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Copy of The Economics of Coffee

An Investigation of the Coffee Industry

Arthur Karuletwa

on 19 March 2013

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Transcript of Copy of The Economics of Coffee

The Economics of Coffee An Investigation of the Coffee Industry Background World Production Pricing of Coffee Coffee is an important commodity and a popular beverage. Over 2.25 billion cups of coffee are consumed in the world every day, and over 90% of coffee production takes place in developing countries, while consumption happens mainly in developed ones. Brazil is the leading coffee producer, followed by Vietnam. According to the ICO in 2011, Brazil still held the title of leading coffee producer with over 43,000 bags of coffee exported, compared to Vietnam with 20,000 bags. Brazil is more than doubled in production. When you talk about the price of coffee, it doesn't mean how much it costs for consumers to buy coffee. It means how much farmers get paid per pound of coffee. Worldwide, 25 million small producers rely on coffee for a living. In Brazil alone, a third of the entire world's coffee is produced, with over 5 million people employed in the cultivation and harvesting of over 3 billion coffee plants. It is much more labor-intensive because it is not subject to automation and requires constant attention. Coffee is also bought and sold as a commodity on the New York Board of Trade. This is where coffee futures contracts are traded, which are a financial asset involving a contract for a future sale or purchase of coffee at an agreed price. Robusta Mixture Arabica Fair Trade Coffee The United States is the largest consumer of coffee. Unfortunately, few Americans realize that workers in the coffee industry work in what can be described as "sweatshops in the fields." Coffee farmers receive prices for their coffee that are less than the costs of production, forcing them into a cycle of poverty and debt. "Fair trade" as defined by the World Trade Organization and other major associations is "trading partnership, based on dialogue, transparency and respect, that seeks greater equity in international trade. Fair trade basically gives better trading conditions and rights to the producer and workers. According to the WFTO, "It highlights the need for change in the rules and practice of conventional trade and shows how a successful business can also put people first." Commodity Chain A "supply chain" is the sequence of activities and processes required to bring a product from its raw state to the finished goods sold to the consumer. For coffee, the chain is complex, and typically includes: Exporters - buy from farmers, co-operatives, or auctions, then sell to dealers. They usually have expert knowledge of the area, guaranteeing quality shipment. Growers - usually working on a very small piece of land, ranging from 2.5-5 acres. Many do primary processing (drying or hulling) themselves. Intermediaries - involved in many parts of the chain. They may buy coffee at any stage between coffee cherries and green coffee beans, they may do primary processing, or collect coffee to sell to a processor, another intermediary, or a dealer. Processors - farmers who have equipment to process coffee, or a farmer's co-operative that pools resources to buy equipment that turns cherries into green coffee beans. Roasters - companies like Nestle who turn green coffee beans into drinkable, tasty coffee. They also add value to the product by marketing, branding and packaging. Government Agencies - sometimes controls the coffee trade, buying coffee from processors at a fixed price and selling it in auctions for export. Dealers/Brokers - supply the coffee to roasters, in right quantities, time and price acceptable to buyer and seller. Retailers - sellers of coffee products, which range from supermarkets, catering organizations, or small independent retailers. In the 1970s and 1980s, according to the ICO the monthly coffee price averaged above 100 cents/lb. It declined during the late 1990s reaching a minimum in Sept. 2001 of just 41 cents/lb and stayed low until 2004. The reason for this decline was because of the collapse of the International Coffee Agreement with Cold War pressures. Prices have risen from 2005 to 2009 and sharply in the second half of 2010 on fears of a bad harvest in key coffee-producing countries. "A Question of Fairness" "Fair Trade USA, the movement’s leading advocate in the US, angered critics by saying it would cut its ties at year’s end with the main international fair trade group and make far-reaching changes in the sorts of products that get its seal of approval... Critics accuse Fair Trade USA of lowering standards, maybe motivated by the bigger fees to be earned from certifying a higher volume of products. Some sellers of fair trade products fear that small coffee farmers will lose market share to the big plantations and that companies will have an incentive to include only the minimum amount of fair trade ingredients in their products... Starbucks...also said that it planned to continue using Fair Trade USA to certify coffee it sells in this country. However, the company said that it had not decided whether to place a fair trade label on coffee grown on large plantations. Starbucks said that about 8 percent of the coffee used in its global operations came from fair trade farms in 2010, or about 21 million pounds. Those poor farmers were once isolated from markets in the developed world and had to sell at a low price. Fair trade organizations help them improve product quality and, most important, give them access to a world market." -William Neuman, New York Times "Starbucks is the largest purchaser of Fair Trade Coffee" Bibliography "Coffee | Global Exchange." Global Exchange | Building People-to-People Ties. N.p., n.d. Web. 8 Dec. 2012. <http://www.globalexchange.org/fairtrade/campaigns/coffee
"International Coffee Organization - News from the Executive Director." International Coffee Organization - News from the Executive Director. N.p., n.d. Web. 8 Dec. 2012. <http://www.ico.org/trade_statistics.asp?section=Statistics>.
NEUMAN, WILLIAM. "A Question of Fairness - NYTimes.com." The New York Times - Breaking News, World News & Multimedia. New York Times, 23 Nov. 2011. Web. 8 Dec. 2012. <http://www.nytimes.com/2011/11/24/business/as-fair-trade-movement-grows-a-dispute-over-its-direction.html?pagewanted=all&_r=0>.
"WFTO - What is Fair Trade?." WFTO - Home. WFTO, 7 Nov. 2009. Web. 8 Dec. 2012. <http://www.wfto.com/index.php?option=com_content&task=view&id=1&Itemid=13
"Coffee - The Supply Chain." The Times 100. N.p., n.d. Web. 8 Dec. 2012. <businesscasestudies.co.uk/nestle/coffee-the-supply-chain/#axzz2EWeDfsxo>. Images from Wikipedia/Google Images November 23, 2011
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