This matter is not helped by the fact that many multinational corporations, for example Nestle, take advantage of Brazil’s low labour costs. In the long-term, it is far less costly to move your production to a different country as many of the undeveloped countries will be able to provide a high number of unskilled workers. People living in countries such as Brazil are, in the most case living in poverty and will take on this work even though the pay is only a fraction of what it should be (or compared to the UK etc). For them it may be the only means of earning an income. As the above figures show, the retailers, and shippers see the highest level of profit from coffee production. There could be two possible reasons why Brazilian farmers don’t demand higher prices. Firstly there is much competition for the production of coffee, Brazil is inundated with farmers, and therefore if some of them demanded higher prices it is more than likely that these companies would just go elsewhere in the country. Secondly, there are many countries newly entered in the coffee market, for example Vietnam and Mexico, even if a number of the farmers demanded higher prices Nestle could just change it’s suppliers. For such a large corporation this would not be too costly as their profit is already immense. This could lead to further financial issues for Brazil as coffee is their single most economic influence.
An added battle faced by Brazil is that during June to mid-August occasionally experiences frosts which can devastate the whole harvest. This is a crucial time for the other coffee producers as it means that the demand for their coffee will considerably increase as the world’s largest supplier will be left out of the question.
Brazil has become so dependant on the production of coffee as their main economy that they will go to great lengths to maintain the level of return that they have become accustomed to. In 1999 a $400m (£254.5m) attempt to rig the London coffee market went before the court of appeal. Brazil attempted to prop up international coffee prices; they purchased large amounts of coffee on the London terminal market. The problems began when two companies stated that Brazil were in debt to them to over £40m. These actions are a result from the mid-1980s when commodities of all types had seen inflation from the 70’s suddenly crashed. As coffee prices disintegrated in 1986, from a peak of nearly 240 US cents a pound to well below 100 cents, the Institution of Brazilian Coffee came up with a way to help them. They decided to take vast amounts off the London terminal market to boost the price.
In the 1930’s the International Coffee Organization (ICO) was set up. It is an intergovernmental body whose members are coffee exporting and importing countries. It’s aim was, and is to improve conditions in the world coffee economy through international cooperation, helping price equilibrium by developing demand for coffee in emerging markets and through projects to reduce damage from pests and improve marketing and quality, enhancing coffee growers’ long-term competitiveness and contributing to the fight against poverty. However, as we can see from above, many of these aims have not been fulfilled in respect of Brazil.
The paying condition of the farmers is not Brazils only worry, more recently the coffee industry has begun to see the beginnings of a crisis. They have witnessed a sharp increase in global production. The basic concept of demand and supply is that changes in market demand for a good will lead to a change in equilibrium market price. This means that for a given level of demand, there is a downward pressure created on supply (as explained by the graph)
Over the last 2 years a significant rise in market supply has caused a sharp fall in market prices, coffee prices are now less than a ¼ of 1970 levels and producer prices have plummeted to an all-time low, while prices on the retail end are mostly at an all-time high. Some factors that could be driving prices down is the abandonment of export controls (retention scheme, see below). Also countries are forced to increase supply to protect export earnings. An added factor is that Vietnam has seen an increase in out in the last 4 years, probably due to improvements in growing techniques. This is probably resulting from technology transfers, whereby large corporations set themselves up in under developed countries to take advantage of low labour costs. With them they bring new technology i.e. machinery to help increase output.
This problem is further fuelled by the slow growth of demand: around 1.6% per year. The percentage increase in supply has become considerably higher than that of demand, meaning that the equilibrium price drifts lower. (P2)
What this imbalance between demand and supply has resulted in is saturation of the coffee market and collapsed prices.
The current imbalance between supply and demand for coffee is due to the saturation of the coffee market. Total production in the year 2001/02 (October-September) is estimated that around 113 million bags (60-kg bags) would have been produced, whereas world consumption will be just over 106 million bags. Coffee production has been rising at an average annual rate of 3.6%, but demand has been increasing by only 1.6%. At the origin of this coffee glut lies the rapid expansion of production in Vietnam and new plantations in Brazil, which is harvesting a record crop in the current season. Yet all of this can only pose a very real and wide ranging threat to sustainable development.
