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« Beyond the fringe III | Main | "A crossing of the Rubicon" »

May 19, 2004

Comments

David T

I corresponded briefly last year with Oxfam on this topic. Their argument - at least superficially - appears to be that the fall in coffee prices are the result of (a) the overproduction of coffee (which they blame on IMF policies); and (b) a cartel of coffee buyers. However, their real gripe appears to be that the international price fixing agreement which set the price of coffee has broken down.

There's obviously some truth in this analysis. However, the only solution, as you suggest, is to diversify. And this - supported by the McKinsey study - is exactly what they do suggest. That call is hidden away in their literature, and the specifics of how it is to be achieved was - at least last time I looked at their arguments - playing second fiddle to gripes against the wicked coffee purchasers. But its there. I suspect that Oxfam simply dressed up quite a sensible strategy as an anti-globalisation rant because that's what people are buying at the moment.

On Fair Trade coffee; its just another luxury brand with an "ethical" selling point. My only objections to it are
- only a tiny minority of people will buy it; its effects will be insignificant overall. One study suggested that when the cost of "ethical" products exceeded the cost of "unethical" products by 10% or so, the numbers of people buying it dropped sharply.
- ethical produce is a luxury good, and people tend to cut their consumption of luxuries first when times are tough.
That said, people pay absurd amounts of money for Starbucks; its not inconceivable that people would pay over the odds for Oxfam.

Matthew

There might be a case for buying Gap clothing to help developing countries, but it rests on the idea that Gap is aware of the problem of working conditions and is trying to improve them, not that such problems don't exist. And the reason it spends so much time on this is precisely because of the campaigns and campaigners you attack.

There is still much work to be done. Gap's report says, among other things, that in China >50% of factories don't obey local labour laws, up to 1% in Europe and China employed under-age labour, between 25% and 50% in India and 'Persian Gulf' work more than 60 hours a week, in North Asia 15% to 25% violated local laws on leave, and 10-25% in China, N.Asia, SE ASia, Sub-Saharan Africa and Europe pay is below the minimum wage. Similar regions and numbers are violating local laws on health & safety.

We would expect Gap to comply with labour laws in our country, so it doesn't seem wrong to expect it to comply with similar laws in other countries. Furthermore customers who buy goods surely have some moral responsibility for how they are made, and thus such groups do us a service is exposing this.

ken lewis

I had always understood the aims of the Trade Justice Movement, of which Oxfam is a member, to be helping growth in the industries of developing nations without compromising on their humanity by forcing the producers to work in inhuman conditions.

Take care.
Ken.Lewis

Ryan

Sticking a fair-trade label on a few products so that a few affluent consumers can choose to purchase a product made according to certain standards is clearly no long-term solution to the coffee crisis. As both Oliver and Oxfam (according to David T) agree, coffee producers need to diversify.

Regarding Oliver's statement that there is no market failure here, I would say that when farmers are being paid a price that does not cover their costs of production, this can reasonably be called a market failure. Surely the market is failing coffee producers when many do not receive a living wage for the job they do.

Of course the market is also signaling that there is an excess of supply. And yet the situation persists, and has done for a number of years.

(For example, I can find a news story from 2001 expressing alarm over coffee prices falling by 41% in the last year, and I can find a news story from this month stating that Vietnam has increased coffee exports by just under 30% in the last year. This seems to indicate that this is a long-term problem which is not being addressed.)

So, urgent intervention is necessary in this market, and it does not appear to be forthcoming. I think this is a far more pressing issue than the small number of coffee producers who are now receiving a market-distorting price from organizations like Oxfam. Thanks to them, while so many people are suffering, a small number of producers are receiving a good, stable price for their produce.

It is not Oxfam that we should be getting angry about, but the lack of action from the world’s governments and economic institutions to improve the price of coffee on the world’s markets and stop the ongoing impoverishment of producers and communities in the developing world.

Anthony

We would expect Gap to comply with labour laws in our country, so it doesn't seem wrong to expect it to comply with similar laws in other countries.

Are we expected to enforce the law in other countries?

Matthew

In response to Ryan's post, there is absolutely no need for "urgent intervention".

Think about it Ryan. Coffee trees take years to grow. That means that any over-expansion in the market is not going to show up immediately. Likewise, it takes time for producers to respond to the problem of over-supply - it's not possible for farmers to switch instantly to producing other crops. But that does not the market will not come back into equilibrium in the long term. The fact that there is oversupply does not in itself mean the market is failing.

