
Petroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...
prices make the transportation, roasting and packaging of the coffee beans more expensive.
Prices have risen from 2005 to 2009 and sharply in the second half of 2010 on fears of a bad harvest in key coffee-producing countries, with the ICO indicator price reaching 231 in March 2011
Classification
Organic food
Organic foods are foods that are produced using methods that do not involve modern synthetic inputs such as synthetic pesticides and chemical fertilizers, do not contain genetically modified organisms, and are not processed using irradiation, industrial solvents, or chemical food additives.For the...
coffee is produced under strict certification guidelines, and is grown without the use of potentially harmful artificial pesticides or fertilizers; conventional coffee is grown with more pesticides than any other agricultural crop—cotton
Cotton
Cotton is a soft, fluffy staple fiber that grows in a boll, or protective capsule, around the seeds of cotton plants of the genus Gossypium. The fiber is almost pure cellulose. The botanical purpose of cotton fiber is to aid in seed dispersal....
comes second. Fair trade
Fairtrade labelling
Fairtrade certification is a product certification system designed to allow people to identify products that meet agreed environmental, labour and developmental standards. Overseen by a standard-setting body, Fairtrade International , and a certification body, FLO-CERT, the system involves...
coffee is produced by small coffee producers who belong to cooperatives; guaranteeing for these cooperatives a minimum price, though with historically low prices, current fair-trade minimums are lower than the market price of only a few years ago. TransFair USA
Transfair USA
Fair Trade USA, formerly "TransFair USA" is a 501 non-profit organization.Founded in 1998, Fair Trade USA’s mission is to "enable sustainable development and community empowerment by cultivating a more equitable global trade model that benefits farmers, workers, consumers, industry and the earth"...
is the primary organization currently overseeing Fair Trade coffee practices in the United States, while the Fairtrade Foundation does so in the United Kingdom.
Commodity chain for the coffee industry
v2.png) |
The coffee industry currently has a commodity chain that involves producers, middlemen exporters, importers, roasters, and retailers before reaching the consumer. Middlemen exporters, often referred to as coffee "coyotes," purchase coffee directly from small farmers. Large coffee estates and plantations often export their own harvests or have direct arrangements with a transnational coffee processing or distributing company. Under either arrangement, large producers can sell at prices set by the New York Coffee Exchange.
Green coffee is then purchased by importers from exporters or large plantation owners. Importers hold inventory of large container loads, which they sell gradually through numerous small orders. They have capital resources to obtain quality coffee from around the world, capital normal roasters do not have. Roasters' heavy reliance on importers gives the importers great influence over the types of coffee that are sold to consumers.
In the United States, there are around 1200 roasters. Roasters have the highest profit margin in the commodity chain. Large roasters normally sell pre-packaged coffee to large retailers, such as Maxwell House
Maxwell House
Maxwell House is a brand of coffee manufactured by a like-named division of Kraft Foods. Introduced in 1892, it is named in honor of the Maxwell House Hotel in Nashville, Tennessee. For many years until the late 1980s it was the largest-selling coffee in the U.S. and is currently second behind...
, Folgers
Folgers
Folgers Coffee is a major brand of coffee in the United States, part of the food and beverage division of The J.M. Smucker Co.-Company history:...
, and Millstone
Millstone Coffee
Millstone Coffee is a brand of coffee sold in the US, a division of The J. M. Smucker Company. The company sells whole bean and ground coffee in retail settings and on its website.-History:The company was founded in Everett, Washington, in 1981...
.
Coffee reaches the consumers through cafes and specialty stores selling coffee, of which, approximately, 30% are chains, and through supermarkets and traditional retail chains. Supermarkets and traditional retail chains hold about 60% of market share and are the primary channel for both specialty coffee and non-specialty coffee. Twelve billion pounds of coffee is consumed around the globe annually, and the United States alone has over 130 million coffee drinkers.
Coffee is also bought and sold by investors and price speculators as a tradable commodity. Coffee futures contracts are traded on the New York Mercantile Exchange
New York Mercantile Exchange
The New York Mercantile Exchange is the world's largest physical commodity futures exchange. It is located at One North End Avenue in the World Financial Center in the Battery Park City section of Manhattan, New York City...
