The coffee industry is swimming in paradox. On the one hand, the beverage is more consumed and appreciated than ever before around the world. On the other hand, the remuneration of producers is at its lowest point, so much so that more than half of them now sell the fruits of their labour at a loss…
For millions, if not billions of people around the world, it is impossible to start a day without it. Covered with a little (or a lot) of sugar, sprinkled with a little (or a lot) of milk or just black, it is consumed in all forms: filter, espresso, capsule, soluble, ready-to-use, etc. You may even enjoy it if you read these rules. That wouldn’t be surprising, because it is one of the most consumed drinks on the planet. Every day, some two billion cups are consumed or swallowed quickly. As you may have guessed, we are, of course, talking about coffee, a drink whose production provides a livelihood for more than 25 million people in the producing countries, some 100 million throughout the world, and which generates some USD 90 billion a year.
Europeans addicted to coffee
In 2019, somewhat surprisingly, the largest coffee consumers in the world will be the Dutch, according to the statistics portal Statista1. Our northern neighbours will consume 10.6 kilos of coffee per year per capita. Contrary to popular belief, it is the inhabitants of the Scandinavian countries who drink the most coffee. Behind the Dutch are the Finns (9 kg), the Swedes (7.8 kg) and the Norwegians (7.2 kg). The Italians are known around the world as espresso lovers, but only rank tenth in the world (5 kg). Belgians rank 13th (4.7 kg). Surprisingly, the Mexicans, whose country is a renowned producer, are satisfied with half a kilo of coffee per person per year.
Europeans are therefore the biggest lovers of L, with the logical consequence that the European Union is the main importer. In 2018, the EU imported 3.1 million tonnes of coffee. And within the Union, Germany, with 1.1 million tonnes imported, is ahead of Italy (587 000 tonnes), according to Eurostat figures. Belgium, for its part, imported 277 000 tonnes of coffee in 2018, making it the third largest importer in Europe ahead of Spain, France and the United Kingdom. However, not all coffee imported by the EU is ready for consumption. A large proportion is green coffee, i.e. coffee that has not yet been roasted. In 2018, more than 1.8 million tonnes of roasted coffee was produced in the EU, worth EUR 10 billion.
Brazil before… Vietnam
At a global level, green coffee production in the 2018/2019 season reached 168.87 million bags (madam), an increase of 3.7%, according to the International Coffee Organisation (ICO) in its September report. As one sack weighs 60 kilos, this represents a total production of more than 10 million tonnes. This is almost exclusively divided between the Arabica (102.68 Ms) and Robusta (66.04 MS) varieties, both with 1.8% for the first and 6.7% for the second.
With the exception of Mexico and Central America, coffee production is increasing in all producing regions. With 3.7 million tonnes in 2018, Brazil is the undisputed world leader in the sector. Behind it, at a respectable distance, is Vietnam with 1.8 million tonnes of Robusta. The south-east Asian country has been increasing its production since the 2000s in order to surpass Colombia and assert itself as the cariocareus’ fixed dolphin.
Brazil and Vietnam alone account for around half of total coffee production. The former specialises in Arabica, while the latter is growing exclusively in Robusta. In addition, total exports have increased by 9.2% compared to the 2017/2018 campaign.
However, under this apparently good health, the coffee industry is actually in crisis. The sector is experiencing a second consecutive year of production surpluses. Since world consumption is estimated at only 164.82 million sacks (+2.1%), the surplus is therefore in the order of 4 million sacks. These surpluses are largely responsible for a fall in prices, which has been observed on the markets for several years, exacerbating the problems of local producers, particularly the smallest.
The price of coffee
Coffee prices are set on the commodity exchanges: the New York Stock Exchange trades mainly Arabica coffee and the London Stock Exchange trades Robusta coffee. The purchase and sale of coffee is based on forward contracts. The prices thus established serve as one of the reference points for producers and buyers in trade negotiations.
Critics of the coffee exchange point out that agricultural products are generally not ordinary commodities. Their physical characteristics limit the possibility for producers to adjust supply on the spot, which does not fit well into the logic of the market. According to some economists, in the absence of a mechanism to regulate production, supply or world prices, the market mechanism and competition between producers and consumers would lead to a phenomenon of “over-reaction”, characterised by the emergence of a cycle of overproduction and shortages. (Source: Wikipedia)
Coffee prices have halved in 5 years. Last September Brazilian Arabica Nature traded at only 98.73 US cents per lb.2 Colombia Milds and Other Milds traded at 131.90 and 128.89 US cents per lb respectively. Robusta’s September prices were the lowest monthly average since April 2010: 70.64 US cents per pound.
In addition to the abundant supply, linked to increased production, mainly in Brazil and Vietnam, and the market volatility fuelled by speculation, other factors also weighed on prices. 60% of producers sell at a loss.
The exchange rate of the Brazilian currency, the real, is the lowest against the dollar. Thanks to this competitive advantage, the large cariocas producers are able to make ends meet financially, despite the low prices. Not to mention the fact that the large Brazilian farms are much more mechanised and therefore more productive than the small plantations in Africa or the rest of Latin America.