David T

It is not Oxfam that we should be getting angry about, but the lack of action from the world’s governments and economic institutions to improve the price of coffee on the world’s markets and stop the ongoing impoverishment of producers and communities in the developing world.

Its not action to "improve the price of coffee" that is needed; it is diversification that is urgently required.

What I couldn't work out was why Oxfam couched this very sensible proposal - which has at its heart, the idea that coffee producers really ought not to be growing the crop if they can't even recoup the cost of production - in a long rant against the wickedness of Sarah Lee.

Perhaps it was a prelude to the launching of their own brand, and therefore should be seen as the promulgation of a USP for their new brand, rather than simply a proposal for reform.

Guy Berger

I think David T's feelings on OxFam's strategy more or less correspond with my own. I have one more caveat to add to his: if you think that (A) some farmers will be unable to respond to the added price incentive of adopting "OxFam-compatible" technology (pick your favorite market failure argument) and (B) those farmers tend to be the worst-off in terms of welfare, then OxFam's policy could backfire (at least in terms of its self-professed aims).

Rob Read

The price of coffee is only improved by it FALLING, unless you are a a corporatist like the EU where consumers are there to support politicans favoured big businesses.

AK

What do you mean by equilibrium matthew?

Matty

Dare I suggest that the solution is not patronising the third-world with "You'll be better off employed by a foreign-owned corporation than doing your own thing" ideology (Sweatshops may pay more than what they are used to, but they still pay a pittance and the lack of worker's rights *is* a scandal, however much economic spin Western ideologues attach to it).

The solution to Third World poverty is not to treat them as poor wretches who should be grateful for Western patronage. The solution is to develop Third World economies by encouraging them to form their own companies, own their own farms, make their own profits and allow the wealth to flow back into their own country, not abroad. Sadly, with the argument passing between "no to Globalisation!" protesters and Corporatists disguised as free-marketeers, this idea has been lost at the wayside.

Matthew

Anthony,

If you visit Thailand I would hope that you obey the local laws, and if you brought me back a present which you had obtained illegally I think I could practically and morally refuse it without being accused of ruining the lives of the citizens of that country. That doesn't mean I believe I am expected to enforce those laws.

Matthew

James B

Ryan, wake up and smell the... er, coffee. Too many producers + not enough demand = surplus = lower prices. The market hasn't worked to correct the oversuply immediately because I'm sure it damn difficult for coffee growers to suddenly grub up their investment, retrain and make money doing something else. Eventually, enough of them will give up (assuming this IS a structural problem), or we'll have a dose of coffee-bean blight or whatever that will bring supply down closer to demand and raise the price.

In any case, and perhaps more tellingly, according to the ICO (International Coffee Organisation) supply has fluctuated wildly recently. In 1993, 90m bags of coffee were supplied: the following years the figures were as follows: 95; 85; 102; 96; 106; 114; 112; 109; 119; 101. Between the last two years supply dropped by around 15%. So in some years, the price will be better than others. Maybe that's what the producers live for: a glut followed by a period of drougt. Furthermore, the operation of the futures market distorts things slightly, driving prices up in a panic about "undersupply" (see oil at the moment) or vice versa.

Finally, on the demand side, I'd reckon that most people who wish to consume coffee already do so to the maximum they wish/need. Demand for cappucini is, I would reckon, rather inelastic, so lower prices won't add much to aggregate demand. The one thing Oxfam will ensure if they charge more for their coffee is to REDUCE demand, therefore excacerbating the problem they're trying to solve! Funnily enough, that's the opposite of a market failure!

David T

Interesting last point, James! That is certainly possible.

The solution is to develop Third World economies by encouraging them to form their own companies, own their own farms, make their own profits and allow the wealth to flow back into their own country, not abroad.

This is precisely what was done in Africa, and pretty much the reason that Africa is so poor today. In order to foster "home grown" industries, tariffs were applied, the effect being, of course, to increase the prices of those home produce goods, render them scarcer that they might otherwise be, ensure that they were of poor quality, and - as an added bonus - created a fabulously corrupt bureaucracy. The exceptions to that rule, comparatively speaking, are said to be Botswana and Ghana which - surprise surprise - are the ones to liberalise duty.

So, all in all, I wouldn't favour that option.

