Coffee Industry Term Paper

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Coffee Industry

According to legend the origins of the coffee industry began when an Arabian goatherd named Kaldi found that his goats reacted strangely around a certain green-leafed bush with red cherries. He ascertained that the excitement exhibited by the goats was due to the effects from eating these cherries. He also consumed some of the fruit and felt "invigorated"; later monks were said to have benefited from the plants qualities to help them stay awake during their long hours of prayer. Whether this story has any basis in fact is unknown but what has been determined is that Coffea Arabica originates from Ethiopia. The plant was cultivated by the Oromom people in the Kafa Province of the country. Arab traders are said to have transported seeds and grew plantations in about 1000 A.D. (Coffee, FAO)

The first known coffee house or coffee shop was reportedly started in Constantinople in 1475; the concept later spread to other parts of Europe (ibid) Interestingly, Lloyd's Insurance Company was reputedly started in the back of a coffee shop in 1689 (ibid)

The route by which coffee entered Europe is not clearly known, although it has been suggested that the route was via Turkey. "It is possible that coffee was brought in along the same trade routes that were used to transport gold, valuable gums, and ivory from Africa; and silk and spices from Asia. (ibid) Coffee was firmly established in Europe by the 16th century.

Despite the popularity of the beverage today, the story of coffee production is one that has been of debatable success, particularly for developing countries and for the growers and producers of the plant. Today, coffee is grown in more than 50 countries around the world and supplies a livelihood to more than 20-million farmers. (Spilling the beans) However, the recent history of coffee production and international trade has been problematized by declining prices for the raw material parallel to global demand. Another important aspect affecting yields and market value is the intervention of large companies and corporations in the marketing, processing and distribution of coffee, which has resulted in problems for the farmers in developing countries.

Globally, coffee consumption is increasing but not nearly as rapidly as production, so prices are decreasing. In 2002 real coffee prices reached historic lows. Many producers are abandoning coffee plantations; others are destroying them. All of this is happening when markets in developed countries are fixated more than ever on high-quality coffee. While many consumers are willing to pay more for their coffee, they are actually drinking less of it. Furthermore, increased supply has not been followed by a commensurate decrease in price in most developed countries. (Coffee, FAO)

The coffee bean is harvested from a small tree or shrub which predominantly grows in tropical climates and requires sunshine and moderate rainfall. The coffee plant begins to mature and flower within three years of planting. The two most important aspects that affect coffee production are land and labor.

Coffee grown in full-sun has a productive life of six to eight years and shade-grown coffee eighteen to twenty-four years (even more if plants are cut back and harvested from new shoots); the relative value of land and labor can shift over time."

Coffee, FAO)

Importantly for the consideration of coffee production in developing countries, it is estimated that the areas or holdings on which coffee is produced has been reduced from the previous commercial size of 500 hectares to holdings of less than 5 hectares. This has become the average for more than half the global population. (ibid)

There are two main species of coffee that make up the bulk of output throughout the world. These are Arabica (Coffea arabica) and Robusta (C. canephora). Arabica was the first coffee to be produced for sale and originated in the Ethiopian highlands. The production of Robusta coffee began only after World War II. Generally Arabica coffee is produced in Latin America and Robusta in West Africa and South East Asia.

2. Importance of Coffee

It is difficult to underestimate the importance of coffee for the world economy, particularly for the economical growth of many developing counties that are heavily dependent on the product. "Coffee is the most valuable commodity after crude oil. It is the most valuable agricultural commodity in word trade." (Spilling the Beans) An indication of the importance of coffee, in terms of world trade, is that in 2000 exports throughout the world totaled 8.7 billion dollars.

The main countries in which coffee is grown are Brazil, Mexico, Angola Ethiopia, India and Vietnam, as well as the Pacific Islands. The annual crop is estimated at 7 million tones. (ibid)

It is estimated that 100 million people, mainly in developing countries, are dependant on the growing, processing, trading, marketing and retailing of coffee. (ICO Annual Review 1999/2000) Further statistics underline the importance of this product. Approximately over 10 million hectares are at present under coffee production and growth. The average annual production amounts to about 8 million tons of unroasted coffee and the "value-added" industry is worth approximately $60 billion worldwide.

