Green coffee bean prices have doubled this past year, reaching an all-time high of $3.00 in May of 2011 according to the International Coffee Organization’s annual and monthly wages report. Demand has met supply at a place where growers are earning a respectable profit and it seems as though the natural market has finally found the sweet spot within the historically volatile coffee trade.
Stabilization efforts such as export quotas and Fair Trade certification have searched for ways to ensure the market benefit the producer, but today the free market is actually doing the best job at protecting the producers.
A unique and coincidental mix of bad weather and crop disease has decreased supply, while the increase in demand from growing middle classes in developing countries as well as a growing taste for quality coffee in the U.S. has spurred a steady climb in green coffee bean prices.
A relief for institutions like the International Coffee Organization (ICO) that has tried and failed to avoid crashes as hard as a caffeine addict cut off from his afternoon brew.
In 1962, importing and exporting countries gathered at the United Nations in New York to discuss a strategy to create price stability in the coffee bean trade (“International Coffee Agreements 1962 and 1968”). A commodity traded through futures contracts along with other agricultural products such as sugar and cocoa, coffee supply was far exceeding consumers’ demands.
The negotiations resulted in the formation of the ICO and the 1996 International Coffee Agreement (ICA) whereby members agreed upon measures to manipulate supply and increase demand in order to keep coffee prices stable. The ICA contained provisions on production and diversification to boost demand, and more importantly established a quota system by which supply of green coffee beans would be withheld from the market once it surpassed consumer demands (“International Coffee Agreements 1962 and 1968”).
The ICA held bean prices at a comfortable level until 1973 when an increase in prices rendered the quota system dysfunctional. In 1976 members agreed to install a more flexible system by which quotas could be used when prices were low and suspended when prices were high. In February 1986, prices reached a level were quotas were officially suspended, only for the prices to dramatically fall by December of that year (“International Coffee Agreement 1976” and “International Coffee Agreement 1983”).
This time, members of the International Coffee Organization had a difficult time agreeing upon what to do. Negotiations to set a universal export quota system in 1989 were inconclusive. Consequently, the ICO decided to once and for all eliminate provisions to regulate coffee prices (“International Coffee Agreement 1983”)
While the ICO members were arguing, producers lost their power in holding price standards in the market and green bean prices fell from $1.34 per pound to $0.77 per pound (Find source).
Activists heard the producers’ cry and a new organization determined to protect growers’ well-being began to gain popularity.
Unlike governments trying to stabilize the coffee market, Fair Trade USA (or Trans Fair USA as it was called at the time) set out to stabilize prices for the growers. Although officially organized in the 1940s in Holland, Fair Trade USA broke into the scene in the late 1980s (Fair Trade USA). The organization decided it would set a price floor for green coffee beans and add a 10-cent premium to every pound of coffee sold under its certification.
But Fair Trade certified coffee accounted for a miniscule percentage of all trade, and a new producer country was about to flood the market.
Development banks looking to promote export-led growth set out to fund coffee production. Vietnam proved to have the perfect tropical climate for production and broke into the market, increasing coffee production by over 1100% throughout 1990s (cite). Vietnamese Robusta coffee beans, notably lower in quality than the preferred Arabica beans grown in Latin America and Africa, were bought up by large retail manufactures like Nestle and Kraft, the owners of Folgers and blank. The companies often masked the low quality, bitter taste by adding flavors like vanilla or hazelnut (cite).
This drastic rise in production lead to what is known today as the “Coffee Crisis” of the early 2000s. Bean prices plummeted, reaching a record low of $0.34 in 2001 (ICO Annual and Monthly Averages 1998 to 2012”). Executive Director, Nestor Orsorio explained in a submission to the World Summit on Sustainable Development in 2002, “Coffee production has been rising at an average annual rate of 3.6%, but demand has been increasing by only 1.5%. At the origin of this coffee glut lies the rapid expansion of production in Vietnam and new plantations in Brazil, which is harvesting a record crop in the current season.” Exporting intended to boost developing countries’ economies but, with no demand for their goods farmers were not able to survive off of the market’s price.
Producers needed more consumers.
Conveniently, a burgeoning coffee chain named Starbucks expanded across the United States and the world. Growing from 17 stores in 1987 to 3, 501 stores in 2000, consumers were hooked on the specialty coffee shop (“Starbucks Company Timeline”). Consumers were not just drinking their morning cup from home, but stopping by the shop to enjoy fancy and delicious concoctions of espresso, milk, sugars and flavors. People were enjoying the drink as a luxury good.
Sitting down to enjoy their joe, consumers finally took more interest in where this delicious beverage was coming from. As consumers began to take a closer look at their brews, and question the supply chain, Starbucks responded. The company introduced ethically sourced coffee in 2001 and entered licensing agreements with Fair Trade in 2002 (“Starbucks Company Timeline”).
While the Fair Trade 10-cent premium per pound has always gone directly to cooperative funds to bolster community development, the price floor set by Fair Trade certification backfired.
