Black Gold

NOTE ON THIS NEW EDITION:

The opening chapter of this book concerns the deep coffee crisis of the early noughties. While this dire phase has thankfully passed, the wider observations made remain relevant today, and there is nothing to prevent such a crisis arising again, as indeed appears to be happening right at this moment, in a less severe incarnation. I therefore have not attempted to update the statistics I used previously to reflect current market conditions.

1

THE WAY WE LIVE NOW

I see I have been bitter. But what would you think of someone who could write such things without bitterness?

‘MULTATULI’, Max Havelaar, or the Coffee Auctions of the Dutch Trading Company (1860)

The catastrophically low price currently paid to the producers of coffee is leading to the largest enforced global lay-off of workers in history. Nonetheless, it is remarkable how little agreement there is concerning the numbers of people who are dependent on coffee growing for their livelihood. The Wall Street Journal, a newspaper not given to exaggeration in matters of business, estimated that some 125 million people depended on coffee in 2002. ActionAid claimed 60 million, Fair Trade 100 million. The World Bank has calculated that there are 25 million small producers in developing countries who depend on coffee as their sole source of income, each supporting an average of five family members: this is the equivalent of the entire population of Japan, the world’s eighth most populous country. Furthermore, the Bank estimates that a staggering 500 million people globally are involved directly or indirectly in the coffee trade. This figure is echoed by Dow Jones Commodity Services, which also assesses the importance of coffee to developed countries too: they have calculated, inter alia, that 300,000 people work in Italy’s 110,000 coffee shops, serving 70 million cups of espresso per day.

The coffee market in the USA is worth $19 billion annually, with 161 million consumers directly serviced by 150,000 full- or part-time workers. The Specialty Association of America estimates that if everyone from coffee machine mechanics to styrofoam cup makers were accounted for, the figure for those involved in the business would leap to 1.5 million. In Japan, a leading roaster has claimed that over 3 million jobs – 4.5 per cent of the workforce – are directly or indirectly related to coffee. While the industry is keen to stress the importance of coffee, if only to alert politicians to the gravity of the problems affecting it, clearly there is huge international dependence on the trade.

As long as the price that coffee fetches on the world market continues to be lower than the cost of production, smallholders and farmers must subsidize coffee consumers. They cannot do this indefinitely. The result is unemployment and the loss of livelihood on the vast scale commensurate with the numbers previously employed. Thus the World Bank estimates that between the years 2000 and 2002 some 600,000 workers in the coffee industry lost their jobs in Central America alone. This is the equivalent of the entire population of the city of Bristol becoming unemployed. With no sign of a meaningful price recovery, this employment crisis is getting much worse, rapidly and globally. It has started to cause political and social disruption, poverty and privation on an unprecedented level in countries where the national economies are frequently already extremely fragile. There has also been a fundamental shift in the recipients of the coffee trade’s largesse. In 1991 the global coffee market was worth around $30 billion, of which producing countries received $12 billion, or 40 per cent. Current figures suggest that the global revenues from coffee sales are in the region of $55 billion, of which only $7 billion (13 per cent) goes to the exporting nations. Coffee is the world’s most valuable trading commodity after oil, but the share of the coffee trade enjoyed by producers has fallen by two-thirds in ten years, whilst transnational coffee companies have reaped huge windfall profits from the low price that they now need to pay for the commodity. The average price paid to producers of coffee internationally has fallen 80 per cent since their last high in 1997: over the same period, the average retail price of the keenly competitive major US brands has fallen to $2.75 per pound, only 27 per cent less than its peak. The price of instant coffee in the UK, which represents 85 per cent of that market, has fallen by a paltry 5 per cent since the same date. The four multinational roasters that dominate the world coffee trade – Procter & Gamble, Nestlé, Sara Lee, and Phillip Morris account for 40 per cent between them – report record sales and record profits, although all except Sara Lee ($495 million in reported profits from their coffee and tea division) are understandably chary of stating exactly how much is attributable to coffee. Nestlé attributed a significant proportion of its 5.5 per cent half-year growth in sales to August 2003 to its ‘star performers’, instant coffee and bottled water.

