Coffee’s Relationship With Capitalism

Originally posted on the Huffington Post on October 2, 2013.

Sustainability in coffee means different things to different people, but at its heart, it’s about a healthy succession of the industry — from farmers to consumers, and everyone in between. To this end, coffee and capitalism are seemingly at odds with one another.

High school economics tells us that the value of a consumer good is determined by supply and demand. So, how much farmers grow and how many people are willing (read: need) to drink it — in cafes, restaurants and offices around the world — ought to define the price. That, however, is not the way it works in the coffee world.

Coffee is an interesting agricultural product, in that unlike other crops its production has not been overtaken by large agri-businesses as it has proliferated around the world. Instead, coffee is grown mostly by independent farmers or by organized co-operatives and producer groups. As well, more than 80 per cent of the world’s coffee is exported from “developing” to “developed” countries, the result of which is an immense wealth disparity between those growing it and those consuming it. The sad truth of the matter is that a person drinking a cup of coffee is almost always better off than the person who grew the coffee.

Unfortunately, the nature of the typical capitalistic, profit-first commerce model is that most companies are happy to see the price of coffee as low as it can go, subsequently creating higher profit margins. On the supply side, however, that lower price means less money for the millions of coffee-farming families around the world, which has the capacity to create a host of issues in both the short, and long-term.

To understand the problems with the coffee trade requires a bit of insight into how it is bought and sold. Coffee is traded in futures contracts on exchanges in New York and London. As a roaster, if we want to roast coffee tomorrow, that means we likely bought it months ago. The purpose of buying this way is to hedge risk and lock in prices in advance, to ensure supply and avoid sharp spikes in price. Like buying stocks, there is a potential risk in buying futures at the wrong time, as predicting wrong can be the difference between a year of profit or loss. Yet this is the kind of risk most coffee buyers accept — it’s just the cost of doing business.

The issue with the futures market in this case is that the production and availability of coffee doesn’t have nearly enough control over the market. Buying a futures contract doesn’t mean you actually take possession of your purchases — it is akin to trading stocks, where no physical assets are exchanged. This allows for traders to manipulate prices, based on the sheer volume of futures contracts they can buy and sell, without regard for the actual cost of producing the coffee. They are trading paper and in doing so, are capable of creating grave instability in the coffee market.

Currently, coffee prices sit just below $1.20/lb, which is below, or in some cases far below, the cost of production in most growing countries. The effect of this is potentially crippling to the industry. Without the ability to make any money, let alone turn a healthy profit, many farmers will be less likely to continue to grow coffee and will potentially start ripping out their trees to plant other crops that have value both at market and for subsistence purposes.

Looking beyond the current conditions, there is also a pressing threat to the traditions that go into coffee production. Like any of the world’s great trades, coffee culture needs to be passed down generationally. Without an opportunity to make a proper living, the coffee elders, teachers, experts will have no incentive to educate their children, nor will their children want to continue on. This, along with the lure of city life, higher education, and less labour-intensive jobs, has created one of coffee’s biggest issues of the near future — the mass exodus of the next generation of coffee-growing families from the farms to the cities. These issues only stand to be exacerbated by the crippling leaf rust epidemic which will affect Central and South American coffee production by up to 30 per cent this year.

If prices don’t increase, soon and by quite a bit, farmers will be far less likely to grow coffee. This will subsequently intensify the supply-demand crunch and likely cause real shortages in an already tight situation. The market will eventually be forced up, but at that point, it may be too late for coffee to come back.

Originally posted on the Huffington Post on October 2, 2013.

The reality of the situation is that the coffee market can withstand the much higher prices required to stabilize the supply/demand equation over the long term. Many roasters don’t mind the idea of spreading the wealth more equitably, and see the promise of a brighter future if farmers are able to make more money. Considering the massive amount of coffee consumed around the world, it really wouldn’t take much of a price hike to affect some serious, positive change.

To illustrate the point, worldwide production in 2012 was approximately 19 billion pounds of coffee. Just an extra $.10 per pound over the course of the year could have meant an additional $1.9 billion dollars of revenue flowing directly to producers in the developing countries that make up the coffee lands. The potential difference that money could make to farmers is tremendous, especially when weighed against the relatively minimal cost to individual coffee drinkers.

The concept of sustainability is not just a feel-good marketing concept; it is both a moral and functional imperative. And so, to make the financial case for paying farmers more is simple: if we don’t do it now, there won’t be coffee to sell later. To make the humanitarian case for it is just as simple: coffee farmers deserve better.