(NYMEX) under ticker symbol KC with contract deliveries occurring every year in March, May, July, September, and December.
Fair trade coffee
According to the World Fair Trade OrganizationWorld Fair Trade Organization
The World Fair Trade Organization , formerly the International Fair Trade Association , was created in 1989 and is a global association of 324 organizations in over 70 countries...
and the other three major Fair Trade organizations (Fairtrade Labelling Organizations International, Network of European Worldshops and European Fair Trade Association), the definition of fair trade
Fair trade
Fair trade is an organized social movement and market-based approach that aims to help producers in developing countries make better trading conditions and promote sustainability. The movement advocates the payment of a higher price to producers as well as higher social and environmental standards...
is "a trading partnership, based on dialogue, transparency and respect, that seeks greater equity in international trade". The stated goal is to offer better trading conditions to marginalized producers and workers. Fair trade organizations, along with the backing of consumers, campaign for change in the rules and practice of conventional international trade. However, not all coffee producers are happy with the methods or results.
Fair Trade organizations promote a trade environment in which the coffee importer has a direct relationship with the coffee producer, excluding the middlemen. Coffee importers provide credit to certified farmers to help them stay out of debt with coffee traders so they can develop long-lasting trade relationships. Producer organizations are paid a floor price (Fairtrade Minimum Price) of US$ 125 cents per pound for Fairtrade certified washed Arabica and US$ 120 cents for unwashed Arabica, or the market price, if higher. The free trade price of coffee rose above this minimum in September 2007, but due to recent economic events, the free trade price dropped back below this minimum in October 2008. The fair trade price for (conventional natural robusta) coffee has been $1.01 since June 2008
The price of conventional commodity coffee was also over $1 in 2008, but about $0.70 in 2009.
Fairtrade certification is not free; there is an application fee, initial certification fee, membership dues, annual audit fees and more. Certification can cost thousands of Euros for a single plantation. Large corporate farms can often handle the paperwork and recuperate the cost of certification more easily than small, independent farms. As a result, there are plenty of small, independent farms that are not Fairtrade certified even though they meet or exceed the Fairtrade standards.
Coffee and the environment
Originally, coffee farming was done in the shadeShade
Shade is the blocking of sunlight by any object, and also the shadow created by that object. Shade also consists of the colors grey, black, white, etc...
of trees, which provided natural habitat for many animals and insects, roughly approximating the biodiversity
Biodiversity
Biodiversity is the degree of variation of life forms within a given ecosystem, biome, or an entire planet. Biodiversity is a measure of the health of ecosystems. Biodiversity is in part a function of climate. In terrestrial habitats, tropical regions are typically rich whereas polar regions...
of a natural forest. These traditional farmers used compost of coffee pulp and excluded chemicals and fertilizers. They also typically cultivated bananas and fruit trees as shade for the coffee trees, which provided additional income and food security.
However, in the 1970s and 1980s, during the Green Revolution
Green Revolution
Green Revolution refers to a series of research, development, and technology transfer initiatives, occurring between the 1940s and the late 1970s, that increased agriculture production around the world, beginning most markedly in the late 1960s....
, the US Agency for International Development and other groups gave eighty million dollars to plantations in Latin America for advancements to go along with the general shift to technified agriculture. These plantations replaced their shade grown techniques with sun cultivation techniques to increase yields, which in turn destroyed forests and biodiversity.
Sun cultivation involves cutting down trees, and high inputs of chemical fertilizers and pesticides. Environmental problems, such as deforestation, pesticide pollution, habitat destruction, soil and water degradation, are the effects of most modern coffee farms, and the biodiversity on the coffee farm and in the surrounding areas suffer.
As a result, there has been a return to both traditional and new methods of growing shade-tolerant varieties. Shade-grown coffee can often earn a premium as a more environmentally sustainable alternative to mainstream sun-grown coffee.
External links
- What is the market share of eco-certified coffees? - Market share of eco-certified coffees as of 2010 with links to references and industry sources.
- Updated certified coffee market share, 2008 data - Top ten largest industry roasters and the amount of certified coffees each purchased in 2008.
- Updated certified coffee market share, 2009 data - Amount of certified coffee produced and sold in 2009, by certification.
- Coffee latest trade data on ITC Trade Map