David T

By contrast, the right sort of investment - industries founded and run, rather than simply funded by outside investors - brings jobs, capital and most importantly, technology/know-how into the country.

Mere investment, without knowhow, tends to result in corruption and the loss of that investment.

Ironically, in a corporatist state, the protected "home grown" industries will have the influence, money and therefore the power to prevent the sort of liberalisation which I think is necessary. In a state which is additionally bureaucratic, it will be difficult to start and run businesses at all. If the state adheres to a form of communism, it may not have the legal machinery to ensure the property rights of investors. Finally, if the state is also lacking in certain human rights, it may also present an unattractive prospect for investment. For example, without freedom of information/speech, investors will not be able to make informed business decisions.

Its not easy to reform such countries.

BigMacAttack

I love Oliver's posts on this site but this time he overstates his case. While making a lot of good points.

Buy whatever you like, including Oxfam coffe.

If Oxfam and consumers are willing to overpay for coffee bully for coffee producers and third world countries. The very act of paying a fair price, overpaying, will nullify Oliver's claim that growing coffee will never be profitable, at least for those coffee growers Oxfam buys from.

It is unlikely that producers and investors not on Oxfam's gravy train will be much influenced to continue growing and investing in coffee. So Oxfam's approach will not harm them.

I see no reason not to believe that those growers on Oxfam's coffee gravy train will be smart enough not to reinvest their excess profits in the dubious hopes that Oxfam's free lunch will last for any meaningful length of time. They will almost certainly attempt to invest the monies in more productive enterprises. Since I see no reason to believe that either Oxfam or their customers would be any more likely to invest those monies in productive 3rd world businesses and since I think it is likely that the reverse is true, I think it is likely Oxfam's approach will have the desired result of improving third world economies, though not in the manner Oxfam intended, but rather in the manner Oliver reccomends.


Ryan

Thanks for the statistics, James B. Coffee supply has indeed fluctuated, but these production figures represent a consistent over-supply which has reduced coffee prices by 50% in the last three years. [Sources - Oxfam, Refco].

According to Refco's analysis, production is likely to decrease a little going forward. However this is unlikely to improve prices significantly considering the stregnth of the surplus. Sitting on our hands and hoping the market will solve everything seems naive.

Oliver Kamm

Ryan - I'm glad to have your comments on this blog once more, but I fear you have misunderstood my reference to market failure. I was using the term in the technical sense of an allocation of resources that is Pareto sub-optimal. Pareto optimality is said to exist where an allocation of resources can't be altered to make someone better off without making someone else worse off. If I say that a particular allocation is not evidence of market failure, it doesn't actually answer my point to observe that some economic enterprises are loss-making.

I hope that, with that correction, you will see that "sitting on our hands and hoping the market will solve everything" is not an accurate description of the argument in my post (though of course I can't speak for the position of other contributors to this thread).

James B

Ryan


Well, I tried to find some reliable information on coffee demand but the top entry in Google was this:

http://news.bbc.co.uk/cbbcnews/hi/animals/newsid_2979000/2979977.stm

On a more serious note, an article in the Obsever from April 2004
http://www.ico.org/ed/observer.htm

"The International Coffee Organisation (ICO) price rose from an average of 48 cents a pound in 2002 to 52 cents in 2003 and to 59.7 cents a pound in the first three months of 2004. It averaged 60.8 cents a pound in March, a rise of nearly 50 per cent since September 2001.

The ICO is now signalling a shortfall in coffee for export. The cause? It seems there's an awful lot less coffee in Brazil this year. Awful for Brazil, the world's largest producer, but good for other coffee exporting countries. After producing a record 48.5 million 60 kilogram bags (the traditional measure of coffee) in 2002-3, Brazil's output has fallen dramatically in the current crop year, which ends this April, to 28.5 million bags - a drop of over 40 per cent."

and this

"Low prices also meant that some growers neglected their bushes or diversified into other crops. Output in Vietnam, the second largest coffee producer, was also down - from 14.77 million bags in 2001 to 11.25 million in 2003 as farmers lost enthusiasm for the crop"

Market forces, me thinks.

David Gillies

This is another example of the fetishisation of agriculture. The UK is 75% self sufficient with around 1% of the workforce employed in agricultural production. Coffee growing is horrific, back-breaking work that's near-impossible to mechanise (you try harvesting waist-high bushes on a 45 degree slope in a tropical climate. For twelve hours a day).