McEwan, R.B. And B. Allgood)

However, it is the relationship of coffee to the developing countries - South American counties in particular - that is the central focus of this study. The importance of this crop production and associated processing and trade is obvious from the following quotation.

For many developing countries, coffee forms a crucial part of their economies. Despite low prices, it remains one of the most valuable primary products in world trade, a valuable source of foreign exchange. Around 114 million bags of green (raw) coffee are produced annually - the bulk being exported to consumer nations at a cost of $8.7bn.

Spilling the Beans)

The main coffee-producing countries, according to the area that is being cultivated, is as follows: Brazil (2.27 million ha), Colombia (850,000 ha), Cote d'Ivoire (829,000 ha), Mexico (701,326 ha), and Vietnam (477,000 ha). Each of the following countries has between 200,000 and 350,000 hectares planted to harvest coffee: Cameroon, Ecuador, Ethiopia, Guatemala, Honduras, India, Peru, Uganda, and Venezuela. Combined, the top eleven countries account for nearly 74% of all land devoted to coffee and 74% of global production as well (FAO 2002). (Coffee, FAO) This amounts to about 10 million hectares currently under coffee production. (McEwan, R.B. And B. Allgood)

The following is a graphic display of areas under production by country.

Source: Product Profile: Coffee Extracts)

The following list gives an indication in millions of bags of the top producers and exporters of coffee as of 2002.

Brazil 26.5

Colombia 12.0

Vietnam 7.5

Indonesia 7.2

Mexico 5.0

Coffee Information)

Brazil

Latin America and the Caribbean countries are at present the largest coffee producing regions in the world. This situation is likely to continue for the foreseeable future. However, the projected growth rate for the region is expected to decrease from 1.7% during the previous decade to 0.4% annually. (FAO Corporate Document Repository) The overall output from this region is expected to be 4.0 million tonnes (67 million bags) by 2010, compared to 4.2 million tonnes (70 million bags) in 1998-2000. (ibid) A decrease in coffee production in Brazil is also expected - from 2.1 million tonnes or 35 million bags during the period 1998 to 2000, to 1.3 million tons or 22 million bags by 2010. (ibid)

Brazil is certainty seen as the largest producer of coffee, having yielded an estimated 1.8 million tonnes in 2001. (Spilling the Beans) After Brazil the most prolific producers, in order of priority, are Vietnam, Columbia Indonesia, Cote d'Ivoire and Mexico; followed by India, Guatemala, Ethiopia, Costa Rica and Uganda. (ibid) Brazil is both the world's largest Arabica producer and the second largest Robusta producer after Vietnam.

The Brazilian economy is heavily dependent on coffee production. Coffee has been strongly related to the vicissitudes of the Brazilian economy, and especially as a driving force in the earlier acceleration of these Latin American economies.

Coffee provided a hopeful foundation from which to catapult the nascent Latin American economies into the upper stratum of development. The Liberal Project that gained a political footing throughout the region saw coffee as the vehicle to national wealth. Coffee plantings began to dot the countryside, displacing cattle, sugarcane, and subsistence crops. It also moved into lands never before used in agriculture.

The coffee business in this area has undergone some precarious changes during the past few years. In previous years "coffee lured inhabitants toward the interior of the country and transformed a mostly agrarian society into a modern nation. From the beginning of the century until the 1960s, this commodity was essential to the survival of the country." (ROSANNA M.)

The coffee market was so extensive and important for the country's economy that the Instituto Brazileiro do Cafe (IBC) was set up to administer it. However, some fundamental mistakes were made with regard to the way in which production and quality were determined. "Under IBC policy, the price-differential between a high quality coffee and…[continue]

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