Cost of coffee.indd - RISC

◆
◆
Real costs
A supply and demand equation ignores the social costs of production. It is true that prices
will go down if there is over-supply (or the threat of over-supply), but for many farmers
there is no easy choice to stop production. They will often accept lower prices and continue
to harvest so they can clear their debts. They will cut back on education costs, medical
care, investment in house repairs and so-on. In effect the coffee market is subsidised by
the farmers. Of course they will give up eventually – or be forced to sell their land to pay
their debts – and the coffee supply may go down as a result. But at the same time, cheaper
producers (for example plantations in Indonesia and Viet Nam) will continue to expand
since they can still be profitable at low prices. This is because they can pay very low wages
to labourers. So we can see a kind of ratchet at work; each price drop forces some small
farmers out and allows plantations to move in. The net effect is for farmers to become poor
landless workers and for low paid plantation workers to replace them
Speculation
The big price swings in the coffee market often owe more to speculators’ worries about a
glut or under-supply in the future than any real movements. Now that trading is a 24 hour
a day business (with markets all around the world linked via computers) a panic can spread
quickly without much real consideration. So, while the long terms prices, year on year, are
influenced by demand and supply, the shorter term movements are not nearly so sensible!
page 16/17
If crop disease, drought, or a heavy frost damages the harvest, the price goes up. This
encourages more farmers to grow more coffee, until supply exceeds demand. When
that happens, the price falls and so too does quality, as farmers cut back spending on
equipment, fertilisers or the time they spend tending or processing the crop.
This does not mention several factors. Farmers cutting back on expenditure will normally have
to cut back on what they can spend of their family welfare – this is not just a business we
are talking about. With the time lag between price movements and shifts in production being
several years, the swings between low and high prices are huge – new production cannot start
for a few years after prices go up, and farmers are locked into coffee for several years after
prices go down. The reality is that coffee is grown, but farmers cannot afford to harvest it. If
they don’t have enough land to grow other crops, they will need to look for work on other farms,
or in the worst case, sell their land and move to the cities to look for work.
Nestlé has always supported viable international agreements to establish the stability that
is in everybody’s interests…
An example of such an agreement and how Nestle has supported it would be instructive!
page 18/19
The futures market was established to enable coffee dealers and manufacturers to protect
themselves against changes in the price of coffee.
A key concept here. The two most important players in the market – the consumers and the
producers – cannot protect themselves. Consumers have little to worry about, as the price of
coffee in the shops has little to do with the world market price, but producers, for whom coffee
represents up to 100% of their cash income, are by far the most vulnerable group. In some
ways the futures market makes the market less predictable for them.
[Dealers] can also resolve the fact that suppliers like to do business at the peak of the
market while buyers prefer to wait until prices have fallen. The futures market enables
them to trade at different times and to separate supply from price. For example, the
producer can sell coffee to the dealer before harvest time when the market price tends to
be higher, and deliver the coffee at a later stage.
This makes it sound as if a farmer can sell when the price is high (before harvest) and actually
deliver later (when the price is lower). The dealer would have to be very rich and generous!
In fact, the dealer will offer a price based on the market at the time of delivery. Local traders
30