Coffee Industry: Economics and Investment an Interesting

¶ … Coffee Industry: Economics and Investment

An interesting industry to consider in terms not only of investment, but also in terms of history, socio-cultural and economic influences, is coffee. It appears that, although the industry has recently experienced a world-wide crisis in sales, prices and quality, the industry is still flexible enough to provide opportunities for small companies and even coffee-producing individuals. Indeed, it appears that the crisis has brought about the highest of quality not only in some coffees, but also in the collective planning strategies of major stakeholders.

According to TechnoServe (2003) for example, 68 stakeholders from all sectors within the coffee industry have agreed to a collective analysis of the coffee industry in order to determine how best to deal with the crisis. Among these stakeholders are companies from specific countries where coffee has a major impact on the economic and social well-being of their residents. These include Cafecom and Fedecocagua from Guatemala, The Colombian Coffee Federation and Racafe & CIA from Colombia, Nestle USA and the National Coffee Association from the United States, Oxfam International from both the United States and Europe.

According to De Palma (2001), the coffee industry has been struggling to recover since the September 11, 2001 attacks. Since the United States has such a significant stake in international trade, coffee-producing countries have also felt the effect of this. Yet, according to the American Coffee Association (De Palma, 2001), the American coffee market has recovered, with coffee-loving Americans spending $9.2 billion per year on retail coffee and $8.7 billion on brewed coffee, espresso and cappuccino when dining out.

Other issues that have significantly affected the coffee market are supply and demand trends. The price of raw coffee, despite a healthy trading market for the finished product, had been declining prior to the 2001 attacks, according to the fairly slow rise in coffee demand. Another influencing factor for coffee producing countries is environmental factors such as rainfall. Excellent rainfalls during 1999 and 2001 have resulted in an over-supply of coffee from countries such as Nicaragua, forcing farmers to sell their produce at less than cost price. Coffee-producers are thus most directly affected by the fluctuating coffee market, and indeed the crisis currently experienced. In this light, coffee-producing as well as coffee-consuming countries are discussed below. These include: Guatemala, Colombia, Hungary, France and the U.S.A.

Nicaragua

Despite the crisis, two small producers of coffee in Nicaragua have placed quality above pricing and succeeded (BBC News Online, 2002). This is particularly significant, since the produced coffees are the two practically unknown local brands, San Isidro and El Regreso. These coffees gained the highest per pound price during Latin America's Cup of Excellence coffee auctions of 2002. At the auctions, these coffees sold for $11.75 per pound, which at the time was more than 20 times the price on the current market, and also much better than the 20 cents per pound offered locally to the farmers, or the international market price of 50 cents (BBC News Online, 2002).

Because of the low international market prices, the Latin American coffee auctions are aimed at uplifting consequently impoverished coffee producers, who are the most greatly disadvantaged by unfavorable market fluctuations. At the same time, these farmers are encouraged to produce high quality coffee, which would then be sold at a deserving price. The Nicaraguan coffees earned about $500m, which went directly to the farmers in question. The event was also prestigious for the country itself, since 2002 was the first year during which Nicaragua was represented at the auction. Such events also serve to rekindle enthusiasm for the coffee industry in general.

Further success was reached at these auctions under the leadership of Warren E. Armstrong (Roastersguild, 2003). Mr. Armstrong started a dairy and coffee farm with his Nicaraguan business partner in 1988, situated in Jinotega, Nicaragua. He has been the Executive director of the local farmer association, Association Aldea Global Jinotega, which represents more than 700 small Nicaraguan farmers. It is through this association that the above farmers attained their victory. In the subsequent year, three small farmers gained ninth place out of 385 entries in Nicaragua's Cup of Excellence competition, held to determine entrants into the Cup of Excellence coffee auctions.

In terms of investments, events such as the Cup of Excellence competition in Nicaragua could serve as an opportunity not only for the coffee industry, but also for industry investors, especially with the help of the Aldea Global Association. The competition could for example be sponsored to offer more opportunities for holders of second to 10th place in the competition for example. Monetary rewards could for example be offered in the interest of producing the highest possible quality of coffee for global consumption. This coffee could then reach a market price that is more favorable for the producer. At the same time the market is enhanced because producers are motivated to produce better quality, and consumers are ensured that the higher price also means higher quality. It is obvious that Nicaragua has the means and the resources to produce high quality coffee. Thus an investment in this country's coffee industry would be favorable, especially if untapped sources of income are identified and exploited to its full potential.

Colombia

Columbia has a long and colorful history of coffee production. After Brazil and Vietnam, the country is the third largest producer of coffee in the world, and the quality of the coffee produced here is recognized globally (Colcafe, 2001). The quality of the coffee is ascribed both to the long tradition of coffee production and to the excellent suitability of the region of the country in terms of soil quality, climate and attitude, to the coffee plant.

