A Brief History of the Coffee Crop & Direct Trade
At Everyday Joe’s, we brew the beans of Intelligentsia Coffee out of Chicago. We made the switch to them about 9 months ago, and haven’t regretted a minute of it. Much of our delight is due to their beliefs about the way coffee farmers should be treated. Read below for more in this short essay by Geoff Watts, Intelligentsia’s VP of coffee.Hola:
With all the activity in the coffee marketplace these last weeks, I think it is a good time to reflect a little bit on the industry and coffee valuation.
Let’s start with a quick history. Coffee has long been an important crop for international trade as far back as the 19th century, and many countries around the world still depend on coffee as their principle source of agricultural export income. By the early 1900′s coffee had come to represent more than half of the total exports in places like Brazil, Guatemala, El Salvador, and Nicaragua. Today, it is one of the most heavily traded commodities on world markets.
The way coffee has been valued over the years, however, has changed dramatically. In recognition of the importance of this product, a commodity exchange was set up to trade coffee futures in the early 1800′s. From the early Arabic coffee monopolies in the 17th century to the Brazilian land barons of the 19th century, there have always been individuals or organizations on the supply-side whose activities have had a huge global impact on pricing, but the tension between supply and demand generally kept it in balance. This situation continued unimpeded until the 1950′s when a huge and unprecedented price spike led to an over-planting of coffee trees. This excess supply then caused a major shift in the supply-demand equation. Prices dropped because of over-production, and in 1963 the International Coffee Organization came into being as a way to regulate the trade.
In the early sixties a quota system was established that induced producing countries to withhold supplies and limit production whenever volumes rose. The idea was to keep prices relatively stable and to avoid years of massive over-supply that could cripple the economies of the developing nations who relied on export income from coffee. Some say that US participation in the agreement (at the time the most important coffee-consuming country in the world) was motivated in part by Cold War fears and the belief that economically struggling Latin American countries could be pushed towards communism. There could be some truth to this as the US coincidentally withdrew its support for the agreement in 1989, just after the fall of the Berlin wall and the “end” of the Cold War.
The quota system did help keep the market fairly stable, but it was still subject to some significant ups and downs despite the price regulation mechanisms. In 1973 prices rose dramatically, and the quota system collapsed in the face of a rising market. In 1975 the famous Brazilian “black frost” drove prices through the roof, again leading to more intense planting in the following years. Predictably, supply went up again several years later and the market crashed, leading to a reintroduction of quotas in the eighties. At that point a trigger system was established whereby the quotas would turn on and off at certain pre-selected world production volumes. In 1986 the upper level trigger went off and quotas were again dropped, only to be reintroduced at the end of the year. They stayed in place until the US withdrawal in ’89.
Here’s a look at the International Coffee Agreement from 1983:
“…a system of export quotas operated when necessary to secure price stability within ranges agreed annually by exporting and importing Members at meetings of the International Coffee Council. Quotas were suspended if prices rose above certain levels and subsequently reintroduced if prices fell. The quota system operated in such a way that consideration was given, in setting individual quotas, to past export performance and to the stocks of coffee held in exporting Member countries. The export quota system was supported by an obligatory system of controls.
Each export by a Member was covered by a Certificate of Origin. Importing Members did not admit coffee from Members unless the Certificate was validated by coffee export stamps issued by the Organization. When quotas were in effect, importing Members were required to limit their imports from non-members and exports to non-members were closely monitored. Carry-over stocks of coffee in each exporting Member country were verified annually, involving the physical counting of stocks in many hundreds of warehouses scattered throughout the territories of producing countries.
The verification took place at the end of the crop year of each country. The Council was required to coordinate national production policies to achieve a reasonable balance between world supply and demand, and there was a Fund for the promotion of consumption financed by exporting Members. Promotional campaigns were conducted in the major importing countries in cooperation with the trade and the resources of the Fund were used to sponsor research and studies related to the consumption of coffee, especially in the United States of America and Europe. The Promotion Fund financed coffee centers, scientific research and training programs to help improve the quality of coffee and its general image. In the 20 years during which promotion activities were financed by a Fund, exporting Members contributed some US$100 million.”
You can see that everything revolves around supply and demand issues and price controls. A lot changed in the ensuing years, and here’s a look at the 1994 version of the agreement that came into being after the quota system was abandoned completely:
“…encouraging Members to develop a sustainable coffee economy promoting coffee consumption; promoting quality of coffee; providing a forum for the private sector; promoting training and information programs designed to assist the transfer of technology relevant to Member countries; analyzing and advising on the preparation of projects to the benefit of the world coffee economy.”
