Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Background paper to World Bank Agricultural Technology Note 30, Toward more sustainable coffee, published June 2002. Coffee market trends Kristina Sorby, RDV The Coffee Crisis The crisis in the coffee commodity market affects foremost the 25 million small producers and the more than half a billion people that are directly or indirectly dependent on coffee. Coffee is the second largest export commodity in the world after oil and is exported from 52 countries in the south. The current crisis has evolved through a series of changes in the industry. Since the liberalization of the coffee market, the price volatility has amplified (Giovannucci et.al. 2002). The world production of coffee has risen dramatically in the past three years (see figure 1), mainly due to the production increase in the two world leading countries Brazil and Vietnam (see figure 2). Vietnam has for example increased production by 1400 % between 1990 and 2000, and Brazil has contributed even more than Vietnam to the global oversupply during the past five years. Both countries also have large numbers of trees in development, which will lead to an overproduction for at least the next 2-4 years. Figure 1. World Coffee Production:1968-2001 120,000 110,000 100,000 90,000 80,000 70,000 60,000 50,000 1968/69 1970/71 1972/73 1974/75 1976/77 1978/79 1980/81 1982/83 1984/85 1986/87 1988/89 1990/91 1992/93 1994/95 1996/97 1998/99 2000/01 This is an informal publication of the Agriculture and Rural Development Family of the World Bank. It is intended to encourage the exchange of ideas among Bank staff and all others interested in development issues. This paper carries the name of the author and should be used and cited accordingly. The findings, interpretations, and conclusions are the author s own and should not be attributed to the World Bank, its Board of Directors, its management, or any member countries.
Figure 2. Production changes from 1994/95 to 2000/01 (USDA data). 0'000's of 60 kg bags At the same time, the roasters and traders of coffee have concentrated into larger corporations, which increased market power on the demand side. A new technology of steaming the coffee bean has developed, and the roasters can now accept coffee of lower quality in the processing. These factors together has driven the price in the first months of 2002 down to a 100 year low (calculated with inflation). Figure 3 shows the coffee price development from 1983 to 2001. Figure 3. Coffee Prices: 1983-2001 200 150 100 50 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0-2,000-4,000 Colombia Ecuador Kenya El Salvador Uganda Honduras Mexico Peru Cameroon Guatemala Cote d'ivoire Oct-83 Oct-86 Oct-89 Oct-92 Oct-95 Oct-98 India Vietnam Brazil Market for sustainable coffee The global retail market value for certified sustainable coffee was in 1999/2000 around US$ 455 million. By including non-certified products, sold with a sustainability label, the 2
figure reaches US$ 530 million. Approximately 15-18 million pounds of certified organic coffee were exported globally, and including the trade of non-certified organic coffee, the amount is 21.2 million pounds. A 15-18% increase was estimated for the season of 2000/2001 (Giovannucci 2001). Sustainable coffee gives a considerable price premium to the farmer. The willingness of the consumer to pay extra for products that are produced in an environmentally and/or socially sustainable way, is transferred to a premium for the producer. Table 1 shows a few examples of either the price premiums received by the farmer, or the total price paid for the products. The Fair Trade premiums are set prices with a minimum premium of US$ 0.05, or US$ 0.15 for coffee that is also certified organic, if the coffee market price exceeds the set floor prices. The organic price follows the market price, but the price is in most cases significantly above local conventional price. Table 1. Price and/or premium development from 1999 2001 (US$) Production system 1999 2000 2001 Organic Premiums Ex. Guatemala local premiums - N/a (30% overprice) Ex. México local premiums - $28 /quintal** (45% overprice*) Shade-grown Price Ex. El Triunfo, Chiapas, Mexico (Shade-grown, Organic and Fair Trade certified) Fair Trade Prices (F.O.B.) Regular washed arabica; Central America, Mexico, Africa, Asia Certified organic washed arabica; Central America, Mexico, Africa, Asia Regular washed robusta; Central America, Mexico, Africa, Asia Certified organic washed robusta; Central America, Mexico, Africa, Asia $8.2 /quintal** (18% overprice*) $26 /quintal** (62.5% overprice*) - - $138 /100lb (March 2002) (108% overprice***) $126 /100lb (24% overprice) $141 /100lb (39% overprice) $110 /100lb (63% overprice) $125 /100lb (85% overprice) $126 /100lb (76% overprice) $141 /100lb (97% overprice) $110 /100lb (214% overprice) $125 /100lb (257% overprice) $126 /100lb (111% overprice) $141 /100lb (137% overprice) $110 /100lb (340% overprice) $125 /100lb (399% overprice) Average global coffee price (NY) - arabica $101.54 /100lb $71.43 /100lb $59.50 /100lb - robusta $67.64 /100lb $35.06 /100lb $25.05 /100lb N/a = Exact amount not available *Overprice compared to local conventional prices. **1 quintal = approx. 100 lb *** March 2002, Global coffee price, NY: US$ 66.38 /100lb Sources: Damiani, (2002) ; Damiani, (2001); Fair Trade Labeling Organizations International (2002); International Coffee Organization (2002). Latin America is the largest supplier of sustainable coffee. Giovannucci performed in 2001 a survey of the North American specialty coffee industry and the countries that the importers stated as their sources can be seen in figure 4. Mexico is the largest individual supplier, however, Guatemala, Costa Rica and Peru are also large suppliers of sustainable coffee. 3