In many countries, such as Honduras, Mexico, Burundi and Ethiopia, the majority of production is still produced by small-scale farmers. Even in Colombia, the third largest producer in the world, 95% of the country’s approximately 550,000 farms are less than 5 hectares. And at current prices, these small farms simply cannot make a living. According to Fairtrade International, about 60% of producers are now selling their coffee at a loss. For them, this means that debts are piling up and they are being forced to cut back on everything, including food, health care and education for their children.
Nestlé and company are not in crisis
There is a wave of consolidation among coffee buying companies. This phenomenon, which is expected to continue over time, is also contributing to a fall in prices. As the major players grow in size, the second largest players in the industry are becoming less important, even though their sales are increasing,” said Matthew Barry, analyst for strategic marketing data provider Euromonitor3. According to this specialist, companies with regional or global ambitions have no choice but to expand. If they don’t, they risk being swallowed by their major competitors.
Three major players are at the centre of buyers’ concerns and are increasing their purchases: Nestlé (22% of coffee purchases in 2017), Jacobs Douwe Egberts (JAB, 11.5%) and Lavazza (2.5%). Lavazza has recently taken over the coffee division of Mars. As for Nestlé, which owns, among others, the famous brands Nescafé and Nespresso, the giant has acquired the rights to market Starbucks retail products.
The profit margins of these major players are in stark contrast to those of the producers. Prices are not falling for end consumers. For example, according to Bernstein Research, quoted by Food Navigator, the Nestlé brand has a profit margin of 22% on its liquid and powder beverages. For Starbucks branded products, the margin is as high as 24%.
“We are getting a pittance. Gustavo Echeverry, a 50-year-old Colombian coffee grower, told AFP last spring. “I dream of taking over the farm to succeed my father and grandfather,” explains 19-year-old Javier Jimenez. “But if the crisis continues (…) I will have to look elsewhere and even leave for the United States”.
“The problem of migration is linked to coffee.
Go away, look for another job. This goal is increasingly being achieved by coffee farmers in order to escape misery. An article in the Washington Post last June explained that the Guatemalan population is now the main source of attempts to enter the United States. Between October 2018 and May 2019, no less than 211 000 of them were arrested on the border with Mexico. And one of the most decisive factors in this real exodus is the fall in coffee prices.
The American daily newspaper mentions the example of the Hoja Blanca cooperative. More than half of its 100 members, or one of their children, have emigrated in the last two years. Abandoned farms in the region are multiplying. “What we think is that the migration problem is actually a coffee problem. Genier Hernandez, head of the cooperative, told the Washington Post.
“Much of the migration on the southern border of the United States is due to falling coffee prices,” confirms Ric Rhinehart, former director of the Specialty Coffee Association of America, in the same article. “We all fear that we have reached the end of an era in which coffee-growing was a sustainable way of life in Central America. »
The pressure of climate change
As if the fall in prices were not enough, climate change is also leading to higher production costs. And small farmers, unlike larger structures, have less room for manoeuvre to fight its effects. In many regions that used to be suitable for growing coffee, droughts are becoming longer and more frequent. Heavy rainfall periods are increasing, leading to more erosion and landslides, epidemics (tracheomycose, coffee rust…) are becoming more and more devastating, and so on. In this way, the world’s coffee growing area could be halved by 2050.
In the mountains of Colombia, for example, the temperature is rising by 0.3 degrees per decade, according to a study published last April by agronomist Peter Baker and passed on by the Yale School of Forestry and Environmental Studies. The number of hours of sunshine has also fallen by 19% since the middle of the 20th century due to the denser cloud cover. However, coffee trees are very sensitive to weather conditions, especially Arabica trees. They require a specific temperature and amount of water. This is why the optimum height for growing coffee is usually higher. Growers who are able to do this try to keep up, but this forward flight has its limits.
To combat drought, some growers install rainwater harvesting systems to better irrigate their trees. However, such an installation is only accessible to people who are not already on the brink of poverty. That is why others simply choose to uproot their coffee trees to make way for more profitable crops, such as avocado or coca, or to turn their land into pasture.
“Any negative shock (disease, drought, low prices…) is felt disproportionately by those least able to absorb it,” says Hanna Neuschwander, communication manager for the agricultural research organisation World Coffee Research, in the Yale School article. “Over the next 50 years we will see a consolidation phenomenon where only the most efficient producers will be able to survive in the marketplace.
According to her, the coffee industry will only be able to cope with the effects of climate change if scientific research is carried out locally, on a country-by-country basis, to adapt crops to the changes.
That is why, under the impetus of its scientific director Christophe Montagnon, World Coffee Research has made preparing for climate change a top priority. “My ultimate goal is that through our work in the coming years, coffee farmers will gain access to genetic progress through improved varieties.