The only country with which I am familiar in coffee production terms is Costa Rica. The glut of coffee has certainly hurt growers here, but the combination of strong property rights and comparatively technically advanced production methods has mitigated a lot of the effects. There has indeed been diversification (notably into tourism) and many of the producers are concentrating on producing very high quality boutique brands which can be sold at a premium. For example, try Britt Tarrazú Montecielo - just about the best coffee I've ever tasted. It's around $10 a 12oz bag in the States (I pay more like $4.50) but it's selling strongly. The precise economics of the situation I leave to more learned heads like Oliver's.

As an aside - I flatly refuse to drink 'fair trade' coffee as in my experience it tastes dreadful. Unconvinced (to put it mildly) as I am of the economic merits, I refuse to indulge in mortification of the flesh in order to feel more virtuous. I take my coffee seriously.

WJ Phillips

Asda SmartPrice granules are 31p a jar for 100g. A heaped teaspoonful produces a small black cup that rivals anything on offer in the back streets of Istanbul. It's grown by North Korean old age pensioners on 3p a week.

James B

I hadn't realised they grew coffee in Korea, let alone being the world's second-largest exporter. My prefered sip is Sainsbury's Ethiopian or Columbian.

I hadn't realised my last post re Ryan had pitted the Observer versus Oxfam: which one is telling the truth about coffee prices???? What fun.

cicada

Great idea that, encouraging coffee growers to stick with an unprofitable industry. Whatever satifies the Oxfam egos, I suppose. It's a wonder they never learn from the real-life examples out there. Take Singapore. No natural resources, just 4 million people and when it was born 40 years ago, wracked by racial strife. Yet today, it's got one of the highest per capita incomes in the world. And not an NGO in sight.

Dave F

I understand David T's argument. So taking this to its logical conclusion, should not Oxfam be ensuring a fair trade price for coca growers and hemp planters, since the hugely inflated street price is clearly of no benefit to them, and simply puts vast profits in the hands of multinational druglords?

Bravo Romeo Delta

Ryan

Surely the market is failing coffee producers when many do not receive a living wage for the job they do.

If they're not receiving a living wage, then why are they not dead? Seriously, terms like 'living wage' tend to be misapplied and used capriciously.

But past semantic issues, can you envision a system by which paying overinflated prices for something does anything other than artifically subsidizing the problem?

Anthony

Matty,

I said "Are we expected to enforce the law in other countries?", not "Are we expected to follow the law in other countries?" which is an important difference.

Guy Berger

But past semantic issues, can you envision a system by which paying overinflated prices for something does anything other than artifically subsidizing the problem?

I think "artificially subsidizing the problem" is not the right way to think about this. If some coffee drinkers gain an added psychological utility from consuming a certain type of coffee, then there is potential for pareto improvement if those consumers compensate producers for their utility gains. Unlike what we usually think of as a subsidy, this one is funded by those consumers who experience utility gains rather than by indiscriminate taxation.

I think the issues with this program mostly come down to whether it really helps those farmers that Oxfam wants to help.

Guy

Matthew

Anthony,

You've lost me again. I explicitly said I didn't expect you, or Gap, to enforce the law, but I expect you or Gap or their agents to follow it.

ps By the way I am a different person to 'Matty' and to add the confusion 'Matthew' who posed on 'equilibrium'.

David T

Dave F

Yes, this does worry me. I think an ethical consumer should not buy street drugs for just that reason. Given the violence and corruption that an illegal, but often officially sanctioned, drug business engenders at the present - not to mention the monopolistic nature of drug production - it would be nice if the law enabled one to "grown your own" at home. Weed that is; I can't imagine growing your own coca. The illegality of drugs - which renders the market hugely uncompetitive - produces precisely the sort of corruption that I object to in other corporatist methods of production and distribution.

The odd exception to the rule is ecstacy, which as you will know, is subject to a relatively high amount of competition. This is why the price has dropped from around £15-20 a pill to £3-5. In fact, the price is so low that people I know who used to sell it simply aren't prepared to run the risk any more.

Dave F

Since you offer a serious (and consistent) argument in reply to my rather facetious post, I would observe that Ecstasy is an industrial product, from lab to retail, and is subject to normal supply and demand patterns. However, were drug use to be decriminalised, and controlled sale allowed, the price would fall sharply. After that, the best way to limit production would be to pay farmers compensation via say, the World Bank, for supplanting them with food crops. Or Oxfam could help here too?

