A Producer’s Perspective: Challenges Across the Coffee Value Chain

Editor’s note: Next month, the global coffee industry will gather in Medellin for the World Coffee Producers Forum to explore how to strengthen farmers, discussing sustainability, labor, managing price volatility, and improving productivity and yields.  Here, Frederick Kawuma, Secretary General of the Inter African Coffee Organization (IACO), sets the stage for these discussions by providing an overview from the producers’ perspective.

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Coffee farmer Feleke Dukamo checks the latest coffee prices. Source: Wikimedia Commons

By Frederick Kawuma, Secretary General of the Inter African Coffee Organization (IACO)

There has recently been a spate of studies analyzing the income of coffee farmers. The first thing that becomes evident is that the income from coffee farming varies depending on the country, and even the region within the country, where the studies have been done.

The second thing that becomes evident is that the income from coffee farming depends on the price the farmer gets for his coffee, which depends on “the market.”

So what is “the market”?

According to Investopedia, a market is:

1. A market is a medium that allows buyers and sellers of a specific good or service to interact in order to facilitate an exchange. This type of market may either be a physical marketplace where people come together to exchange goods and services in person, as in a bazaar or shopping center, or a virtual market wherein buyers and sellers do not [physically] interact, as in an online market.

2. The general market where securities (or commodities) are traded. This form of the term may also refer to specific securities markets and may take place in person or online.

3. People with the desire and ability to buy a specific product or service.

For the coffee farmer, the ultimate meaning of “the market” is the price received for his goods. It can be offered by international traders or even roasters in some instances, but usually the price the farmer receives comes from some kind of intermediary, be it an organized exchange or local brokers.

According to economic theory, the price is set by the supply and demand for a good. For coffee, we have the ICE New York “C” contract and the London Robusta contract that serve as proxies for the global supply and demand for Arabica and Robusta coffee, respectively. But both these contracts are financial instruments, not coffee per se. These financial instruments are used by professional coffee people (including some growers) to offset price risk but they are also used by professional investors who make a living from “buying low and selling high.”

For instance, the volume of futures contracts traded on the ICE “C” contract for 2016 (note: this is futures only, no options included and only NY “C”, no Robusta contracts) was 9,856,314 contracts. At approximately 250 bags equivalent per contract, that represents 2,464,078,500 bags or about 16 times more than all the 155 million bags produced globally.

How can we characterize these financial instruments as being representative of the supply and demand for coffee – and should we continue using them as proxies for setting the price for our coffee?

As producers, we must rely on the information available to us. Back in the old days, we relied on coded cables, then the telex machines, telephones with direct dialing. Now we have texting, AIM/AOL, Skype, WhatsApp – and instant gratification.

It used to take days to send a bid and get a reply, sometimes a week or more depending on how close the farm was to the central post office. Now the information and disinformation flow back and forth incessantly.

But one piece of information we know we can rely on is that the coffee business has grown and continues to grow, but many producers still receive the same income as we did 40 years ago.

A recent Economic Impact study published by the National Coffee Association of USA noted that:

  • The total economic impact of the coffee industry in the United States in 2015 was $225.2 billion
  • Coffee-related economic activity comprises approximately 1.6% of the total U.S. gross domestic product
  • Consumers spent $74.2 billion on coffee in 2015.
  • The coffee industry is responsible for 1,694,710 jobs in the US economy.
  • The coffee industry generates nearly $28 billion in taxes (including ancillary goods).”

And according to research from the International Coffee Organization done in 2014 (source: ICO ICC 111-5 Rev.1 24 February 2014):

  • An aggregation of total consumption value gives an estimated gross value of US $173.4 billion in all exporting and importing countries in 2012
  • From 2000 to 2012, theoretical gross earnings by producers totaled US$11.6 billion for an average annual production of 121.8 million bags.

From the producer’s perspective,  we need to somehow increase the flow of income to producers. Growing coffee must be a profitable endeavor for everyone.

Otherwise, fewer and fewer of us will be able to continue growing coffee, and our children will leave for greener pastures in other more promising sectors of the economy.

How can the coffee industry work together to  support the livelihoods of producers at origin? Share your thoughts in the comments below. 

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