There is as much variety in coffee as there is in wine as consumers are now well aware. Final product markets are beginning to segment and prices spreads are increasing. But who is gaining from the differentiating market – the roasters and retailers in rich countries, the global coffee trading companies or the developing country producers? What can be done to increase the share of these relatively price inelastic product niches for poor producers?

Research by the UK Institute of Development Studies explored these issues by examining detailed data on global coffee prices and interviewing key respondents in the corporate and policy making communities.

Key findings are that:

• Coffee terms of trade have declined over the long-run and are currently less than half of what they were in 1963.
• Global prices have collapsed over the past 18 months and producers are being forced off the land and into poverty.
• Final customers are becoming more discriminating in their choice of coffee; specialtyspeciality coffee houses are growing in importance. Final product prices have become more differentiated and are reflected in the increasing price spread in global coffee markets but not in farm gate prices.
• Producers are achieving virtually none of the gains arising from price inelastic segments of the market, except for FairTrade coffee which accounts for around 1.5 percent of global trade.
• Global coffee traders are thought to achieve relatively high profit rates but profits from importing roasting and retail activities are not that high.
• Roasters and global traders have gained at the expense of coffee farmers, largely due to growing power asymmetries between increasingly concentrated global buyers and increasingly atomised developing country producers.
• Pressure from multilateral and bilateral agencies to abolish coffee marketing boards have contributed to these growing power asymmetries and to a decline in the extension capabilities required to assist farmers to improve coffee quality.

What can be done to change this distributional outcome? The World Coffee Council is considering the reintroduction of coffee quotas which led to relatively stable prices between 1965 and 1975. However the number of new entrants into the coffee market (notably Vietnam) makes it unlikely that this initiative will be successful. FairTrade coffee has played, and is likely to continue to play a role in lifting producer incomes but touches only a small share of the global coffee market.

A new opportunity is opened by increasingly differentiated coffee markets. Left to market forces alone this opportunity is likely to be grasped by the global roasting companies who will lead customers to equate quality coffee with brand names. However, the primary determinants of coffee taste are at the farm level. The policy opportunity is thus to:

• help educate customers to recognise the local determinants of quality
• encourage the growth of estate coffees at the expense of coffees sold under global brand names
• assist producers to produce better and more consistent coffees (backed by extension policies).

Source(s):
'Can an agricultural commodity be de-commodified, and if so, who is to gain?' IDS Discussion Paper by Robert Fitter and Raphael Kaplinsky (forthcoming December 2001)
See also: 'Who gains from producer rents as the coffee market becomes more differentiated?: a value chain analysis', IDS Bulletin Paper May 2001 by R. Kaplinsky Full document.

Funded by: UK Department for International Development (Escor R7948)

id21 Research Highlight: 9 October 2001

Further Information:
Raphael Kaplinsky
Institute of Development Studies
University of Sussex
Brighton BN1 9RE
UK

Tel: 44 (0) 01273 678 280
Fax: 44 (0) 01273 621 202
Contact the contributor: R.Kaplinksy@ids.ac.uk

Institute of Development Studies (IDS), UK

Other related links:
'The lure of the French bean: what’s in it for women?'

'Do fair trade partnerships work?'

'Leaving it to the market: the failure of liberalisation to help the rural poor of Mexico'

The International Coffee Organisation works for the world coffee community

'The 'latte revolution'?: winners and losers in the restructuring of the global coffee marketing chain' from CDR

'Coffee: spilling the beans', New Internationalist edition focusing on coffee

'Spilling the Beans: What's wrong with the coffee trade?' from the Fairtrade Foundation