David T

Yes, and it is also very easy to make.

The result of decriminalisation may well be as you describe: but I'd defer to others who have studied the issue ...

dsquared

ahem.

Oliver, when you note that "Unfortunately the sharp decline in world coffee prices is not only cyclical", you ought to be clear that it's not only cyclical because it isn't cyclical. Coffee prices have been on a flyer for the last year, as one of your commenters above notes.

Btw, I'm not sure what this is about either:

"yet by insinuating that other coffee is ethically dubious, Oxfam threatens the livelihoods of other more successful, but generally poor, coffee farmers. "

The "successful, poor" cofee farmenrs of the alst five years have been the big farms of Vietnam. I'd have thought that you'd be the last person on earth to claim that collective farms run by a totalitarian government weren't "ethically dubious".

Oliver Kamm

Dan - I'll stick with "not only cyclical". World Bank report Coffee Markets: New Paradigms in Global Supply and Demand, March 2004, depicts long-run price history as repeated spikes followed by new cyclical lows due to productivity gains and increased production as new suppliers enter the market. Because of the inherent cyclicality, the price recoveries are only temporary while the structural factors make it less likely and less frequent that the spikes will match the previous peaks.

I'm in fact the last person in the world to claim that economic choices, even those that encompass my own preferences, are ethically unproblematic. That's one of my differences with Oxfam.

dsquared

Fair enough, though if you're gonna cite that, the superduperscrupulous thing to do would be to note that they absolutely don't agree with you on the desirability of fair-trade marketing practices; in particular they seem to absolutely contradict you on the subject of whether fair-trade encourages farmers to stay in uneconomic production; their view is that fairtrade buyers ahve had the effect of both encouraging and financing a migration upward to higher value-added coffee varieties.

By the way, I also think that your argument on Gap is weak. It seems to depend on general assertions about "western companies such as Gap" rather than facts about Gap itself. The studies of "Western companies" are mainly influenced by Nike, which has sorted its act out over many years of having to fight the company-specific campaign against it. Why should I not make the decision to buy Nike, which is leading the way toward better labour standards, rather than Gap, which appears to be unable to manage its business well enough to comply with local labour standards that Nike comfortably exceeds?

Guy Berger

Daniel D,

Could you clarify the following statement?

The "successful, poor" cofee farmenrs of the alst five years have been the big farms of Vietnam. I'd have thought that you'd be the last person on earth to claim that collective farms run by a totalitarian government weren't "ethically dubious".

My knowledge of Vietnamese coffee farming is quite thin, but I do know that quite a bit of it takes place on private farms. (For example, the World Bank report says on p. 87 that "it is evident that expansion of the planted area has occurred independenlty of government control.") What percentage of Vietnamese coffee is grown on collective farms run by the government?

Oliver Kamm

The authors' arguments are in fact scrupulously balanced, as they ought to be. While they note that the fair-trade premium is 'not onerous', they specifically refer to buyers' concerns that a price floor would give a misleading signal to expand production.

Extensive studies of western companies are summarised in the NBER working paper The Effects of Multinational Production on Wages and Working Conditions in Developing Countries, Brown, Deardorff & Stern, May 2003, pages 41-51. The authors make it clear that they are talking of a generality of companies - not mainly Nike, and not mainly apparel (though it is mainly manufacturing) - where there is "a very large body of empirical evidence" whereby "foreign ownership raises wages both by labor productivity and expanding the scale of production, and, in the process, improving the conditions of work".

Dom

Well if we're being technical isn't "Low coffee prices are not the result of market failure, but a sign that there are too many producers." an oxymoron? How can one have too many producers without market failure?

Richard

It is very easy to say that coffee farmers should diversify, but what are they meant to produce instead? Due to western agricultural subsidies coffee is one of a few crops that can be sold in western markets. No wonder it is overproduced! If we remove our trade distortions coffee farmers we be able to diversify, hence the price of coffee will fall.

Those who preach free trade shbould be willing to point out that currently the WTO rules are biased to western countries, and should campaign for free trade in all products i.e. a removal of agricultural subsidies. And people on other side of the argument, advocationg "fair" trade are well intentioned but misled to think that creating another distortion is the best way to solve a distortion created problem.

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