...Kopi Luwak, the expensive coffee famous for its sojourn through the digestive tract of the Asian palm civet, is coffee “from assholes for assholes.” ...
isn't there a rather broad assumption made by an economist to assume that lower prices would bolster worldwide demand and buoy the coffee industry, that quality would remain stable?
If I remember correctly it was maintaining a low price point that nearly killed the coffee industry, and saw consumption of coffee drop throughout the middle of the twentieth century because quality continued to slide.
I'd also like to point out that Correa do Lago's arguments certainly make the Fair Trade vs Direct Trade debate a whole lot more interesting!
The commonly told story arc has commodity-grade Folgers giving way to status-conscious Starbucks and then to responsible, high-quality estate brews, and assumes by implication that someday soon most coffee will be sustainable and “good.”
The crux of farmers’ well-being, Correa do Lago says, is consumer demand. Coffee farmers in Brazil can — and have — made extraordinary gains in productivity, he said, but if consumer demand doesn’t increase along with more efficient production, then farmers don’t see any benefit. Instead, wealth is transferred to consumers by way of oversupply and lower prices.
The way to benefit broad swaths of coffee farmers — and thus make the market as a whole more sustainable — is to increase consumer demand. This, of course, isn’t done by raising the price of a cappuccino; it’s done by lowering it. To that end, Correa do Lago also criticizes coffee industry groups that worry more about how to divide the coffee cake — specialty versus commodity, robusta versus arabica — instead of devoting their muscle to making the entire cake bigger.
I asked Correa do Lago if this is an argument for artificially lowering retail prices. He insists that it isn’t. Instead, he suggests that the open market for coffee be made more transparent. If green coffee prices were widely published the way Americans keep track of their other biggest import — the barrel price of crude oil — then consumers would come to expect a cheaper cup of coffee when those commodity prices tracked lower, and retailers would have to offer those savings the same way public pressure helps push down gasoline prices at the pump.
As it is, commodity coffee giants such as Nestle have the clout and market share to buy huge amounts of green coffee at the going price, then hold steady or increase what it charges consumers even while green prices plummet. This, of course, fattens company profits and could actually be abetted by a specialty coffee sector that’s helping to create the expectation for higher retail prices.
This vast inequality of wealth continues unfettered while direct-trade coffee relationships create the illusion that the industry has “arrived” at fair farmer compensation, Correa do Lago told me. What’s more, he believes that most direct-trade contracts actually provide only minimal gains for individual farmers, year-to-year.
(c) not only is the current trend in the opposite direction, but -- and this is where i'm uncertain -- the expectation specialty coffee creates of higher retail prices may actually contribute to the dampening of demand. i mean, just look at all the new york times articles about this crowd in the past year. although specialty is still a drop in the bucket in real dollar terms, it's cultural effect could be much larger on price expectations.
(a) you can't just do without C-grade coffee -- economically and morally. economically, this is the vast majority of the market, and so putting farmers out of business en masse would have major ripple effects, to say the least. the effects on specialty coffee would be hard to anticipate but almost surely unpleasant. (look to the subprime crisis for a basic economic example.) morally, we heard numerous tales from those who work in kenya, burundi and guatemala of farmers who stay in the business despite making no money. why? because there's literally nothing else to do. my immediate family lives in chad, in central africa, which is one of the few countries in that latitudinal belt of africa not growing coffee. and i can tell you: vast numbers of people sit around there and do absolutely nothing. so it's not at all a stretch to say that, if they can't grow coffee, many of them simply wouldn't do anything. this would be catastrophic. obviously, the coffee market as a whole (not specialty per se) is riding on the backs of these people. so there's moral responsibility there.
bz wrote:the argument i heard is much broader, and it's this:
(a) you can't just do without C-grade coffee -- economically and morally.
Peter G wrote:Exhibit a: total coffee consumption declined steadily from the early '60s to the late '80s, a period of time that corresponded to the increase of robusta percentages in commercially available coffee. Coffee got cheaper (in real dollars) and tasted nastier, and consumers switched to soda in droves.
Many economists have apparently looked at coffee as a caffeine delivery system, and made the assumption that caffeine addicts will use more caffeine if they can acquire it for a lower price. The market place of the '70s and '80s gives lie to this. Not only did coffee get cheaper by the pound, but the producers of coffee beverages (offices, restaurants, fast food joints) prepared cheaper and cheaper cups using less and less coffee (resulting in worse and worse tasting beverages) and people left in droves. Coffee consumption went down because it tasted bad.
Let me address the last idea first: that direct trade relationships create the illusion that the problems have been solved. It’s an interesting concept: that the existence of the Direct Trade model makes consumers assume that ALL coffee is sourced in that manner. Do we observe that to be true? This seems to be the only mechanism within Do Lago’s argument where Direct Trade is somehow damaging to all coffee producers.
The reality is that specialty coffee is an ENTIRELY DIFFERENT PRODUCT than commodity coffee. Making this argument is like saying that the existence of fine restaurant makes McDonalds seem more expensive than it actually is.
It bears pointing out that Do Lago is coming from a very Brazil-centric position. In Brazil, the majority of coffee is grown by very large farms which are technified to some degree. To him, the commodity approach is logical.
... remember that C grade coffee is the BEST coffee that is usually included in supermarket blends and diner coffee, the rest being under-grade coffee purchased for cheaper, including “coffee byproducts” used to stretch coffee. This adulteration is done in the name of lower consumer prices, and is defended as a strategy to keep demand high by keeping prices low.
... you CAN do without C grade coffee. Imagine, if the majority of the U.S. was consuming 3.00 cups of delicious coffee in restaurants, cafes, and at home; if this coffee was being sourced for fair prices from co-ops in Africa, Latin America and Indonesia….the world would be a lot better place.
Overall demand is shrinking (bad news for Brazil) but quality demand is increasing (good news for Burundi and the rest). This is nothing new, Starbucks is already buying a bunch of coffee from Burundi, at very good prices.
From a market perspective, there seems to be no future in commercial-type coffee. The main consumers of this type of coffee are aging dramatically: my grandparents drank MJB but my baby-boomer father does not. Certainly, there is no reliable consumption of commodity-grade coffee by generations X or Y. They seem to either drink specialty coffee or none at all. In all markets, all-arabica, high quality coffees are more commercially successful, even at a higher consumer price.
There is an excellent parallel in the wine world. As California wine produces got better and better at producing good quality wines, they were able to push up consumption and price simultaneously. Again, as Peter so accurately points out, there are commodities that are without any gradients of quality from the consumer perspective - oil, soybeans, hard wheat - and there are consumer products that are highly differentiated. Regarding coffee as the former leads to perilously inaccurate modeling for coffee markets.
Guatemalan exports have switched to 85% HB and SHB qualities, with PW Guats nearly non-existent. This is no fun for the former PW producers, but speaks volumes to the markets ability to sort out the highest and best uses for land. (That ought to spark some conversation).
Not yet mentioned is that the fastest changing factor in supply and demand which is encouraged by most coffee producing countries is increased consumption at origin. Brazil and Guatemala are doing a lot to encourage this. In Brazils case while their production, so is their population.
What a lot of academics forget when talking about the pricing and demand etc is that they are applying the assumption that the producer can switch to other products in much the same manner that the same academic changes underpants, alas it aint that simple, and that is where the problems and arguments come into play.
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