The commodity coffee market is unlike any other. At first glance it is not very different than gold, corn, oil or any other commodity traded on the global markets. Prices rise and drop, people invest, hedge, win and lose. However, there is one significant difference. Unlike the other products, coffee is not produced by a handful of large agricultural or mining companies. Rather the contrary, coffee is produced by an estimated 25 million smallholding producers which results in a total of 200 million people directly and indirectly dependant on coffee; that’s almost 3% of the world population (Conroy, 2001).
The fact that such a large amount of people are dependent on coffee could be a good thing; if coffee production were a lucrative business to be in. But, let me break it to you; it is not. Producing coffee is not profitable because it was never meant to be. Coffee spread around the world through European colonization in the seventeenth and eighteenth century with little regard to the ethical implications of this trade. Coffee roasting and retailing has always been and still is the most lucrative part of the value chain.
However, the (not so) glorious days of the colonies are long gone and slavery has been abandoned for centuries (right?). This does not take away that the principles of the trade have not changed. Although the coffee plantations are not foreign-owned anymore, the trade is still based on cheap extraction of raw materials and huge profits on the processing and retails side of things.
The cost of production of a pound of coffee and the global market price for a pound of coffee are almost on par. For a couple of months a coffee producer might be able to earn a few cents on a pound of coffee but on other occasions it might actually cost him or her money to produce it. One might argue that this is the nature of doing business, but there is one major difference.
A coffee producer is deeply intertwined with the coffee plantation in every single aspect of life. All cash flow has to account for everything; personal and business. There is little or no social security to protect a coffee farmer in case the market price dips, or one of many threats affect to highly vulnerable coffee harvest. The only thing one can do in such an occasion is to tighten the belt.
To sum it all up: almost 3% of the world population is directly and indirectly dependent on coffee production for their livelihoods. However, coffee production was never meant to be profitable. Moreover, the cost of production often exceeds the price paid for coffee. Furthermore, coffee is a high risk crop and the finances are deeply intertwined with the producer’s personal lives. Lastly, there is no or little safety net in case things go south for the producer.
Check back later for part 2: fixing this problem.
Cheers,
Bram