Starbucks, a relative newcomer to the international coffee trade, is likewise reaping a huge profit harvest, up 19 per cent in 2003, and adding to its 6000 existing stores worldwide almost daily. The business is regarded as that rare breed, a ‘tastemaker’, a company that successfully creates a new market. Starbucks has repositioned coffee as an ‘affordable luxury’, and has provided a suitably mellow environment for people to indulge in it. The company’s Chairman and Chief Global Strategist, Howard Schultz, is a lean corporate colossus fêted by stock analysts and the business press. He is the ‘author’ of the soft-focus New Age autohagiography entitled Pour Your Heart Into It in which he writes that ‘My ultimate aim … is to reassure people to have the courage to persevere, to keep following their hearts even when others scoff. Don’t be beaten down by naysayers.’ It is unlikely that the smallholder abandoning his coffee plantation in Guatemala for a dismally uncertain future in a city shanty-town would derive any comfort from Schultz’s inspirational message. The price that his coffee achieves in the branded coffee shops of the developed world clearly spells out imbalance and inequity. Starbucks generally buys better coffee than many companies, and consequently pays the higher price by which its Public Relations division sets great store; but it is no coincidence that the company has become one of the prime targets of the anti-globalization movement. It has come to represent the unacceptable face of unfettered capitalism with its combination of modern aspirational marketing techniques and an attritional strategy towards its independent competitors. Crucially, in the eyes of activists, it also has a lead product that is effectively subsidized by the suffering of Third World farmers.

The widening gap between the haves and the have-nots in our globalized economy is brutally exemplified by the growing inequalities in the coffee trade, and, just as politicians in wealthy Western nations respond to popular concerns about Third World poverty with spin rather than substance, so the major corporations that have benefited from the current world coffee crisis have demonstrated a notable lack of commitment to doing anything about it beyond window dressing. Procter & Gamble, makers of Folgers, maintain that they contributed $10 million to community programmes in Mexico, Brazil, and Venezuela. Kraft, Sara Lee, and Nestlé claim that they go out of their way to help small producers, ‘ensuring that they receive the full value of their crop’, according to a Nestlé spokesman. Presumably this comment is designed to reassure concerned consumers that the transnationals do not actually steal the coffee at gunpoint.

The poverty of the world’s coffee farmers contrasts with the coffee trade’s wealth of statistics. Most of these emanate from an unremarkable 1960s office block in Berners Street, just north of Oxford Street in London, in which can be found the down-at-heel remnants of the once globally powerful International Coffee Organization (ICO). Funded by coffee-producing nations (invariably tropical and undeveloped), as well as consuming nations (generally Western and developed), in its heyday the ICO, with all its undoubted flaws, was a pragmatic attempt by the world coffee trade to mitigate the effects of wilder fluctuations in coffee prices. These arose from a combination of over-supply punctuated by periodic crop failures in Brazil. Although the motivation for the creation of the ICO was primarily commercial rather than philanthropic – chronic instability in a market is bad for business – the net effect was to impose limits on the gap between poverty and privilege in the coffee trade. Mandated by the International Coffee Agreement (ICA), which was signed under the auspices of the United Nations, the ICO promoted, regulated, monitored, and administered the ICA, which worked through an elaborate quota system permitting the pre-agreed restriction or expansion of coffee supplies to keep prices within certain thresholds. However, the full functioning of the ICO required the active participation of the USA, consumer of 25 per cent of the world’s coffee. Whilst there was a perceived threat of creeping Communism in the coffee-producing countries of Central America, it was in the best interests of the USA to support the ICA in order to help defuse social unrest in its backyard; but with the break-up of the Soviet Union this raison d’être evaporated and the ideologically driven policies of laissez-faire capitalism were given full rein. An international commodity-price control agreement had no place at the neo-liberal economic table, and the USA withdrew its support for the ICA in the late 1980s, and from the ICO itself six years later. The importance of the Berners Street headquarters of the ICO thus diminished; the research laboratory, lecture theatre and other facilities were closed down, and the promotional budget was slashed. The organization still hosts meetings of the member nations, and still compiles statistics with commendable zeal, but is a shadow of its former self.

The problems resulting from the market free-for-all unleashed by the US withdrawal from the ICA were exacerbated by the World Bank and its cousin, the Asian Development Bank. Both of these institutions had lent heavily to Vietnam in the mid 1990s in line with their mandate to stimulate low-cost production and end market inefficiencies. Having massively defoliated the nation with Agent Orange during the Vietnam War, the USA promoted – through the World Bank, in which it has a controlling stake – the refoliation of Vietnam with low-grade Robusta coffee bushes, with a devastating effect on the other Third World economies dependent on coffee. From its previous position as a very minor producer of coffee, by the year 2000 Vietnam had become the world’s second largest coffee producer after Brazil, exporting 9 million bags of 60 kilos each – still of low-quality Robusta – which, along with Brazilian coffees harvested by machines, were produced at a labour cost of one-third of that required for the higher-quality Arabicas of many other producing countries.

