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June 05, 2011

Coffee: Farmers, consumers hostage to market dominance of a few

by Saliem Fakir

About 2.5 billion cups of coffee are consumed every day.

Culture and coffee are treated as synonymous. Ever since te first coffee shops opened doors in the Middle East, around the 15th century onwards, coffee culture spread like wild fire in the western world.

Coffee houses are places where artists, writers, intellectuals and those seeking the pleasures of good conversation are meant to hang out. However, this image of civility belies the real world of coffee trade, which is far more Hobbesian if you are a coffee grower.

And, where a good cup of coffee mediates civil culture in one world, poor prices for producers imposes upon them many un-civilities. The 'hidden hand' of monopoly control can heap upon poor farmers untold misery and cruelty.

A documentary about the coffee trade, Black Gold, was launched by the Fair Trade Label South Africa (FLSA) at the Labia theatre in down-town Cape Town in early May.

It provides for sober examination the unfairness in price that coffee farmers get against the price at which a cup of coffee is sold at a Starbucks Café or any other coffee shop in developed economies or middle class emerging markets. The movie's focus on coffee lays also open the wider canvass under which developing countries, especially, in Africa, suffer the consequences of adverse agricultural trade practices.

Without a resolution of agricultural trade disputes at the World Trade Organization and the on-going subsidisation of agriculture in most developed economies, the vulnerability of farmers to unfair practices will continue.

Black Gold offers a sliver of a view of the relationship between agricultural trade practices in dominant markets and the negative development consequences for developing countries dependent on the agricultural sector for exports and foreign earnings.

Coffee is the second most traded commodity after oil, but those who produce it happen to be some of the poorest commodity crop farmers in the world.

In Ethiopia alone 77 000 small-scale farmers depend on the coffee trade for a livelihood. If coffee produces low returns, farmers are forced to shift from palatable urbane caffeine addictions to the production of the cheap narcotic 'chat', which fetch better prices in the east African market.

One cup of coffee can buy up to 10 kilos of coffee beans from a coffee grower. A kilo of coffee can produce between 80-100 cups of coffee with one cup fetching close to US$2 or more.

On the path between the farmer and the consumer there are many different people making money along the coffee value chain. Indeed, there are at least six steps in the value chain before a warm cup of coffee hits your lips.

There is a vast gap in price between what the farmer earns and what the consumer pays at a coffee shop.

Traders in coffee have called this phenomenon the "coffee paradox" - declining prices for producers and increasing prices for consumers. Or putting it in a more stark way: the coffee market is valued between US$70-80 billion of which coffee producers only get US$5 billion of this market value.

Diminished prices tend to also pit producer countries against each other because every producing country is reduced to a zero-sum game. It's the coffee market's way of divide and rule.

Both consumers and coffee growers are slaves to the price setting advantage that dominant market players hold. The price gap also reflects the relative powerlessness of the resource provider and consumer's unawareness of their own power to shape the market. Both, though, live with information asymmetry.

The seller of coffee knows little of the working of the trading houses where coffee is sold or bought. The consumer knows little about the world and conditions under which the seller of coffee has to live and produce his or her coffee.

In between sits the giant of coffee dealers and their middlemen who have perfect knowledge of where to buy, from whom and at what price.

In a far-off world from the hardships of the highlands of Ethiopia or the capital of Addis Abba where poor peasants bring their bags of 'Black Gold' (some of the world's best coffee beans), traders in the US and London hold the farmers' lives on a tether and ultimately the key to their future.

Coffee prices are dictated by four dominant multinationals that control most of the world's trade in coffee. Four large companies set the price. They are Nestle, Proctor and Gamble, Kraft and Sara Lee.

For a long time coffee prices were managed by an international quota system for importers and exporters through the International Coffee Agreement, which collapsed in 1989 as the US withdrew its support for the agreement.

The Agreement was not always fair, but it at least stabilised coffee prices for exporters and provided stability in the market.

The current situation of no controls together with market dominance has devastated the prosperity of many coffee growers. The collapse of the Agreement has affected 25 million households in coffee growing areas of Africa, Latin America and Asia.

Black Gold's powerful visuals take us deep into rural Ethiopia and shows how this has wrought havoc.

An Ethiopian farmer, perhaps, is far better off trading his/her raw labour in Europe than growing coffee in Ethiopia. His/her family would be better off from remittances than farming. But not all farmers can work overseas.

While the consumer lives ignorant of the world of the peasant and the peasant of the life of the rich world's coffee lover, they need not be so far apart.

Irony would have it that while geographic separation and information asymmetry is as much a source of weakness it is also their strength.

Morally conscious consumers can shift the balance. Better organized farmers, either through strong co-operatives or through the support of state enterprises, can intervene directly in the coffee market by bringing strength through numbers in the negotiation of better coffee prices.

The fair trade movement is trying to break the price logjam by educating coffee consumers about growers' conditions while at the same time trying to negotiate better prices for coffee growers. At this stage, it is still a battle of David versus Goliath, but at least it's a start.

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