Mugged: Poverty in our coffee cup

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This paper looks at the effect of unfair trade policies on coffee growers in developing countries. 25million coffee growers face severe threats to their livelihoods as a result of declining profit margins linked to the falling price of coffee in the international market. The price of coffee has fallen by 50 percent in the past three years to a 30-year low. Families of developing-country coffee farmers are facing severe economic challenges that many have had to pull their children out of school for lack of financial capacity. This paper examines the coffee value chain and traces the problems associated with it to the free and liberalised international market. It recommends possible solutions and makes a case for a Coffee Rescue Plan which brings together all the stakeholders in the coffee industry. The paper relies on both primary and secondary data for its analysis.
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  MUGGED MAKETRADEFAIR www.maketradefair.com Poverty in your coffee cup P h  o  t   o :  R  u  p  e r  t  E l  v i  n   Acknowledgements This report was written by Charis Gresser and Sophia Tickell. Theauthors would like to thank all Oxfam staff, partners, and industryexperts who helped in its production. In particular, they would liketo acknowledge the contributions made by the following people:Jeff Atkinson, Peter Baker, Bert Beekman, Izzy Birch, Phil Bloomer,Ian Breminer, Liam Brody, Geronimo Brumatti, John Burstein,Constantino Casasbuenas, Antonio Castro, Celine Charveriat, JohnCrabtree, Geneviève Deboeck, Xavier Declercq, Siddo Deva, ChadDobson, Pablo Dubois and Néstor Osorio and colleagues at theInternational Coffee Organisation, Diana Gibson, ChristopherGilbert, Duncan Green, Tran My Hanh, Than Thi Thien Huong,Marita Hutjes, Jon Jacoby, Karen St Jean-Kufuor, Jörn Kalinski,Gezahegn Kebede, Khamlouang Keoka, Martin Khor, PatrickKnight, Tatiana Lara, Max Lawson, Ana Eugenia Marin, RuthMayne, Monica Naggaga, Michael Oyat, Rainer Quitzow, AndrewRay, Alex Renton, Colin Roche, Geoff Sayer, John Schluter, RobertSimmons, Dang Kim Son, Hoang Xuan Thanh, Steve Thorne,Simon Ticehurst, Pauline Tiffen, Abera Tola, Wendel Trio, AlbertTucker, Mick Wheeler, Dereje Wordofa, and Luuk Zonneveld.The text was edited by Kate Raworth and David Wilson, and designed by Barney Haward.Some of the research contained in this report was produced with the financial assistance of the Commission of the EuropeanCommunity. The views expressed in it are those of the authors and, as such, do not represent the official point of view of the Commission.© Oxfam International 2002www.maketradefair.comadvocacy@oxfaminternational.org  AcknowledgementsSummary1.The crisis in coffee Crisis,what crisis?When coffee turns from boom to bust….The devastation ofcoffee communities and countries Families going hungryChildren forced out ofschoolWorsening healthcareDestitute seasonal workers and labourersGrowing attractions ofgrowing drugsFinancial crises for national economies 2.The roots ofthe crisis Market restructuring:from managed to flooded The breakdown ofthe managed marketEnter the giants:Brazil and Viet NamLagging demand Power imbalances in the market:penniless farmers,profiting roasters Where do all the profits go? Tracing the value chain...Roaster power:heavenly profits in the midst ofcrisisãBrand power ãCost controlãMix and match:flexible blendsãFutures markets:flexible financing New technology and techniques drive down quality New roaster technology:squeezing the last drop out ofthe beanToo much robusta,too little arabica… Intensive farming techniques reduce quality and degrade the land No alternatives:declining commodities and the failure ofrural development Lack ofalternatives to coffee as a cash cropDepending on declining commoditiesToo little value capturedFailure to deliver on rural developmentInadequate regulation Farmers’and workers’organisations under attackScarce informationToo little training and support Bad loans,no new creditWeak rural infrastructureDeclining aid and double standards:farmers betrayed by the donors 3.Niche markets – an escape route? Not for all Fair Trade:a glimmer ofhopeSpecialty brands capturing high valueRunning for the same exit?No grounds for inertia 4.Getting out ofcrisis:a strategy for action Restore the balance ofsupply and demandRestore quality and raise productivityRaise prices,revive livelihoodsRetain and build value-adding capacityEstablish real alternatives for rural developmentConclusionRecommendations:A Coffee Rescue Plan NotesBackground researchOxfam’s work with coffee producersOxfam International contact details 1 Contents  2 There is a crisis destroying the livelihoods of 25 million coffeeproducers around the world. The price of coffee has fallen by almost50 per cent in the past three years to a 30-year low. Long-termprospects are grim. Developing-country coffee farmers, mostly