The Coffee Crisis
Joe Thomas School of Business and Technology: MBA 12/18/2011 U4A1- The Coffee Crisis Dr. John Halstead In “The Coffee Crisis”, the authors described that in 2004 the governments of coffee producing countries were considering how to respond to rapid decline to coffee prices. Coffee was the main source of income for about twenty-five million small land farmers in Latin America, Africa, and Asia. In 2001, coffee prices hit a forty year low; resulting in extreme hardship for many farming communities. The affect of this crisis lead to most farmers extracting their children from school; forcing them to work.
In attempt to aid the farmers affected by this crisis, relief programs were established to financially assist farmers to survive the low prices. However, most of the countries attempting to provide aid were not wealthy, thus resulting in the inability to sustain aid for the coffee farmers. The authors state that the question that hung in the balance was whether or not coffee prices would remain low. If the prices continued to stay low and coffee farmers continued to suffer; should the countries encourage the coffee farmers to abandon their crop and switch to something else?
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To begin to understand the crisis, the authors provide a background on coffee. Coffee is a crop that does best in an area that has a warm climate and plentiful rain. Coffee is centrally grown near the equator, however is primarily consumed in the northern hemisphere. It is traded in 60 kilo bags and the annual crop exceeded 100 million bags in recent years. “In 2003, for example, 101 million bags were produced of which roughly 95 million bags were consumed and the remaining 6 million added to storage in the hopes of fetching higher prices in later years”(p. ). There are two main types of coffee; Robusta and Arabica. Robusta is easy to grow, however it yields lower and contains more of an acidy content. It grows from sea level to 800 meters and is produced mainly in Asia and some counties in Africa. Its use is intended for instant coffee, espresso, and for local consumption. Arabica is grown above 800 meters, primarily in Latin America and some parts of Africa. Its use is intended for roasted or ground coffee. Arabica makes up two-thirds of the coffee produced.
The authors state the origins of the coffee crisis are based off of the industry analysis placing blame on many factors. “Worldwide, coffee consumption had barely kept up with population growth- in the principal importing countries, for example, coffee consumption hovered at around 4. 6 kilos per person per year for the last twenty years. The United States, which alone consumes nearly 20 percent of the world’s coffee, saw coffee consumption per capita declined slightly as the consumption of soft drinks increased.
According to one estimate, average annual coffee consumption in the United States fell from 36 gallons to 17 gallons per person between 1970 and 1990 while annual soft drink consumption increased from 23 gallons to 53 gallons per person. The decline in US coffee consumption seemed to slow in the 1990’s, perhaps because of the increased interest in premium coffees and the spread of the Starbucks, Pete’s, and other coffee shop chains. Per capita coffee consumption also increased moderately in Europe and other importing countries, which helped to offset the decline in the United States”(p. 3).
The authors continue to state that while consumption was slow, production was growing rapidly though the collapse of the International Coffee Agreement in 1989. In 1962, the International Coffee Organization (ICO) managed the coffee market by negotiating export and import quotas to support target prices. The authors examine that the collapse of the ICA occurred due to the changing consumer market in the United States and the growing ambitions of Costa Rica. United States roasters were faced with a declining demand of gourmet coffees, but ICA regulatory quotas forced them to purchase lower quality Brazilian beans.
With this, Costa Rica had land suitable for growing higher quality beans, but was sanctioned from planting more trees by the ICA. In this situation, the U. S. and Costa Rica were put into a negotiation deadlock with the ICA; waiting to come to an agreement. Brazil and Vietnam expanded production in the 1990’s by expanding their production through focusing on the utilization of different beans and different production technologies. Brazilian entrepreneurs began to develop new coffee plantations in less frost-prone areas to the equator.
In regard to Vietnam, the country was assisted by the development of irrigation systems. By the end of the 1990’s, Vietnam was the largest Robusta producer in the world, even though its costs were rising as the growth in the Vietnamese economy was increasing local income or wages. The authors elaborate on a second factor to blame for the coffee crisis which entailed the growing technical skills possessed by the five major roasters- Phillip Morris, Nestle, Sara Lee, Proctor and Gamble, and Tchibo. These companies accounted for 69 percent of the roasting and instant coffee manufacturing capacity.
With an increase of Arabica prices after the Brazilian frost in 1997, roasting companies experimented with steam cleaning techniques to hide any bitter flavoring of Robusta when mixing with Arabica. These roasters were also educating themselves on how to use lower quality grades of coffee mixes; thus providing use for previously discarded beans to be sold to roasters who demanded a lower quality beans. In conclusion, the coffee crisis came to a head when the quality premium was no longer enough to make the coffee farmers profitable; ensuing that countries with high cost and average or lower quality were going to encounter a problem.
In certain countries, coffee farmers covered only variable costs. If they failed to do this they would have to pay personnel less and ask them to do a lot more; resulting in unemployment and difficult working conditions. With this, larger farms were hit extremely hard by this aspect because they utilized paid and not family labor. Reference “The Coffee Crisis. ” Gomez-Ibanez, Jose; Quinlan, Stephen. Case No. 1776. 0. Published 12/01/2004, John F. Kennedy School of Government.