Coffee snobs unite! How Americans' bad taste in coffee is putting Juan Valdez out of business

Washington Monthly, July-August, 2003 by Joshua Kurlantzick

IN MARCH, MY FIANCEE AND I SEARCHED through stores in Vientiane for souvenirs of Laos to give friends in Washington. Not easy--the tiny country's best-known export is opium, which doesn't work as a gift for everyone. But we found the perfect present: bags of coffee grown on Laos' Bolovens Plateau, which produces some of the world's finest-quality beans. The cost was stunningly low--Lao coffee had fallen in price dramatically since my visit to Laos two years earlier. The collapse was driven home to me the next day, when several former students of my fiancee--who used to teach there--gave us so much local coffee that when we returned to the United States, customs officials checked my bags, probably thinking that I was using the sheer bulk of coffee to conceal drugs.

Two weeks back from my trip, I got a reverse price shock, this time at a grungy-looking cafe in San Francisco's Sunset district. A six-cup-a-day addict, I have sipped the elixir in places as varied and as pricey as Bedouin tents in the Arabian Desert and coffee shops atop Japan's fanciest hotels. But at this modest Sunset cafe, a latte cost $5--the highest price I could remember. Recalling that only two weeks earlier I had bought pounds of fine Lao beans for pennies, I could not justify spending five bucks on an espresso drink with milk, and I searched for another shop, only to find that the cafe next door also charged nearly $5. I bought a Diet Coke.

My experience was hardly unique. Over the past decade, the global coffee industry has gone through a transition that, at first glance, seems to defy the fundamentals of economics. Since the early 1990s, coffee production, centered in developing Latin American, Asian, and African countries, has soared. Yet at the same time, prices for specialty blends at supermarkets and cafes have risen, and even the price of mainstream coffee brands like Folgers has not dropped that much. Call it Economics 102--a new paradigm in which both producers and consumers lose.

The plight of Third World coffee-growers has not gone unnoticed by high-end java drinkers like me. Many of us socially conscious, even guilty, types have wondered if our own dainty, $5-1atte habits are contributing to the problem. The fair-trade/fair-price movement, which bets on getting liberal coffee drinkers to shell out a little bit extra per pound for high-end coffee purchased through a consortium so that Third World growers can feed their families, has been getting more visible: Anyone who's gone into a Starbucks has seen the "Fair Price" signs. Such efforts are laudable, even helpful.

But for once, the real problem isn't us elites. It is, in a sense, our parents--or whoever continues to drink low-grade, supermarket-bought, pre-ground coffee. The quickest way to help the poor Third World grower--and maybe make our own Starbucks cheaper, too--may very well be to fancify the tastes of the average American coffee drinker.

Vietnam Protest

Until the early 1990s, global coffee-bean production was controlled under a deal called the International Coffee Agreement, a kind of cartel, which, unlike OPEC, required both exporters and consuming countries to submit to quotas. (The United States is the world's biggest coffee consumer--more than half of American adults drink coffee every day.) During the Cold War, as Fortune's Nicholas Stein has noted, American officials viewed stable prices as a means of preventing farmers from becoming so destitute they turned to communism. But with the fall of the Berlin Wall, the increasing openness of world financial markets in the early 1990s, and the growing allure of deregulation for all industries, the cartel begin to lose its power; its member-states no longer could agree on quotas, and the cartel eventually folded.

Into the breach, improbably, stepped Vietnam, a still communist-controlled poor country whose ambitious government had started aggressively opening its economy in the late 1980s. Vietnam had produced small amounts of coffee for years. But now, Hanoi began using subsidies to encourage farmers to plant vastly more acres of beans, and employing the state's coercive apparatus to see that its requests were heeded. Vietnamese coffee production grew from 2 million bags per year in the early 1990s to more than 15 million by the early 2000s, making it the second-largest coffee producer in the world. "Vietnam went from being a small producer to a major producer extraordinarily fast--too quickly," says Robert Nelson, president and CEO of the National Coffee Association, a trade group of American companies. Vietnam didn't do this all on its own--the IMF and World Bank encouraged grower countries to bulk up production as a natural source of hard currency.

Most of Vietnam's new production was robusta, the less flavorful, more acrid (some experts compare the taste to that of burnt rubber), and less expensive type of bean, as opposed to arabica, the milder, more flavorful, more expensive variety. Arabica was simply much harder to grow in Vietnam's harsh climate and rough topography; robust--as its name suggests--is a tougher plant that can grow in a wider variety of terrains. As Vietnam has boosted production, other exporters, most of them focused on robusta, have copied its strategy. It makes economic sense: Because robusta is much less picky about where it can grow and needs less care, it can yield a profit margin substantially higher than arabica. Brazil, the world's biggest producer, and another major robusta exporter, upped its output: Brazil's share of the global coffee market rose from 19 percent in 1996 to nearly 25 percent in 2001, according to the Brazilian press. Indonesia, another major producer to receive significant IMF and World Bank assistance, followed suit. Just in South America, the International Coffee Organization estimates that production rose by nearly 25 percent in 2001-02. The massive increase in production has led to a vast, and deeply troublesome, surplus. Oversupply is particularly pronounced in robusta, although there is some slight oversupply in arabica as well. According to a comprehensive report on the crisis released last year by Oxfam International, there are now more than 40 million excess bags of coffee on the market--more than double the excess coffee in previous gluts--and perhaps the worst coffee glut in history.