Perhaps the thing
that stands out the most in international coffee trade is the obvious injustice
towards African, Asian and Latin American rowers.
May 10, 2013
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Logistical issues
prevent African countries from
deriving greater value from coffee. (AFP)
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Perhaps
the one thing that stands out the most in the international coffee trade is the
obvious injustice towards African, Asian and Latin American coffee growers, who
get some 7% of the value of roasted coffee sold in supermarkets.
The
Fairtrade people have complained for years and have made some impact when it
comes to farmers' returns for their coffee. An even more glaring issue is the
coffee trade of countries such as Germany, which has grown so rapidly over the
last decade that it now exports more coffee than all of Africa put together.
According to the International Coffee Organisation, in 2011 African countries
exported some 10-million bags (60kg each), or about 9% of total world
production.
Germany
exported, or more correctly re-exported, 11.9-million bags of coffee in the
same year. The value of those re-exports was approximately $3.6-billion in
2011. In 2010, the last year for which coffee value figures were available,
Africa's total coffee exports of around $2-billion weren't worth much when
compared with German coffee exports.
The
irony is that European firms don't even add a great deal of value to the coffee
– they often merely re-export unprocessed green beans, which made up half of
Germany's total coffee exports in 2011. Germany has done for coffee what De
Beers has done for a century for diamonds, it aggregated without adding any
value. The remainder of German coffee re-exports was sold as roasted (about
three million bags) and a further three million is made into instant coffee,
which Latin American coffee aficionados rudely call "non es café",
which translates to: "It is not coffee."
Why
Germany has become a linchpin in the international trade in coffee is
fascinating to those who think that what it is doing is precisely the sort of
activity that developing African countries ought to be doing. The problem is
that roast coffee loses freshness quickly. While you do not have to roast the
coffee in the place it is consumed, proximity along "the value chain"
is considered important in explaining the strategic positioning that Germany
has achieved.
This
is one of the most commonly cited reasons why African coffee exporting
countries have been confined to the export of unprocessed beans to countries
such as Germany. Germany exports the vast bulk of its coffee to neighbouring
countries in the European Union and some to the United States. Unlike Africa,
its first-class logistical connections are efficient and it can get the product
to supermarkets in Poland or Austria quickly and maximise shelf life.
Concentrated
value chains
The
trade in coffee gets more complex when one looks at the structure of the
companies. The industry has traditionally been dominated by four large coffee
traders: Ecom, Neumann, Louis Dreyfus and Volcafe. Together, they control about
40% of the world coffee trade.
Half
the global market is for roasted and processed coffee, and is controlled by
five companies: Kraft, Sarah Lee, Nestlé, Procter and Gamble, and Tchibo.
Nestlé's Nescafé is said to control about 50% of the world market for instant
coffee. The coffee market is highly concentrated and this helps explain why
countries in the developing world that have tried to beneficiate their coffee
have generally failed to do so – it is simply not enough. The barriers to
Africa getting its beans roasted and sold are logistics and marketing.
Not
rocket science
Most
rich countries do not maintain high tariffs for roasted coffee and in most
cases it is duty free from all sources, though not in Europe. Unlike complex food
products or other beverages, the sanitary constraints on coffee are fairly
limited even in a sophisticated market like Europe.
Roasting
coffee requires no enormous skill or technology so what stops African countries
from beneficiating their green coffee beans? The problem is that with almost
every product there is a market constraint that limits African producers moving
down the value chain to get more value added. There is certainly sufficient
incentive. The price of good quality green beans is $3.30/kg while roasted
coffee retails at between $18/kg and $25/kg in Southern Africa. So why is no
value added in Africa?
Papua
New Guinea, like so many African countries, spent a decade from the mid-1990s
trying to export its high quality, low-caffeine and organic Arabica coffee into
the world speciality market.
Despite
its duty-free access to Europe and Australia, there were scores of constraints
to even moderately well resourced companies with considerable government
financial assistance to penetrate developed country markets. Most had to do
with getting the product on to the market. Roasted coffee had to be marketed in
a way that attracted customers. Therefore, large amounts of advertising were
necessary. Exporters had to get special packaging material, which would
preserve the limited shelf life but simultaneously allowed the coffee aroma to
penetrate the packet in the supermarket.
The
biggest constraint was getting the product on to the supermarket shelf. New
coffee exporting companies have to pay for shelf access in many supermarkets
and the product gets pulled if it fails to deliver the desired level of sales.
Despite millions of dollars spent attempting to develop the roasted coffee
market in both Europe and Australia, green beans make up more than 99% of Papua
New Guinea's coffee exports. This experience has been replicated all over
Africa.
The
German coffee paradox is a direct result of the first class logistics that
allow the export of freshly roasted coffees. This is difficult to achieve in
more challenging environments such as Africa, where delays in delivery are
common and can result in a greatly diminished shelf life for a roasted coffee
product.
This,
along with consumers who want particular European brands, has meant African
countries have never been able to export roasted coffee.
'Non
es café' wins
By
contrast, countries such as Brazil, Columbia and Ecuador have succeeded in
coffee beneficiation. They have played it smart and haven't played by the rules
of free trade given to them by the US and Europe. These countries succeeded
because they moved to the instant end of the coffee market. Brazil is now not
only the world's largest exporter of green beans, it is also the world's
largest exporter of instant coffee.
It
achieved this through a series of policy measures in the 1960s and 1970s that
imposed high export taxes on unprocessed coffee and allowed domestic producers
of instant coffee to avoid these taxes.
The
North American and European producers of instant coffee simply could not
compete and many moved to Brazil to take advantage of the export tax regime.
Size
really matters
The
lessons of Brazil and the other Latin American countries are clear –
beneficiation of coffee will only be done where there are local champions and
commercial advantages created by government policymakers who understand markets
and value chains. But in coffee, as in so many other endeavours, size
really matters – and no country is bigger than Brazil. African countries simply
do not have the same export volumes to follow exactly what Brazil did in the
1970s, but the ingredients for success are the same.
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These are the views
of Professor Roman Grynberg and not necessarily those of the Botswana Institute
for Development Policy Analysis where he is employed