The Future of Coffee as a Commodity Trade - Essay Example

Critical Assessment Of The Future Of Coffee As A Commodity Trade The "invisible hand" in Economics according to Adam Smith (1776) plays a very concrete role when it comes to finding balance between supply and demand. In the case of coffee as a commodity in a global market, this needed balance hasn't been accomplished in the last years. Factors like prices and market share have produced an overall imbalance between the supply and the demand of coffee and its trade as a commodity has been deeply affected threatening to produce more poverty on Least Developed Countries (LDCs) and developing countries alike. This issue has been addressed by a diverse array of institutions with different approaches in order to find adequate solutions to short-term and long-term conditions of the coffee market as a commodity that is mainly produced in LCDs and developing countries where the levels of poverty are pretty high. The Food and Agriculture Organization (FAO). (2004) published a report entitled "The state of agricultural commodity markets 2004" with the main concern of addressing the issue of agricultural commodity economies with the intention of finding workable solutions to the challenges ahead. Jacques Diouf, FAO Director-General, stated the following in the Foreword: "The price of coffee plummeted 70 percent between 1997 and 2001, threatening the livelihoods of an estimated 25 million people who depend on coffee and triggering food emergencies in several countries in Africa and Central America." (Food and Agriculture Organization, 2004). This is really a very critical situation. There are several reasons behind it. It is a complex problem that has to be assessed from a multi-lateral perspective taking into account all the stakeholders, especially the small farmers in LDCs and developing countries. In its report, FAO acknowledges the greater productivity of the coffee sector. At the same time it points out that the main beneficiaries are the developed countries producers and consumers: "Advances in agricultural productivity through improved technology potentially benefit both producers and consumers. The former stand to gain from lower costs and improved competitiveness, and the latter from lower prices. But it has mainly been producers in better-endowed and more-developed regions that have been able to take advantage of productivity gains to strengthen their position on world markets." (Food and Agriculture Organization, 2004). The FAO report also addresses the issue of concentration of a few big companies in the global market. This troublesome factor in the overall scenario of commodity trading is stated as follows: "Another development in agricultural commodity markets has been the increasing concentration of market power in the hands of a few transnational corporations. Just three companies now control almost half the coffee roasting in the world, for example, and the 30 largest supermarket chains control almost one-third of grocery sales worldwide." (Food and Agriculture Organization, 2004). Daniele Giovannucci, Bryan Lewin and Panayotis Varangis published a report for the World Bank entitled "Coffee markets: New paradigms in global supply and demand". Among their findings, the following statements picture a negative situation for producers in LCDs and developing countries regarding coffee economic viability: "Most of the world's coffee is produced by smallholders utilizing just a few hectares of land. In the past year, many reports have confirmed the heavy toll on farmers that have had to sell below cost or even give up their coffee farms because current prices do not even cover the most basic costs of harvesting and transport to market, and estimate economic losses for small coffee farmers at US$4.5 billion per year." (Giovannucci, Lewin, & Varangis, 2004). These losses are extremely burdensome for small farmers who mostly live in LDCs and developing countries. Finding a solution by raising prices has its ups and downs as can be seen in an article about commodity trade published in the Encyclopedia Britannica: "Attempts by some developing countries to raise prices, however, can induce other developing countries to increase their output. For example, African coffee production was stimulated when Latin-American countries took steps to raise the price of their coffee." (Commodity Trade, 2006). So this kind of solution won't solve the problem at hand if additional steps are not taken into account. Coffee viability in the commodity trading scene requires multiple actions at several levels of implementation according to the characteristics of the producing and consuming countries interacting in a global market. As the Natural Resources Institute (NRI) stated in its report "Commodity trade in World markets" competitiveness should be considered as a more serious problem rather than pricing: "Loss of market share by LDCs is of even greater concern. These countries, three-quarters of them in sub-Saharan Africa, have suffered more from loss of market share than from adverse movements in their commodity terms of trade. Competitiveness on world commodity markets is therefore considered to be even more important than stable or improved commodity prices." (Natural Resources Institute, 2003). On the other hand, trading "can be a powerful engine for poverty reduction. But rigged trade rules and double standards too often mean it now hurts poor people's livelihoods." (Oxfam, 2006a). Oxfam is a not-for-profit organization that encourages a wide variety of alternatives to poverty reduction. Oxfam gives the account of different initiatives in the coffee trading sector as follows: "Over the past two decades, the private sector, NGOs, and consumers have responded to the sustainability challenges facing coffee producers through a variety of multi-stakeholder, market-based initiatives. Certification systems like Fair Trade, Organic, Utz Kapeh, and Rainforest Alliance have consistently recorded growth that far exceeds that of the overall coffee market." (Oxfam, 2006b). All of these initiatives have had positive effects on the coffee market worldwide, but none of