The coffee trade moved along in the 90′s and the market began to change dramatically as Specialty coffee took off and the world got to know Starbucks. Prices went up and down a lot as the market became more volatile during a period of changing consumption patterns and changing political economies at origin. Then in 1999 the collapse came, known today as the “Coffee Crisis”. Ups and downs had become normal, but this was the first time the depression was sustained for so many consecutive years. It crippled the industry. Many farms went out of business, coffee quality diminished, and we saw all sorts of reactions from the increasing popularity of certification systems like Fair Trade to new hedging strategies and increased interest in the futures market on the part of fund speculators.
For four more years the prices stayed in the gutter and producers scrambled to survive. Many abandoned their farms and moved to the cities. Bank foreclosures were common. It was a terrible time to be a coffee grower. A big part of the problem was the introduction of cheap Vietnamese Robusta coffees. That country received a lot of donor money and loans to rebuild after the war, and it invested hugely in coffee production. The US lifted their trade embargo in 1994, and the flood of cheap, low-quality coffee started to arrive. The supply-demand ratio tipped over completely and things got weird.
Intelligentsia was still very young at the time, and we saw both the highest and lowest markets in centuries within the space of a couple of years. It became very clear, very quickly that something had to change—and that the relationship between coffee quality and coffee prices would have to be radically redefined if there would be any hope for great coffee in the future. If quality is to be maximized, producers need stability and profit. It costs more to produce better coffees, yet as I’ve mentioned a hundred times, it is a long-term process. Investment in quality on the producer’s side starts a whole year before the coffee is ready to sell, and so it becomes a risky proposition to spend cash on trying to improve the coffee if there is no guarantee that it will come back to the grower in the form of higher coffee prices that reward the better quality.
We’ve been evolving our Direct Trade buying model every year in response to producer feedback and impact analysis. It can be complicated. We must always push forward, driving prices to a level where they are legitimately enough to encourage and pay for maximum attention to detail at the farm level. You get what you pay for…that’s the mantra. If quality is expected, it must be awarded prices based on its real costs of production and its value as a Specialty coffee, not as dictated by a global commodities market that can drive prices up and down in an almost whimsical fashion. Escape from the New York “C” is the name of the game, and it is what most producers of high quality coffees really want.
Interestingly, as I write this the “C” is reaching its highest sustained level in the last decade. Some say this is due to increased activity among fund traders and speculators who have started gambling on commodity futures including coffee, wheat, and corn. Some say it is increasing consumption in Asia and Eastern Europe, combined with low productivity from many coffee farms due to minimal inputs and erratic weather patterns. Most likely it is all of the above. The good news for growers is that most signs point to sustained levels of higher market prices, which will drive prices upward across the board for both commercial and Specialty coffees.
I like a market like this one because it makes it much harder to get great coffee at a bargain basement price. Roasters and importers can really take advantage of producers in low market periods and get decent to good qualities for less than what they really should as measured by costs of production. It puts growers in a terrible position, with little bargaining power and with limited options. Once the market goes up a bit, the whole system gets healthier as the bargain shoppers get priced out of the marketplace and end up reducing their quality, exposing their purchasing models as opportunistic and inequitable in the face of a more balanced market scenario where producers have some chips to work with. The high-quality buyers find more competition for the top lots since growers tend to consolidate coffees and ship in bulk at the earliest opportunity in good markets. The good get better, the bad get worse, and the ugly find themselves with nowhere to turn.
Just as a point of interest, here is a look at the ICO’s current mission statement, as of 2007:
“…enabling government representatives to exchange views and coordinate coffee policies and priorities at regular high-level meetings; improving coffee quality through the Coffee Quality-Improvement Programs and specific projects; increasing world coffee consumption through innovative market development activities; initiating coffee development projects to improve quality; marketing encouraging a sustainable world coffee economy; working closely with the private sector through a 16-strong Private Sector Consultative Board, which tackles issues such as food safety; providing objective and comprehensive information on the world coffee market; and ensuring transparency in the coffee market through statistics.”
Sounds like some good strategy. No matter what the next 10 years look like for world coffee markets, I am certain that greater separation between “commercial” and “Specialty” coffees, in terms of both taste and value, is the key to success for the producing world. That’s why we’re so obsessive about quality in our selection process and so proactive with regard to paying growers prices that reflect what the coffee SHOULD be worth, regardless of what happens with the commodity markets.
Whew, that was a long one this week. If you would like more reading, check out the information on Tres Santos, our Direct Trade Offering from Colombia.
As always, find our Nods at:
http://www.intelligentsiacoffee.com/origin/offerings.
Good luck to all of us,
Geoff Watts
VP of Coffee
Intelligentsia Coffee & Tea
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