Figure 4. Countries of origin for sustainable coffee. 70% 60% 50% 40% Organic coffee Fair Trade coffee Shade coffee 30% 20% 10% 0% Mexico Central America South America Asia Africa Other Don't know Source: Giovannucci (2001). Organic coffee in Mexico The area with organically produced crops in Mexico has grown at an average annual rate of 45 % between 1996 and 2000 (see figure 5), involving more than 33,000 farmers and over 100,000 hectares. Employment in organic agriculture grew by 45 %, and exports of organic products 42 %. About 70 % of the organic area is used for coffee production, representing 10.4 % of the total coffee area in Mexico. Exports reached US$ 32.6 million in 2000. Organic coffee is predominately grown by smallholders (average production area 2.5 hectares) of indigenous ethnicity in the southern states of Chiapas and Oaxaca. Organic coffee production in Mexico started in the 1980s, building on pioneering efforts of a few isolated middle size and foreign farmers with long term direct marketing links to specialized organic stores in Europe. While Mexico developed a vibrant organic agriculture, it had no government agency or program dealing specifically with the subject. However, many farmers were able to get grants, subsidized credits and technical assistance through regular rural development programs. Several farmer organizations of coffee producers emerged with the support of the Catholic Church, focusing on the adoption of technologies compatible with the local resources and on establishing direct marketing links (Damiani 2001). 4
Figure 5. Cultivation of organic coffee in Mexico (hectares) 80000 70000 60000 50000 40000 30000 20000 10000 0 1996 1998 Certified 2000 In transition 2000 Total 2000 Source: Damiani (2001), adapted from Gomez Cruz et.al. (2001). Future demand The total world production of coffee is estimated to reach 117 million bags in 2002/2003, while the world consumption will only reach 108 millions bags. With an oversupply of 8 million bags, the future market for conventional coffee is problematic and there is a large incentive for entering niche markets (PROCAFE 2001). The US National Coffee Association considers that sustainable coffees are important niches, but does not believe that it can be applied to the whole industry (Nelson 2002). The sales of organic products in Europe are, however, increasing by 23% per year and the WTO has predicted the percentage in the total food market in Germany to increase from 2% today to 10% in 2008 (Vildozo 2002). Table 2 shows how the market recognition and sales of Fair Trade coffee developed from its introduction in the country until 2000. Table 2. European Market Data for Fair Trade Coffee Country Years in Existance Retail Market Share Sales Metric Tons Market Recognition Holland 7 2.5% 3,000 90% Switzerland 4 5.0% 1,400 36% Germany 2 1.0% 5,000 23% Source: TransFair USA (2000). In Giovannucci s (2001) survey, the industry expected the market demand for sustainable coffee to either increase or remain the same over the next two years. For organic coffee, almost 60% in the industry believed that the demand would increase. An informal survey made by TransFair USA (2002), shows that 49% of specialty coffee drinkers would chose Fair Trade coffee, while 50% also said that they would pay $1.00 or more per pound for 5
Fair Trade coffee. Taste is the most important factor in coffee purchasing behavior why it is crucial that certified sustainable coffee is of high quality. References: Damiani, O. (2002): Organic agriculture in Guatemala : A study of producer organizations in the Cuchumatanes Highlands. Office of Evaluation and Studies, IFAD. Rome. Damiani, O. (2001): Organic agriculture in Mexico : Case studies of small farmer associations in Chiapas and the Yucatan Peninsula. Office of Evaluation and Studies, IFAD. Rome. (Draft) Fair Trade Labeling Organizations International (2002): Fair Trade. A viable alternative for small farmers. http://www.fairtrade.net/coffee.html (accessed April 23, 2002). Giovannucci, D. (2001): Sustainable Coffee Survey of the North American Specialty Coffee Industry. Conducted for: The Summit Foundation, The Nature Conservancy, North American Commission for Environmental Cooperation, Specialty Coffee Association of America, World Bank. Giovannucci, D., P. Varangis, B. Lewin (2002): Who Shall We Blame Today the International Politics of Coffee. Tee and Coffee Trade Journal, Vol 174, No. 1, Jan. 2002. International Coffee Organization (2002): ICO Indicator Prices, Monthly and Annual Averages 1999-2002. http://www.ico.org/frameset/priset.htm (accessed April 23, 2002). Nelson, R. (2002): Seminar at the World Bank. (accessed April 11, 2002). PROCAFE (2001): Differentiating Salvadorian Coffee. (Slideshow presented at the World Bank, October 2001) TransFair (2000): http://transfairusa.org/why/coffee.html (accessed March 28, 2002). Vildozo, D. (2002): Certification of Organic Foodstuffs in Developing Countries. Seminar at the World Bank ESSD week, April 11, 2002. 6