Besides the climate, the Colombian farmers' tradition of coffee production also ensures its superior quality. Special care is taken to preserve age old family traditions within farming families: coffee beans are handpicked, and prepared carefully, resulting in what Colcafe (2001) terms "the mildest coffee in the world." Colombian farmers and their expertise are thus an important asset to the coffee industry of Colombia, like they are in Nicaragua. The result of such excellent coffee production methods is that this trade has provided Colombia with its main export product and source of foreign currency for many years. Its average yearly production of 11 million sacks of green coffee from 1996-2000 has provided for 10.5% of the total global coffee production. It is thus not surprising that coffee, since the beginning years of its Colombian production in the 16th century, has grown to affect nearly every area of the country's social and economic culture.

The product for example provides the main source of income for residents in rural areas. Colcafe (2001) estimates approximately 400,000 families who depend directly on the coffee growing industry for their income, in addition to which almost 600 small towns dedicate their time to the production of this beverage. It is thus clear that, being exceptional, and coming from a long tradition, the coffee industry of Colombia has provided well for the country's citizens, providing social and economic welfare. Colcafe is one of the larger coffee manufacturers in Colombia, producing and exporting coffee products. Although its history is therefore impressive, the crisis in the coffee industry is particularly felt in Colombia, precisely because the country is so dependent on it for the country's economic welfare. This may serve as either a deterrent or an attractive force for investors.

Josh Frank (2004) addresses the difficulties faced by the Colombian coffee production industry as a result of global forces in the economy. Increasingly huge coffee corporations such as Starbucks and Seattle's Best have for example profited increasingly from the coffee trade while small farmers have exponentially suffered as a result. The reason for this is that quality is no longer the primary concern over quantity. The race for an increasing amount of cheaper coffee beans of lower quality has driven small Colombian farmers to the back of the market.

A further problem is that pressure to produce increasing amounts of coffee beans has caused significant environmental deterioration. Land previously covered by forests have been cleared in order to produce crops, emaciating the very crop-producing ability of the land. In this way coffee producing countries such as Colombia and to an extent Nicaragua as well have suffered under the onslaught of multinational companies in search of coffee buying opportunities. With the wider availability of coffee in retail stores, coffee exports from Colombia began suffering (Frank, 2004).

The once profitable industry, accounting for 50% of the country's legal exports in the 1970s, dropped to 7% by 1995 due to wider availability of cheaper products in industrialized countries. During the 1960s to 1970s, Colombia coffee traded at $3 per pound. This has dropped to just $0.62 per pound in October 2001. While coffee farmers however still employ most of the country's workers, oil has become Colombia's greatest legal export, while other former coffee farmers left the country, or sought more profitable trading opportunities with coca and opium (Frank, 2004).

Related to this tragedy is the rise and fall of The Colombia Coffee Federation (FNC), a labor union reminiscent of the Aldea Global Federation in Nicaragua, mentioned above. The Colombian Federation began its existence in 1928, and acted on a representative basis on behalf of small coffee farmers who had little influence in the political world (Frank, 2001). These were profitable years, and farmers had no difficulty gaining in terms of profit and of politics.

During the 1970s, and several global economic factors coming into play, Colombia's FNC however soon lost much of its power. Trade factors such as the free-market system, deregulation, privatization, whereby industrialized countries practically overpowered the local systems, resulted in this loss of power for the local Federation. Local trading legislative power was thus undermined by these forces.

In Colombia, as in the other coffee producing countries, overproduction of coffee also became a problem, as already mentioned. Coffee production in Colombia increased to estimates of 750,000 to 900,000 farms in 1972 (Frank, 2004), which resulted in a price decline. This in turn resulted in a loss of over 200,000 farms by the mid-1990s with the ever-increasing oversupply of coffee in Colombia. The problem was exacerbated by other traditional coffee producers also increasing their production, while new producers were also starting to flood the market. Frank (2004) mentions that 60 countries produced some 132 pound bags of coffee, against the world consumer rate of 108 million bags.

Again, a low regard for quality as opposed to cheap buying price attracted large multinational buyers such as Nestle, Phillip Morris, and Proctor and Gamble. Colombia's meticulous and quality oriented farming methods, while still producing top quality coffee, are simply no longer economical enough to suit the requirements of the industrialized world. Coupled with this is the rise of countries such as Vietnam as producers of cheap beans, where production and farming costs are also very low. These factors resulted in a steady decline in the standard of living once customary for Colombian coffee farmers. Not surprisingly, those profiting most from the new economic circumstances are the largest chain traders Starbucks and the larges multinational buyer Nestle.

