Making Coffee Good to the Last Drop: Laying the Foundation for Sustainability in the International Coffee Trade

Georgetown International Environmental Law Review, Winter 2004 by Brown, Grace H

C. REASONS FOR THE CURRENT COFFEE CRISIS

After the regulatory structure of the coffee market lapsed and coffee companies flooded the market with coffee, the coffee market immediately reverted back to its inherently volatile state. But this time around, the market experienced more than just a replay of the same kinds of problems that had plagued farmers in previous years before the ICAs. The emergence of three unexpected factors influenced the structure of the unregulated coffee market, creating a crisis of unprecedented proportions. These factors included the global oversupply of beans due to new producers entering the market, falling demand for coffee, and poor quality of coffee beans flooding the market. The convergence of these factors instigated the negative social and environmental spillover effects that are so prevalent in the coffee trade today.38

1. Increased Coffee Production Creates Global Oversupply

The structure of the international coffee trade and the level of coffee production radically changed when Vietnam entered the unregulated coffee market and flooded the already saturated market.39 Right after the ICA broke down in 1989, Brazil, the world's largest producer, downsized production because of weather frosts.40 With Brazil temporarily immobilized, the time was right for Vietnam, infused with increased foreign investment and government subsidies, to enter the market. Vietnam went from being a "statistical blip in the coffee world" to becoming the world's second largest producer.41 However, by the end of the 1990s, Brazil regained its top status when Brazilian farmers were no longer required to follow certain environmental regulations related to frosts.42 Taken together, Brazil's increased post-frost production and Vietnam's market entry further exacerbated existing oversupply stocks.43

Global coffee oversupply has caused prices to drop to their lowest levels in 30 years in absolute terms and to their lowest levels in 100 years when adjusted for inflation.44 In 2002, 115 million bags of coffee were produced, but only 105 million bags were consumed, creating an oversupply of 10 million bags.45 A year-on-year excess supply has fortified stocks that have accumulated to a surplus of over 40 million bags.46 This oversupply continues to keep prices depressed.47 U.S. coffee consumption averages about 18 to 19 million bags per year, but due to the oversupply, U.S. coffee imports declined by nearly 11% in 2002.48 Groups like Oxfam International have called for the destruction of oversupply bags, particularly bags containing poor quality beans, to restore the balance of supply and demand.49 Yet governments and coffee roasters have been reluctant to act on this matter of oversupply, arguing that such action would be undue interference with the free market.50

2. Falling Coffee Demand

In addition to continuous oversupply, decreased demand for coffee worldwide has also contributed to the fall in coffee prices.51 As mentioned earlier, the demand for coffee is usually inelastic, which means that demand stays relatively constant as coffee prices fluctuate.52 This demand stability may be attributable to the fact that coffee consumers rarely see changes in the price of coffee even as the price of coffee futures drops because of hidden, deliberate price fixing that occurs somewhere in the process between the coffee farmer and the consumer.53 Small farmers normally have little idea of the price of coffee on the London and New York futures markets and must rely on middlemen exporters, known as "coyotes," to whom coffee farmers sell their beans and rely upon for a fair price. Coyotes, who know the price of coffee futures because of greater access to market information, are likely to exploit the price of coffee for themselves and so on down the line from coyote middleman to the remote consumer. As a result, the price of coffee becomes so inflated by each party along the way that consumers ultimately pay the same price regardless of changes in the price of coffee futures.54