poorsmallholders, now sell their coffee beans for much less than theycost to produce – only 60 per cent of production costs in Viet Nam’sDak Lak Province, for example. Farmers sell at a heavy loss whilebranded coffee sells at a hefty profit. The coffee crisis has become adevelopment disaster whose impacts will be felt for a long time. Families dependent on the money generated by coffee are pullingtheir children, especially girls, out of school. They can no longerafford basic medicines, and are cutting back on food. Beyondfarming families, coffee traders are going out of business. Nationaleconomies are suffering and some banks are collapsing.Government funds are being squeezed dry, putting pressure onhealth and education and forcing governments further into debt.The scale of the solution needs to be commensurate with the scaleof the crisis. A Coffee Rescue Plan, which brings together all themajor players in the coffee trade, is needed to make the coffeemarket benefit the poor as well as the rich. This is about more thancoffee. It is a key element in the global challenge to make trade fair.The coffee market is failing. It is failing producers on small familyfarms for whom coffee used to make money. It is failing localexporters and entrepreneurs who are going to the wall in the face of fierce international competition. And it is failing governments thathad encouraged coffee production to increase export earnings.Ten years ago producer-country exports captured one-third of thevalue of the coffee market. Today, they capture less than ten percent. Over the last five years the value of coffee exports has fallen byUS$4bn; compare this with total debt repayments by Honduras,Viet Nam, and Ethiopia in 1999 and 2000 of US$4.7bn.The coffee market will also, arguably, end up failing the giant coffee-processing companies, at present so adept at turning green beansinto greenbacks. The big four coffee roasters, Kraft, Nestlé, Procter& Gamble, and Sara Lee, each have coffee brands worth US$1bn ormore in annual sales. Together with German giant Tchibo, they buyalmost half the world’s coffee beans each year. Profit margins arehigh – Nestlé has made an estimated 26 per cent profit margin oninstant coffee. Sara Lee’s coffee profits are estimated to be nearly 17 per cent – a very high figure compared with other food and drinkbrands. If everyone in the supply chain were benefiting this wouldnot matter. As it is, with farmers getting a price that is below thecosts of production, the companies’ booming business is being paidfor by some of the poorest people in the world.Paying prices as low as they can go – whatever the consequences for farmers – is a dangerous business strategy in the long term. Andeven in the short term it does not help the business interests of theproducers of instant coffee. It is particularly risky given that thesecompanies depend on the goodwill of consumers. The rise of FairTrade sales in recent years has demonstrated that consumers careabout the misery of those who produce the goods they buy. The coffee industry is in the process of a radical and, for many,extremely painful overhaul. It has been transformed from amanaged market, in which governments played an active role bothnationally and internationally, to a free-market system, in whichanyone can participate and in which the market itself sets the coffeeprice. Recently this has brought very cheap raw material prices forthe giant coffee companies.At the same time, Viet Nam has made a dramatic entry into themarket and Brazil has increased its already substantial production.The result is that more coffee is being produced and more lowerquality coffee traded, leading to a cataclysmic price fall for farmers.Eight per cent more coffee is currently being produced thanconsumed. In the meantime coffee companies have been slow to comply with what one of them identified as being their coreresponsibility within the current crisis: the generation of demandfor coffee. The current growth rate of 1-1.5 per cent per year indemand is easily outstripped by a more than two per cent increase in supply.Despite the stagnant consumer market, the coffee companies arelaughing all the way to the bank. In the free market their globalreach gives them unprecedented options. Today’s standardisedcoffee blends may be a mix of coffees from as many as 20 differentcoffee types. Sophisticated risk management and hedging allowsthe companies, at the click of a computer mouse, to buy from thelowest-cost producer to mix these blends.At the other end of the value chain the market does not feel so free.Without roads or transport to local markets, without technical back-up, credit, or information about prices, the vast majority of farmersare at the mercy of itinerant traders offering a ’take it or leave it’price. Their obvious move out of coffee and into something else isfraught with problems. It requires money that they don’t have and Summary
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