them has been able to solve the problem of coffee trade appropriately due to the complexity of the market trends and the uncertainties facing the coffee business in itself as an agricultural commodity. World of Good Development Organization has also tried to address the coffee issue with the fair trade practice. The fair trade movement is a way of meeting the challenges of the free market liberalization at the international level. This movement began in Europe 44 years ago in order to create sustainability for the very small producers through several kinds of actions. (World of Good Development Organization, 2002). The World of Good Development Organization gives the account on how the fair trade movement is inserting itself in the United States as follows: "This trend is making its way over to the US slowly but surely. American consumers are increasingly concerned about the origin and the environmental and social footprint of their purchases. This "Fair Trade" movement is growing similar to the Organic industry, which began as a fringe movement but is now a global industry worth $23B (2002, Organic Monitor)." (World of Good Development Organization, 2002). One example of a fair trade company is Grounds for Change. This company follows strict quality standards: "All of our coffee is Fair Trade Certified by TransFair USA and our Organic Certification meets the stringent Organic Processor Standards enforced by the United States Federal Government and the Washington State Department of Agriculture. The coffee we sell is also Shade Grown Coffee which ensures healthy habitat for migratory birds." (Grounds for Change, 2006). The International Fair Trade Association (IFAT) (2006a) is committed to help poor producers get a better price for their coffee, and their efforts are backed by consumers who pay a little higher price for the Fair Trade products with the FTO Mark. (International Fair Trade Association, 2006a). Its key principles of Fair Trade are the following: "1.- Creating opportunities for economically disadvantaged producers. 2.- Transparency and accountability. 3.- Capacity building. 4.- Payment of a fair price. 5.- Gender Equity. 6.- Working conditions. 7.- The environment." (International Fair Trade Association, 2006b). The Fair Trade Foundation names some factors that produce problems for smallholder farmers. Among them the Fair Trade Foundation enumerates "price, access to markets, land, quality, and a lack of affordable credit." (The Fair Trade Foundation, 2002, p. 14.). On the other hand, the International Coffee Organization is "an intergovernmental organization established by the United Nations in 1962, including both producing and consuming Member countries." (International Coffee Organization, 2002). The International Coffee Organization recognizes the problem that there is not a widespread awareness of the issue concerning coffee commodity trading in the developed countries. (International Coffee Organization, 2002). In 2001, the International Coffee Agreement with signed by Member states: "One of the objectives of the International Coffee Agreement 2001 is to encourage Members to develop a sustainable coffee economy. This is reinforced by Article 39, which refers to the principles of Agenda 21 agreed at the United Nations Conference on Environment and Development, requiring sustainability to be considered in the context of economic, social and environmental aspects." (International Coffee Organization, 2001). The actions to be taken by the International Coffee Agreement 2001 are addressed to the supply and demand sides as follows: "Supply side: 1.- Quality improvement. 2.- Diversification. 3.- Production monitoring. Demand side: 1.- Promotion. 2.- Barriers to trade." (International Coffee Organization, 2002) But the International Coffee Organization is aware of the challenges ahead when it comes to addressing efficiently the coffee crisis as Nstor Osorio, Executive Director, stated: "Promoting diversification to reduce excessive dependence on coffee through support for appropriate diversification projects. It was recognised that this required substantial reduction of current tariffs and subsidies protecting agriculture in industrialized countries to secure market access for alternative products." (International Coffee Organization, 2003, p. 2.). The Common Fund for Commodities works in the field of policy making to solve the coffee crisis: "The measures and actions supported by the Fund in the coffee sector cover areas such as production and productivity improvement, value addition, finding new markets, introducing new trading systems, improving access to finance through structured trade finance and piloting innovative credit schemes." (Common Fund for Commodities, 2005, p. 3.). On the other hand, Alex Singleton, Director of the Globalisation Institute, is very critical of the World Bank and Fair Trade practices as he thinks that they are not helping appropriately in the solution to the coffee dilemma. Singleton agrees on the importance of coffee in the development and sustainability of the developing countries, but he also spots some of its problems: "Coffee, a totemic product for the development community, is a product where many producers have suffered from lowering prices. Massive overproduction, caused largely by mechanisation in Brazil and the rise of Vietnam as a major producer, has had its effect on prices." (Singleton, 2006a). As a solution, Singleton proposes a development agenda for coffee taking into account the following issues: "We need a development agenda for coffee farmers to help them win more of the value available from a bag of coffee sold in British supermarkets. Why don't we have coffee farmers process and package the product they are growing, stick their own trademark on it and then sell it direct to Western supermarkets We also need to help farmers to mechanise as much as possible to increase their productivity, helping living standards to rise." (Singleton, 2006b). As an example Singleton names Caf Britt, which has been in the market for the past 20 years following those characteristics mentioned by him. (Singleton, 2006c). Singleton points out some