The Coffee Crisis MBA 6008-Global Economic Environment Capella University Theresa Patterson December 18, 2011 Coffee was the top source of income for 25 million farmers in Latin America, Africa and Asia. Due to the lack of appropriate compensation for their harvest, communities in coffee- producing countries around the world are suffering. Coffee is a chief export for many developing nations and their entire economies are collapsing with the market. In 2004 the governments of coffee producing countries were adamant in finding the answer to the dramatic decline in coffee prices.
Coffee is consumed primarily in the northern hemisphere, particularly in Europe, the United States, and Japan. There are two basic types of coffee: robusta, which is easier to grow but extremely acidic, and arabica, which has a lower yield time but milder in flavor. Robusta is produced mainly in Asia and some countries of Africa. This is primarily an instant coffee for espresso and local consumption. Arabaca is used for roasted ground coffee and compensates for two-thirds of coffee produced.
This oversupply of coffee is particularly significant because it’s flooding the marketplace with cheaper, lower quality coffee.
The coffee being grown in Vietnam is primarily Robusta coffee, which is substantially less expensive due to less labor-intensive growing requirements and lower elevations. Robusta coffee beans are, by definition, a much lower grade than fine Arabica beans, which are grown at higher altitudes and more carefully harvested and processed. This surplus of less expensive coffee has caused some roasters to lower their quality standards by increasing the quantity of Robusta coffee in their blends, thereby lowering their overall costs.
Coffee is the second most traded commodity on the world market. Its production and sale supports millions of families worldwide, but especially in developing countries. Most coffee is still produced on small farms by family farmers, though there are some larger coffee plantations. Until 1989, coffee prices were controlled to some extent by an international agreement. When the ICA collapsed, there were suggestion of an impending coffee crisis, but failed to materialize for several years due to bad weather in the South American countries, where crops were devastated.
The resulting shortage of coffee for sale kept coffee prices high through the mid-1990s. Even then there were some rumors that the coffee crisis had not been averted, but merely postponed. Interestingly, while Americans were not satisfied about the rising price of coffee, the coffee producers were beginning to see the effects of a drop in coffee prices paid for their commodity. A number of contributing factors was responsible for these price changes. The high prices of the mid-1990s encouraged more farmers to turn over more of their lands to growing coffee.
The effects of this weren’t seen for a couple of years, since it takes at least two years for a coffee plant to reach maturity and produce fruit, and four before it is at peak production. Among those entering the market in the mid-1990s was Vietnam, who were once major players in the world coffee markets. Years of bad weather, war and poor economy had kept Vietnam out of the market for decades. In just a few years during the 1990s, Vietnam moved from being a nonentity in the world coffee market to being the second largest exporter of coffee in the world.
Many market experts trace the roots of the current coffee crisis directly to the re-entry of Vietnam into the market. The coffee crisis has yielded unexpected effects. The current low prices of coffee are affecting the economy of those countries where coffee is a major part of the gross national product, of course, but they are also directly affecting the quality of the coffee that is being sold and the sustainability of coffee as a cash crop. Again, there are several reasons for the apparent drop in quality of coffee being bought and sold.
The first reason is the coffee grown in Vietnam is mostly of the robusto variety. Its flavor is substantially different than the flavor of arabica coffee, which is generally more favorable and considered to be ‘better’ coffee. It is used extensively in blended coffees with arabica, though, and one of the effects of the current coffee crisis is that the overabundance of robusto on the market is encouraging many companies to increase the amount of robusto coffee that goes into their blends. Second, and more importantly, with ncome from producing coffee not even covering the expenses of growing it, the growers are forced to sacrifice quality in order to reap the highest possible prices. Robusto coffee yields far more coffee per acre of land than arabica coffee. Growing sun coffee rather than the better tasting but more labor intensive shade grown coffee also yields more product and thus, more profit. The low prices also encourage producers to rush through picking, including underripe and overripe berries in the harvest because they can no longer afford to pay for three separate pickings of the crop.
Fair Trade coffees are only one of the solutions being suggested for the current coffee crisis. While Fair Trade guarantees a floor price for raw coffee sold by coffee cooperatives, it is only one part of a comprehensive strategy to stabilize coffee prices at a level that will continue in supporting its growers. Another is the adoption of a set of quality standards for buyers. Both the UN and the ICO support these quality standards as a way to encourage all growers to adhere to best agricultural practices for growing coffee. References Kennedy School of Government Case Program: The Coffee Crisis Top of Form Website Bottom of Form
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