The Changing Economics of Coffee

For centuries, coffee has been one of the most heavily traded commodities in the world. It was one of the few commodities that moved between the Middle East and Europe after the Ottoman capture of Constantinople. Coffee was one of the crops that spurred the colonization of the Americas and the East Indies by the Spanish, Portuguese, and Dutch. The coffeehouses that arose in Europe were hotbeds of political discussion during the 18th and 19th century. In more recent times, coffee still has a large importance. Many developing countries rely on coffee as their main source of exports. For most of the past half century, the coffee exporting business has been good, as prices were high and the market was relatively stable. However, over the past twenty years, the economics of coffee production and trade have changed dramatically.

During the 1990s, the coffee market experienced a sharp decline in global prices. Market prices for coffee had normally been $1.20 per pound in the 1980s, but by 2000 the price had sunk to only $0.50 a pound. Why did the price drop so much over the decade? There are several reasons for this, but the main cause was simply supply outstripping demand. The end of the United States embargo on Vietnam in 1994 allowed Vietnam to enter the coffee market. Now, Vietnam is the second largest producer and exporter of coffee in the world behind Brazil. Brazil’s coffee production also expanded greatly during the 1990s, as new plantations were opened up. However, this was also the time of the growing coffee culture in the United States as companies like Starbucks gained popularity and consumption increased as well. But supply continued to increase faster than global demand and the price fell. In prior decades, the International Coffee Organization would have attempted to regulate the growth in supply to keep prices high. The creation of the World Trade Organization in 1995 and the commitment to neoliberal trade policies ended the control the ICO had over regulating the coffee market and so there was no way to stop the price from crashing.

The fall in coffee prices had numerous effects both on coffee producers and consumers. On the side of the producers, the crash hurt smaller farmers in many developing countries who relied on coffee for their income were now making less and were forced to either sell their land or change crops. On the side of the consumers, the crash resulted in overall lower quality of coffee. With a lower price, producers could not afford to check for ripe beans as often throughout the harvest, or began harvesting unripe or overripe beans in order to reduce labor costs. Additionally, the expansion of production in Vietnam and other countries during the 1990s consisted mainly in robusta beans, which are cheaper to care for but make lower quality coffees.

The other major development in recent years is the beginning of product differentiation in the coffee industry. As countries like Vietnam and Brazil have emphasized cheaply produced coffee, they have gained a reputation as having lower quality coffee. This makes beans from these countries popular for the mass market chains like Starbucks and with makers of instant coffees. It is easy to see why; when most consumers go to a larger chain such as Starbucks, they’re just looking for a quick espresso for their caffeine fix and do not care much about the quality and taste of the coffee. Thus, the product differentiation has developed between coffee from places like Vietnam which export higher quantities of lower-grade coffees and countries such as Colombia and Ethiopia, which export smaller quantities of higher grade coffees.

The differentiation isn’t just a result of the rise in demand for lower quality coffees, but has also been brought about due to the increased interest in higher quality fair-trade and single origin coffees. This arose from the need to distinguish between higher quality and lower quality coffees. The spread of fair-trade coffees is also the result of an increased concern by consumers in the developed world for environmental sustainability and for the standards of living of those in developing countries. Much like with the wine industry, the coffee industry has started creating geographical certifications of origin. These started with the extremely premium brands such as Kona coffee from Hawaii and Jamaican Blue Mountain coffee, but has recently extended to other countries. Guatemala and Colombia created registered protections for coffee originating from those countries. Ethiopia has established protections for the Herar, Sidamo, and Yirgachiffe regions, three of the main coffee growing regions of the country. These protections help to bring single origin coffees from these areas a better reputation among importers and consumers.

Black Gold, PBS
The Global Coffee Crisis, ICO
Geographical Indication of Origin: The Case of Coffee

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