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The Coffee Paradox: Commodity trade and the elusive promise of development

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... of roasting and instant manufacturing companies (1998) ... Coffee cup at Starbucks, USA (same kind of coffee) 1% goes to the farmer. Organic: same as above ... – PowerPoint PPT presentation

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Title: The Coffee Paradox: Commodity trade and the elusive promise of development


1
The Coffee Paradox Commodity trade and the
elusive promise of development
  • Stefano Ponte
  • Senior Researcher
  • Danish Institute for International Studies
  • spo_at_diis.dk

2
The coffee paradox
  • Presentation based on forthcoming book co-written
    with Benoit Daviron of CIRAD, Montpellier (Zed
    Books, 2005)
  • TOC
  • Preface
  • Ch.1 Commodity trade, development and global
    value chains
  • Ch.2 Whats in a cup? Coffee from bean to brew
  • Ch.3 Who calls the shots? Regulation and
    governance
  • Ch.4 Is this any good? Material and symbolic
    production of coffee quality
  • Ch.5 For whose benefit? Sustainable coffee
    initiatives
  • Ch.6 Value chains or values changed?
  • Ch.7 Conclusion

3
What is the Coffee Paradox?
  • Contemporary presence of
  • a coffee crisis in producing countries (lowest
    international prices in a century in real terms)
  • a coffee boom in consuming countries (specialty
    coffee, coffee bar chains, coffee is a cool
    drink again)
  • How can this happen?

4
The coffee crisis
  • Factors
  • (1) Oversupply
  • End of ICA (1989)
  • Grow more coffee campaigns structural
    adjustment
  • Technical innovation (Brazil, Vietnam)
  • Is that the whole story?

5
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6
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7
The Coffee Crisis
  • Factors
  • (1) Oversupply
  • (2) Oligopoly (market power)
  • Market liberalisation in developing countries
    end of ICA
  • Government agencies do not control exports
    anymore
  • Few global players controlling the market
  • Buyer-driven value chain

8
Green coffee market share by international trade
company (1998) ()
9
Market share of roasting and instant
manufacturing companies (1998) ()
10
Additional explanations Stock-price relation (1)
  • Impact of stocks on price depends on ownership
  • Which stocks are readily mobilizable?
  • ICA period producing country governments
    controlled stocks not mobilizable (or strong
    uncertainty)
  • Stocks owned by roasters are also taken out of
    the market not mobilizable

11
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12
Stock-price relation (2)
  • 1950s-1980s ICA effect on prices large stocks,
    but not available, thus relatively high prices
  • End of ICA relation stock-price similar to
    1910s-1930s
  • After 1997 (SMI) very low levels of stocks, but
    much of this is available (moves from roasters to
    traders) no impact on prices
  • Ownership of stocks counts, in addition to
    oligopolitic position

13
The coffee boom (latte revolution)
  • Increase in value-added consumption of coffee and
    coffee-based beverages
  • Specialty coffee in the US 17 in volume, 40
    value
  • High quality, single origins, espresso based
    beverages, fair trade, organics, other
    sustainable coffees

14
Sustainable coffees
  • Globally, 16,000 tons of certified coffees in
    2000
  • Up to 52,000 tons in 2003 (approx 0.7 of total
    volume of traded coffee)
  • Except for fair trade, relatively low premium
    paid to farmers

15
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16
Equity issues Distribution of value added along
the coffee chain mainstream market
17
Unit import value for green coffee and gross
margin for roasted coffee in the US (1980-2002)
(USD/pound).
18
A different way of telling the story
19
Are specialty and sustainable coffees scoring any
better?
  • Specialty (as high quality)
  • RG sale at Starbucks, USA (Kilimanjaro peaberry)
  • 4 goes to the farmer
  • Coffee cup at Starbucks, USA (same kind of
    coffee)
  • 1 goes to the farmer
  • Organic same as above
  • Fair trade
  • Supermarket sale, espresso blend, Italy
  • 21 goes to the coop (same as in old ICA
    system)
  • Specialty shop, Kili single origin, USA
  • 11 goes to the coop

20
What is quality?
  • Material attributes
  • Symbolic attributes
  • In-person services

21
Material attributes
  • Quality in producing countries mainly relates to
    material attributes
  • Market liberalisation one price for all coffee
    no incentive to farmers
  • Material quality crisis

22
Symbolic attributes and in-person services
  • This is what is sold to consumers in the North
  • Branding and packaging
  • Ambience of consumption
  • Esoticism, good stories
  • Lifestyle
  • In-person service (bar, restaurant, specialty
    shop)
  • This is where the value added comes from
  • As long as producers do not control part of this
    value addition, there will be no way out of the
    commodity problem in developing countries

23
Solutions? (1)
  • Supply management I am skeptical
  • Failure of ACPC cartel
  • Failure of the ICO CQP to have regulatory bite
  • Competition policy (to break the abuse of
    oligopolistic position) legally tricky
  • Diversification difficult to impose as a
    policy also, in some areas, there are no
    alternatives
  • Improve material quality
  • Yes, if there are financial incentives (premium)
    or positive returns not at present for
    smallholders
  • Coordination mechanisms need to be re-established
    in producing countries

24
Solutions? (2)
  • Sustainability certifications?
  • Still small, but growing
  • BUT, premium is needed at farm-gate
  • Lower costs of certification
  • Consumers need to pay more for getting more
  • Improve transparency
  • Labelling rules (indicate type of coffee used, ,
    origin)

25
Solutions? (3)
  • Cultivate consumers, not more coffee
  • The wine route
  • Sell lifestyle, not poverty or development
    message, to mainstream consumers
  • Producers need to sell symbolic quality and
    control returns from it
  • Location, esoticism, origin, combination with
    crafts/music
  • Limited inroads in in-person service provision
    (agro-tourism)
  • Direct marketing, internet auctions
  • Key Appellation systems with legal backing IPR
    protection
  • Producer associations built around appellation
    areas
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