Christophe Montagnon’s second priority is coffee quality. “Coffee is not essential for the survival of a human being, we are going to drink it for pleasure. So quality is extremely important. Today’s industry has understood this: in order to produce coffee, people must have an interest in it, and in order to have that interest, coffee growing must be profitable. »
… But biodiversity under threat
World trade in coffee is currently based on only two varieties: Arabica, which accounts for around 60% of production, and Robusta, which accounts for around 40%. However, in addition to the wild varieties of the two mentioned, 122 others have been mentioned, says Aaron Davis, director of coffee research for the Royal Botanic Gardens in Kew in the UK.5 And they grow naturally in the tropical regions of Africa, the Indian Ocean or Asia.
Yet more than half (60%) of these wild coffee varieties, ignored by industrial farms, are now threatened with extinction. Nevertheless, they can be very useful for large-scale coffee cultivation, for example due to characteristics such as tolerance to different climates or resistance to drought, diseases or pests. Some species have higher or lower levels of caffeine, others have untapped taste qualities, etc. Dr Davis points out that Robusta has gone from a little-known African crop to 40% of the world’s coffee, thanks to the qualities that Arabica coffee once lacked. Qualities such as resistance to coffee rust, strong sunlight, higher productivity, high caffeine content, etc. are all qualities that Arabica coffee lacks.
Arabica of Robusta
The main differences between Arabica and Robusta coffee are the size and shape of the bean, the different growing conditions, the aromas and the caffeine content.
On the palate, Arabica is characterised by fine, varied and pronounced aromas. It is fragrant, sweet and without bitterness. Robusta has a more bitter and full-bodied taste. It is powerful, earthy and rich in caffeine. “Among the coffee varieties threatened with extinction are those that have the potential to develop the coffee of the future,” stresses Aaron Davis. “The use and development of wild coffee resources could be the key to the long-term sustainability of the sector. Targeted actions are urgently needed in several tropical countries, particularly in Africa. »
In Ethiopia, for example, the largest coffee exporter in Africa and the country of origin of Arabica, the wild variety of this species is still an important source of seeds and disease resistance. “We hope that our findings will be used to guide the work of scientists, policy makers and the coffee sector to secure the future of coffee production. Not only for deep L lovers around the world, but also as a source of income for farming communities in some of the poorest countries in the world,” he concludes.
Climate change, overproduction and market fluctuations all play a decisive role in the coffee crisis. But the lowest common denominator of the problem remains the low remuneration of producers.
This is the main objective of the various Fair Trade Organisations working with farmers around the world. Fairtrade International, Oxfam, Fairwild, Etiquable, etc… The list of labels or specialised networks is growing, a sign that people worldwide are aware of how raw materials are bought from producers in the South. What these organisations have in common is their desire to guarantee fair prices and wages, while respecting social, environmental and governance criteria.
On its website, Fairtrade International explains that the approximately 800,000 coffee growers with whom the organisation works enjoy protection against price fluctuations in times of crisis. The organisation guarantees a minimum purchase price of USD 1.40 per pound of coffee (USD 1.70 for organic coffee), well above the market price. However, Fair Trade sees only one way out of the current crisis in a sustainable way: that the companies buying coffee pay a decent price to the producers, a price that covers their production costs, but also provides them with sufficient income for housing, food, health care and education for their children.
… Unfair system
But fair trade is not a panacea. Fairtrade International recognises that even its rock-bottom prices do not provide a decent income for many of the producers it works with. It is important to remember that between the purchase price and the amount received by the producer, operating costs, transport costs, etc. are often added to the price.
One of the solutions envisaged by Colombia at the beginning of the year is to free itself from the markets, which are too much tied to Brazilian production, in order to sell its coffee at a price that covers its producers’ costs, i.e. between USD 1.40 and USD 1.50 per pound. “If you want the coffee, you pay the price; if you don’t want it, you don’t buy it. Otherwise, Colombian coffee is not viable”, said the head of the National Federation of Coffee Growers of Colombia, Roberto Vélez.6 However, this proposal must first receive the support of Colombian farmers, other Arab producers abroad and buyers.
Xaver Kitzinger, co-founder of the Berlin Kaffee Cooperative, is committed to a radical change in the coffee chain. In an article in the Reuters news agency, he believes that “fair trade is good, but in the end it is just best practice in an unfair system. “We need to change the current rules completely to make a real difference for producers,” he said. “That’s why his company works with a cooperative in Rwanda that sells coffee that is not only grown locally, but also washed, roasted and packaged locally before being shipped to Europe.
“The coffee industry is designed to make as much money as possible in the South,” said Peter Kettler, manager of the coffee sector at Fairtrade International.7 “Commercially, it works, it generates profits, but it works against the interests of the farmers. “He draws attention to the report of the Columbia University Economic Professor Jeffrey Sachs in October, which advocates a minimum price for farmers and subsidies to enable them to sell directly to consumers, as an example. This would enable them to adapt better to climate change and give them a better chance to continue their business. Because ‘if nothing changes, in 20 years’ time we will only have two choices when we walk into a pub: Brazilian or Vietnamese”, concludes Peter Kettler.
TDC, October 2019