By Micah Sherer.
This blogpost explores the trading of coffee as a commodity and its implications for coffee producers.
Coffee is becoming increasingly ubiquitous in the developed world from Boston to Beijing. Every year we rely more and more on fancy cafes, hipster coffee shops, and increasingly expensive home setups to get our caffeine fix. We don’t often consider the effect that our coffee consumption has on development, but coffee is almost exclusively produced in the developing world, and the market that supplies it to us exerts titanic forces on the people who grow our coffee.
Coffee is a commodity, and as such is traded either on the London exchange (for lower quality Robusta) or on the New York exchange for the Arabica coffee that makes up the beverages we enjoy in specialty coffee shops. The sad reality is that while we pay increasingly more for our coffee in consuming countries, the global commodity price for coffee (currently $1.02/lb.) is at its lowest price since 2006, and has never gone above its high of $3.35/lb. in 1976. Additionally, preliminary research on cost of production in South America returned a weighted average of $1.27/lb. It should also be noted here that when coffee futures contracts are bought on the commodity exchange, by no means is the total sales price accruing to the farmer. There are middle men like processors, exporters, importers, agents, and hedgers to pay. So how have we ended up with a market failure where the sales price is lower than the cost of production for many producers?
The sad reality is that while we pay increasingly more for our coffee in consuming countries, the global commodity price for coffee (currently $1.02/lb.) is at its lowest price since 2006, and has never gone above its high of $3.35/lb in 1976.
There are many theories and explanations for why the coffee market is trading so low now. Some say that speculators are creating shocks in the marketplace, while others attribute the current low price to a simple oversupply issue. All this theorizing on the current crisis ignores the proverbial elephant in the room: the global price for coffee has been shockingly low for decades. Despite massive increases to both the quality and trendy profile of coffee, we have seen the commodity price stagnate in the one to three dollar range for years (despite inflation). This is largely due to the simple fact that coffee is traded as a commodity, and commodity prices are almost always driven by the consuming countries.
The coffee market’s power imbalance between fragmented sellers and commodity buyers creates a de facto monopsony where the sellers have almost all the price setting power. Additionally, since the International Coffee Agreement failed in 1989 there has been no buffer-stock system to protect sellers. This control by buyers in consuming countries creates a perfect scenario for rich countries to gain wealth by keeping poor countries poor.
This type of extractive behaviour is the basis of dependency theory, which was first introduced by Raúl Prebisch and Hans Singer in 1949. In this theory they argue that the structures rich countries put in place in poor countries keep them dependent and extract their inherent wealth to the coffers of the first world. Prebisch in particular argued that some level of protectionist policy was necessary to disentangle developing countries from the framework that was keeping them poor. This theory has of course been debated and deconstructed in the nearly 70 years since its introduction. Many of the criticisms have centered on the fact that protectionist policies in South America have failed to precipitate economic growth. Additionally, many point out that India has been able to grow at a tremendous rate after moving from a state-controlled economy to a market-based approach. Both criticisms are valid if we assume that the rich countries exert their power through political structures, but quite often it is the free market itself that creates and maintains systemic poverty in producing countries.
Prebisch in particular argued that some level of protectionist policy was necessary to disentangle developing countries from the framework that was keeping them poor. This theory has of course been debated and deconstructed in the nearly 70 years since its introduction. Many of the criticisms have centered on the fact that protectionist policies in South America have failed to precipitate economic growth.
In markets where buyers have price setting power, they typically act to maximize their own profit, and this is doubly true in the cutthroat world of commodity markets where half a cent per unit can cost you millions. This power imbalance has created a system where the commodity market acts as a colonizer in an era when governments no longer can. As the popularity and price of coffee has risen in the developed world, so has the degree to which we take advantage of those who produce it. Through a dependency paradigm we consistently increase the share of wealth that accrues to those who are already relatively wealthy, and we ensure that the poor producing countries never accumulate the wealth or power to fight back against the inherent inequality.
By Micah Sherer
Micah Sherer has a Bachelor's in Economics from Furman University (USA) and has spent the last seven years working in various capacities in the coffee industry. He most recently worked for Ally Coffee, a multinational import company in the Montesanto Tavares Group, directing all East African coffee purchasing for them. Micah is currently studying MA in Poverty and Development at IDS.