of the reasons behind the coffee crisis as follows: "The low price for coffee is partly free-market caused. Coffee farmers in Brazil mechanized - they "substituted capital for labour". According to Oxfam, five people and a machine can produce the same output in Brazil as five hundred people in Guatemala. The other major cause of lower prices is the World Bank. It used loans to encourage South American farmers to switch from growing cocoa to coffee." (Singleton, 2005). But according to the World Bank its "involvement in coffee, contrary to some press reports, is to help sustain existing plantations, no to expand them, and in some cases, to help producers diversify their production." (World Bank, 2002, p. 1.). Singleton is also very critical on the Fair Trade practices when he states the following: "But in economics, it is important to look at both the seen and unseen consequences. To the extent that Fair Trade is successful, it also has a negative effect on the price of coffee. By encouraging coffee farmers to stay in the market and increase production, it leads to further oversupply in the market. This has a downward effect on the incomes of farmers not on the scheme." (Singleton, 2005). The joint effort by UNCTAD and IISD has produced a comprehensive diagnosis of the coffee crisis. They arrived at the following conclusion: "The development of a multi-stakeholder, participatory platform for cooperation, coordination, project development, research and policy generation, under the auspices of a Sustainable Coffee Partnership, promises to provide a direct path for the development of practical, targeted sustainability strategies and policy ultimately leading to improved efficiency in the coffee market." (UNCTAD & IISD, 2002, p. 10). Their position is very eclectic and seems to be viable in the near future along the solutions provided by Fair Trade, the World Bank and the Globalisation Institute. All of these solutions has to be taken into account at the time of making decisions in the coffee industry. Diversification is a good alternative as well as eliminating subsidies in the agricultural sector in developed countries. In the long run, the "invisible hand" of Adam Smith (1776) might play its role in balancing the supply and the demand in the coffee market when the most viable and sustainable solutions are taken into consideration by all the stakeholders. References Commodity Trade (2006). In Encyclopedia Britannica Premium Service. (online). Available from http://www.britannica.com/eb/article-8671 . (Accessed June 10, 2006). Common Fund for Commodities. (2005, 23-25 September). Coffee policies in a market economy: A perspective from the Common Fund for Commodities. 2nd World Coffee Conference - Session II. Ambassador Ali Mchumo, Managing Director. Hotel Pestana, Salvador, Bahia, Brazil. Food and Agriculture Organization (FAO). (2004). The state of agricultural commodity markets 2004. (online). Jacques Diouf, FAO Director-General. Economic and Social Department. FAO Corporate Document Repository. Available from.http://www.fao.org//docrep/007/y5419e/y5419e00.HTM . (Accessed June 10, 2006). Giovannucci, D.; Lewin, B.; Varangis, P. (2004, March 1). Coffee markets: New paradigms in global supply and demand. (online). Report Number: 28300. World Bank. Available from http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTARD/0,,contentMDK:20451171pagePK:148956piPK:216618theSitePK:336682,00.html (Accessed June 10, 2006). Grounds For Change. (2006). "About Us". (online). Available from http://www.groundsforchange.com/learn/index.php. (Accessed June 17, 2006). International Coffee Organization. (2003, May 27). Action to address the coffee crisis. Nstor Osorio, Executive Director. Subcommission to the G-8 Summit, Evian, France, June 2003. Published in London. International Coffee Organization (ICO). (2001). Developing a sustainable coffee economy. (online). Available form http://www.ico.org/sustainable_coffee.asp. (Accessed June 10, 2006). International Coffee Organization (ICO). (2002, August 28). Global Coffee Crisis: A threat to sustainable development. (online). 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Available from http://www.oxfam.org.uk/what_we_do/issues/trade/introduction.htm. (Accessed June 10, 2006). Singleton, A. (2006a, March 12). A development agenda for coffee. (online). In Globalisation Institute. Available from http://www.globalisationinstitute.org/blog/agriculture/a-development-agenda-for-coffee-20060312572/ (Accessed June 9, 2006). Singleton, A. (2006c, March 17). Coffee that really helps development. (online). In Globalisation Institute. Available from http://www.globalisationinstitute.org/blog/agriculture/coffee-that-really-helps-development-20060317601/. (Accessed June 9, 2006). Singleton, A. (2006b, March 13). Development agenda needed for coffee. (online). In Globalisation Institute. Available from http://www.globalisationinstitute.org/press/press-release/development-agenda-needed-for-coffee-20060313573/ (Accessed June 9, 2006). Singleton, A. (2005, January 17). Is Fairtrade coffee a good idea. (online). In Globalisation Institute. Available fromhttp://www.globalisationinstitute.org/blog/agriculture/is-fairtrade-coffee-a-good-idea-2005011729/ (Accessed June 9, 2006). Smith, Adam. (1776). The Wealth of Nations. Vol. IV, chapter 2, p.10. 456 of the 1976 Glasgow Edition. The Fair Trade Foundation. (2002). Spilling the Bean on the Coffee Trade. (online). Available from http://www.fairtrade.org.uk/downloads/pdf/spilling_the_beans.pdf. (Accessed 9 June, 2006). UNCTAD & IISD. (2002, December 1). Building a sustainable coffee sector using market-based approaches: The role of multi-stakeholder cooperation. (online). United Nations Conference on Trade and Development (UNCTAD) and International Institute for Sustainable Development (IISD). Available from http://dev.ico.org/documents/sustain1.pdf. (Accessed June 10, 2006). World Bank. (2002). The World Bank and Coffee. Press backgrounder. World of Good Development Organization. (2002). (online). Available from http://www.worldofgood.org/resources/. (Accessed June 10, 2006). 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