Fair Trade Coffee - propping up coffee prices is not the way to go
By Fazil Mihlar VANCOUVER SUN June/2003

Fair trade advocates want to "help" Third World farmers by artificially propping up world coffee bean prices that have been on free fall for the past decade.

Such a scheme, they say, is the only way to stop the exploitation of coffee farmers by large multinational coffee processors and big retailers. Vancouver Mayor Larry Campbell has also got into the act. Early last month he proclaimed National Fair Trade Week.

It's a surprising proclamation coming from a man who has a Masters in Business Administration -someone who should have a better understanding of how the pricing system works. Most poor coffee farmers won't be helped over the long term by the failure of Mayor Campbell and other "ethical java" advocates to recognize how the law of supply and demand works in the commodities market.

But it is only by working with market forces -the desires of customers -that they can really help impoverished farmers in developing countries.

The price of coffee beans has dropped from a high of $2 a pound a decade ago to about 50 cents today. That's a result of the "current coffee glut", concludes a study by Brink Lindsey, a trade expert at the Cato Institute in Washington, D.C.

In a paper titled Grounds for Complaint? Understanding the "Coffee Crisis," Mr. Lindsey correctly points out that the over-supply of coffee is a result of productivity improvements and decreasing costs on the supply side. And on the demand side, he says, large roasters have developed new ways to get rid of the bitter taste in lower quality coffee beans, putting added downward pressure on prices.

There's always a time lag between planting and harvesting season, making the coffee crop prone to supply shortfalls and gluts.

These situations are difficult to avoid because most producers are small farmers who lack the sophistication to make accurate long-term forecasts of demand.

But supply, as Mr. Lindsey points out, is "stubbornly slow to adjust during periods of over capacity." And since the fixed costs of growing and maintaining trees are a big part of the total cost of production, it's perfectly rational for farmers to harvest coffee beans as long as world market prices cover variable costs such as labour transportation, but not fixed costs like the trees.

Beyond these "cyclical fluctuations," there have been several structural changes over the past decade that has led to this crisis. Low-cost producers in Brazil and Vietnam have expanded production. While Brazil has depended on increased mechanization to drive costs down, Vietnam has relied on cheap labour and favourable growing conditions to do the same.

In other words, theses farmers are doing exactly what every business wants to do: improve productivity, reduce costs, gain more market share and reap more profits. But these two low-cost producers put the squeeze on high-cost ones in Central America. As a result, about 600,000 people in this region have lost their jobs. However, in Vietnam, as, Mr. Lindsey points out, "coffee- related jobs have soared from 300,000 a decade ago to between four and five million today."

So while there's a lot hardship for people in high-cost Central America who rely on the coffee industry, peopIe in low-cost Vietnam are better-off. Are there any workable solutions that will maximize economic benefits for a lot more farmers and minimize the misery? Mr. Lindsey proposes a few that make much more sense that propping up prices.

Coffee farmers would be able to diversify their crops if the developed world would stop subsidizing its farmers and remove trade barriers against agricultural products from the Third World.

Coffee producers could move into "higher value products, and try to find ways of boosting the consumption of coffee world-wide. Additionally, farmers could also reduce the "glut-and- shortage cycle" by doing a better job of forecasting the demand for coffee. All of these solutions, of course, have one common feature. "They work with market forces rather than rail against them," argues Mr. Lindsey.