A statement from the World Bank Chief Economist Nicholas Stem is further proof of Brazil’s ever-worrying crisis: "Many poor countries have improved their policies, institutions and performance in the past decade. Because aid increasingly is channelled to these countries, aid is more effective today than ever before. But even successful poor countries are being hurt by lower global growth, adverse trends in commodity prices, and declining aid." The global economic slowdown is extremely profound and wide-ranging, and countries such as Brazil who are dependent coffee exports have been hit especially hard.
The farmers of Brazil are responsible for the continued growth in the coffee economy: they grow and harvest the coffee beans. Yet they continue to face many challenges, none as influential as the price collapse currently being witnesses throughout the coffee industry: they are set to face substantial losses.
The price of a coffee been has significantly decreased, so much so that in some cases farmers are finding that it is cheaper to abandon the crops than to actually pick them. What makes the situation worse is that it is often incredibly difficult for the smaller farms to change their crop, meaning they are often left destitute. Some of their financial problems could be helped but they do not have access to credit facilities for when there is a drop in income. The result is large scale unemployment and poverty in the agriculture areas. Although this is a very worrying prospect, it does lend room for other crops to yield a higher return, the downside is that for Brazil this will include heroin and other drugs.
SOLUTIONS:
There are several methods that the coffee industry, and specifically Brazil, could attempt to help itself through the imbalance crisis. On the supply side diversification could be a viable concept to follow. It could be beneficial to try and promote that farmers branch out their overdependency on coffee. This could be possible if there was encouragement in supplementary or optional activities and greater coffee product segmentation. However this could prove difficult as there will need to be extensive support from Governments and other donors. Another method could be production monitoring whereby the ICO, for example, could provide production information on other member countries. This would hopefully dissuade programmes that could pose as possible imbalances. A concept that has already been instigated is that of quality improvement. In February 2002 the ICO started the Coffee QualityImprovement Programme (CQP). This entails minimum grading standards and maximum moisture content for coffee exports. Not only should this prove beneficial for the consumer who will receive higher quality coffee, but it will be in the Brazilian producers own interests as they will witness a reduction in the current surplus due to these lower, sub-standard coffee’s being forced out of the market. Brazilian producers could directly help to rectify the situation. For example they could convert to supplying specialist coffee. Not only would this mean better price premiums but they could also charge higher prices from the roasters. The ACPC is currently in the process of introducing a scheme where 5% of the worlds lowest grade coffee is kept for non-human use. This would limit the amount of coffee for supply, and therefore bring Brazil one step closer to creating a balance between supply and demand.
On the demand side possible solutions could incorporate promotion. In my opinion it would be highly effective if, along with the ICO’s help, Brazilian producers/suppliers promoted themselves in new markets, such as China and Russia. Barriers to trade Within the framework of WTO negotiations to seek the elimination of tariff and other barriers to all forms of coffee, together with those affecting all agricultural products originating in developing countries.
Many methods have failed to combat the ever increasing supply of coffee by driving up the prices. For example the Association of Coffee Producing Countries (ACPC) imposed a retention plan whereby each of its 14 member countries have to keep back 20% of their total coffee production. This means that there is less coffee being exported and therefore, in theory, less supply. In an interview with the Agriculture Minister of Brazil, Marcus Vinicius Pratini de Moraes, said that the reasoning behind the failure of the plan was that only Brazil and Colombia had stuck to it. After this, the Brazilian Government announced that it was going to leave the scheme; it had kept back over 170,000 tonnes since the scheme was introduced.
CONCLUSION:
To me it seems clear that Brazils situation has reached an all-time low, their producers realise the threatening loss they are going to continue to make. It is clear that they have made many attempts, with the help of the ACPC and ICO, to rectify the situation: retention schemes, removing low grade coffee. The fact they these institutions also failed suggests that the problem cannot be dealt with by Brazil alone, it is a global issue. There may be some hope in this issue, as demand is rising more quickly in some countries, for example emerging markets like Russia. In addition there is faster growth for the demand of richer coffee beans. An added fact is that coffee is inelastic, this means that there is no substitute for real coffee. This means that if the coffee production can be crbed then there is still hope of the economy regaining it’s former state. The only way the situation will improve is for demand to radically increase or for production to greatly decrease.