The current conditions for coffee production and investment in Colombia are thus interesting. Again, the natural resources in terms of climate and soil for producing top-quality coffee are abundant. As in Nicaragua, the enterprising investor could empower farmers to produce their usual best, which could then create a different market entirely from the one flooded by cheaper brands emerging from Vietnam and bought by retail chains. This could once again create a favorable economic climate for Colombia and its people. Furthermore the socio-political conditions in the country have to be incorporated in any investment enterprise. Nicaragua and Colombia could be used as a dual investment opportunity, in which a profit can be made from delivering a quality product with a pride that has been lost in the industrial rush for profit above all else.

While Nicaragua and Colombia rank among the world's highest quality coffee producers, France, Hungary and the United States appear to be major consumers of this product. It also appears that the last mentioned three countries would benefit from a more expensive market of higher quality coffee. In this way nothing is detracted from the profitable cheap market while a significant improvement can be effected for producers of quality coffee. In fact, the year 2004 has begun to see such a commitment by the above-mentioned Starbucks, with the expansion of its coffee retail to France.

France

According to Business Wire (2004), Starbucks Coffee France focuses primarily on quality for their coffee purchases. The French taste for coffee is largely a determining factor in this, and the large retailer is therefore obliged to add quality to its strategy if it is to be successful in France as a coffee consuming country. As such, Starbucks Coffee France SAS, have also used local quality checking strategies in order to customize their products to the French market. In this the company has worked with small specialty companies in order to ensure a smooth transition into the French culture and quality of coffee.

In terms of community service, Starbucks has entered into a partnership with the French charity organization Les Restaurants du Coeur. In this way the company is demonstrating a wish not only to make a profit, but to also channel some of this profit to worthy causes. As already mentioned, the company is not only committed to the specific community in which it operates, but also to the quality of its product (Business Wire, 2004).

To show their commitment to coffee farmers in origin countries such as those mentioned above, Starbucks pays more than the commodity price to ensure the highest quality product. The fact that such a large company is doing this perhaps is a hopeful sign for countries such as Nicaragua and Colombia. Indeed, the French coffee tradition requires a high quality product, and in this way both large retailers and quality coffee farmers can profit once again. It thus seems wise to add France to a list of investments with regard to coffee (Business Wire, 2004). The example of Starbucks and the many associations it has with smaller coffee establishment in Paris indicates a high confidence level in this market.

Hungary

Coffee in Hungary, and specifically in Budapest, seems to have served an important social function in the past. Indeed, it is believed that at the turn of the 20th century, there were some four hundred coffee houses in Budapest alone. Coffee houses in Budapest were for example used much as coffee houses in the United States and France today: as important cultural centers to discuss the arts, politics and life in general (Hungarian Quarterly, 1997). Indeed, some of the best Hungarian literature is based upon the culture of the coffee house. This includes Lajos Nagy's Cafe Budapest, published in 1936.

Sadly however, the political and revolutionary forces after World War II resulted in the destruction of this tradition in favor of less "bourgeois" values. Thus the tradition of drinking coffee as a public activity appears to have declined in Hungary. Yet Hungary is still an avid coffee consumer, and the nostalgia of the coffee house might profit from an attempt at revival.

A similar effort as that of Starbucks in France might therefore be profitable in this country and others like it. Again, higher quality, more expensive coffees could be combined with cheaper offers to suit every taste and pocket. In the 21st century, the time has come to abandon prejudices from the past and once again embrace the best of the past and combine it with the best of the present. This is what Starbucks is doing in France. Hungary is therefore also a fertile possibility for investment, depending on relative political stability.

The United States of America

The United States, as has been mentioned above, is the largest consumer of coffee worldwide. This country therefore seems to offer the best investment opportunities for both large and small investors. As the largest consumer as well as producer of generic coffee brands however, the country also faces considerable controversy with regard to the coffee trade in terms of price regulation and unfair policies towards farmers while profiting the big players in the business. Giant American companies such as Sara Lee, Kraft, Procter & Gamble and Nestle have been accused of selling coffee beans at $3.60 per pound while coffee farmers earn 24 cents for a pound of the same beans. In this way coffee farmers are left with little more than slave labor while large companies benefit financially (Jeffrey, 2003). The economic practice of free trade, as well as globalization and privatization that serve corporate greed have been blamed for this phenomenon. This discrepancy is also to blame for the tremendous pressure on farmers to produce increasing amounts of coffee for decreasing prices, and further flooding markets. This exacerbates the crisis not only in terms of economy, but also in terms of the environment and social standard of living. Furthermore socio-economic problems are created for the United States, as illegal immigration from Central America has increased as a result of the coffee crisis. In this way the American economy suffers, making unfair trading and labor practices ultimately unprofitable and self-defeating.