Jeff Smith, a development manager at Growers First Foundation, a nonprofit organization that works with small farmers to bring their beans directly to the market, explains why Fair Trade’s attempt to bring greater profits to producers in reality had adverse effects. “The price standard acted like subsidy,” Smith explained, it gave an inflated value that, “caused farmers to produce more than the market was asking for.” This left no incentive for quality.
According to Smith, when the market was asking for a standard price of $1.10, producers sold their lowest quality coffee as Fair Trade at the $1.30 mark, and then sold their quality coffee at a higher price on the market at $1.50. Fair Trade created an imbalance that became more destabilizing as more producers and roasters were certified Fair Trade.
Furthermore, inflated prices attracted more farmers to the business, adding to production levels and driving down natural market prices. Fair Trade has certainly helped cooperatives across the world fund needed community development projects but, on a larger scale it hurt the well-being of the coffee trade.
But the coffee market is subject to more serious influences then the Fair Trade movement. Climate change, increasing demand for quality coffee, and the delicacies of the plant not only protected the market from crashing, but also caused prices to skyrocket in the later 2000s and double in the past two years.
In Colombia, crops were wiped out by widespread leaf disease. Producers in Central America and Brazil also experienced heavy rainfall that washed away portions of their 2011 crops (Stone).
Additionally, demand remains steady in the U.S.
The National Coffee Association reported in its 2012 National Coffee Drinking Trends study, more than three quarters of adults drink coffee, with almost two thirds of that group drinking it daily. More importantly, consumption in developing countries is expanding. In countries like Brazil and Indonesia, a growing middle class is turning into a class of coffee drinkers (“World Coffee Consumption…”). Popular openings of coffee bars also put quality cups at their convenience.
Growing popularity of artisan or direct trade coffee proves that the business can be a successful tool for development. Organizations like Growers First are taking the initiative—instead of trying to protect the growers, they are simply connecting them directly to customers, eliminating the fees of lend sharks and coyotes that traditionally connect growers to roasters, and are coaching growers on diversification and other means to increase productivity.
All this talk of rising coffee prices probably makes speculators nervous. Although anything seems to be possible in the coffee market, Jeff Smith acknowledges the fact that high prices attract more producers, but feels that another huge crash in prices is unlikely. His reasoning is that the demand for quality coffee, which is naturally restricted by the characteristics of the plant, is the new stabilizer. He explains that the best tasting coffee with the densest flavor grows in the most rural locations and at the highest of altitudes. Good coffee simply cannot be mass-produced because it requires scarce locations.
Although prices are expected to rise on average until 2019, so far this year coffee prices are back on the down slope. Businessweek reported Arabica coffee futures for May declining 2 percent, the biggest drop since Feb. 14. Green coffee bean prices have fallen 11% so far this year. This is most likely caused by an increase in production in Brazil, but the ICO feels the it is not enough to significantly rock the market (“Monthly Coffee Report, January 2012”).
A larger consumer base, increasing demand for quality and the checks on supply by the hand Mother Nature (or climate change) have finally joined to bring the deserved profits to the growers of this unique commodity.
“Fair Trade Certified Coffee Review 2010-2011”. Fair Trade USA.
“International Coffee Agreements 1962 and 1968”. International Coffee Organization. <http://www.ico.org/icohistory_e.asp?section=About_Us>
“International Coffee Agreement 1976”. International Coffee Organization. <http://www.ico.org/icohistory_e.asp?section=About_Us>
“International Coffee Agreement 1983”. International Coffee Organization. <http://www.ico.org/icohistory_e.asp?section=About_Us>
“Monthly Coffee Report, January 2012”. International Coffee Organization. 2012. ICO <http://ico.heritage4.com/heritage/heridata/ico_pdf_docs/cy2011-12/documents/cmr-0112-e.pdf>
“Outlook for coffee market 2010-2019”. International Coffee Organization. 2012. <http://ico.heritage4.com/heritage/heridata/ico_pdf_docs/cy2010-11/documents/icc-106-11e-outlook-2010-2019.pdf>
Osorio, Nestor. “The Global Coffee Crisis: A Threat to Sustainable Development”. International Coffee Organization. 2002.< http://dev.ico.org/documents/globalcrisise.pdf>
Perez, Marvin G. “Coffee Drops Most in Week on High Supplies; Sugar, Cocoa Gain”. Businessweek. 22 February 2012. <http://www.businessweek.com/news/2012-02-22/coffee-drops-most-in-week-on-higher-supplies-sugar-cocoa-gain.html>
“Press Release: annual NCA Market Research Reveals Strength Across Coffee Category”. National Coffee Association USA. 28 June 2011. <http://www.ncausa.org/custom/headlines/headlinedetails.cfm?id=762&returnto=778>
“Starbucks Company Timeline”. Starbucks Coffee. 2011. <http://globalassets.starbucks.com/assets/aboutustimelinefinal13111.pdf >
Stone, Zak. “The End of Cheap Coffee”. GOOD Magazine. November 2011. <http://www.good.is/post/the-end-of-cheap-coffee/ >
“World Coffee Consumption: Producing Countries Evolution 2000-2010”. Outlook for the World Coffee Market. International Coffee Organization. September 2010. <http://dev.ico.org/news/market0910.pdf >