The result of the Vietnamese expansion was a catastrophic fall in prices, as well as a considerable falling-off in the quality of coffee blends internationally. Robusta is a coarse-flavoured strain of the coffee plant that is more resistant to disease than its refined cousin, Arabica. It is also considerably cheaper and, despite its low quality, represents an opportunity for roasters to improve their margins. The flood of Vietnamese Robusta on to the market depressed the price of all coffees, and thus the smallholders elsewhere who tended to the plantations producing high-quality Arabicas found their margins inexorably squeezed. Good coffee comes at a price, and for many that price could not be obtained on the world’s markets any more. The situation was sufficiently serious for the usually conservative coffee trade magazines to produce hand-wringing editorials: ‘Vietnam is now the Number Two world producer of coffee – plenty of Robusta for all and more. Yet roasters claim there’s little if any Robusta in their blends. Well, who is buying it all then – the man in the moon?’ The men in the moon in the form of traders in Germany, Italy, and Poland devised a new method of steaming Robusta coffee to remove the worst of its harsh flavours, allowing roasters to use even more in their blends. Junk retailers sold junk coffee to junk consumers at the lowest price point. The World Bank remained unrepentant. ‘Vietnam has become a successful producer,’ said Don Mitchell, principal economist at the Bank. ‘In general, we consider it to be a huge success.’ However, fulfilling the dire predictions concerning the ‘race for the bottom’ (the tendency for export markets for Third World products to migrate to whichever country has the cheapest labour) made by many international NGOs and aid organizations, one of the victims of Vietnam’s success recently has been Vietnam itself. The price of coffee has tumbled so far that farmers there are starting to tear up the newly maturing coffee bushes because they cannot cover the costs of production. The unsubstantiated rumours that China, with its vast low-paid labour force, has started to gear up for the creation of a large-scale coffee industry, assisted by Nestlé, may mean that Vietnamese coffee will be further priced out of the market and that the country’s brief moment in the sun will be over.

While coffee-producing countries fight over the diminishing scraps falling from the consuming countries’ table, a separate coffee futures industry flourishes in London and New York. Coffee futures were originally designed as a financial instrument to enable coffee traders to hedge against windfall gains or losses resulting from movements in coffee prices over time. The creation of a futures market depends upon there being an acceptable set standard of coffee that forms the basic unit of contract – the New York ‘C’ market uses contracts based on ‘Other Milds’ (including Colombian, Kenyan, and Tanzanian Arabica), the London market uses Robusta coffees. The creation of these standards has been possible because of the relatively predictable nature of coffee production: tea, a commodity that varies much more by the year, the season, the weather, and the day of picking, has yet to evolve a futures market because it has not been possible for traders to find, let alone agree upon, a homogeneous type to form the unit of contract.

The coffee futures market is a financial instrument that has now assumed a life of its own largely abstracted from the real trade in coffee. Speculators and investment funds trade on the market with no intention of ever seeing a single coffee bean delivered. It is grimly ironic that, whilst coffee farmers struggle for survival, the capitalist institutions based on the same commodity flourish, and it is no coincidence that when the vast trading floor of the New York Coffee, Sugar & Cocoa Exchange, formerly housed in the World Trade Center, was destroyed on 11 September 2001, it was able to resume business almost seamlessly in contingency premises prepared after the previous bomb attack in 1993 and maintained at a cost of $350,000 a year. The Third World, in the meantime, has neither the financial resources nor the political infrastructure to be able to respond meaningfully to the crisis it faces. The only international organization of coffee growers, the Association of Coffee Producing Countries, shut its doors in January 2002. Although speaking for over 70 per cent of the world’s production, it was unable to find unanimity amongst its member countries, never mind amongst those outside the organization. Colombia’s Federation of Coffee Growers, a central buying and marketing organization which for over seventy-five years had successfully helped its smallholder members to absorb the worst of global coffee price cycles, is now straining under additional pressure from the increasing violence and instability of that country. The membership is sometimes turning to illegal coca cultivation in desperation. ‘Colombia is facing a deep internal crisis related very much to the situation of drugs and coffee,’ the Secretary General of the association of producers reported. Similar national marketing organizations in other producing countries have collapsed over the last ten years, defeated by the World Bank and the IMF’s insistence on placing stringent conditions on loans to countries operating any constraint over the free market. The Nicaraguan Government, for instance, had to drop proposals to delay foreclosures on loans to coffee growers after intensive pressure from the IMF and the Inter-American Bank.