January 15, 2017    10 minute read

The Economics Of Coffee

Hot Commodity    January 15, 2017    10 minute read

The Economics Of Coffee

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Coffee is one of the most important global commodities for a number of reasons. Aside from that satisfying buzz first thing in the morning, of course, coffee’s greatest power is how it ties together all corners of the world in a sprawling network of international trade. Before becoming the lifeblood of the working world, it also had a formative role in the history of the world economy, telling a story that will continue in unexpected ways as changing trends in consumer habits change demand in the market.

The Global Flow Of Coffee

The humble coffee bean begins its journey on plantations, before being carefully roasted and packed off to travel the globe. Those former stages in production mostly take place in less developed economies – so much so that many countries rely enormously on their role in the coffee market. Once picked, it travels long distances, changing hands a great many times. Unroasted coffee is so widely exchanged that it is traded in futures contracts on exchanges from New York to London.

According to the World Bank, 95 out of 140 developing countries depend on commodity exports for at least 50% of their export earnings, and in many such places it’s coffee that makes up the lion’s share of all that enterprise. To give but two examples: coffee makes up over half of Uganda’s exports and three-quarters of Burundi’s.

25m families worldwide depend on their roles in coffee production

In fact, for the last three decades of the 20th century, coffee was developing countries’ second most valuable commodity export overall. The same would most likely turn out to be true today were it not for the difficulty in updating such figures posed by the blurring line between developing and developed countries.

As a relatively labour-intensive industry, coffee production ropes in a huge number of people in the effort to get the good stuff into our cups. According to International Coffee Organisation (ICO) estimates, roughly 25 million families depend on growing and selling beans, most of which are small-scale farmers. In Brazil – which produces more coffee than anywhere else in the world, churning out over two and a half billion kilos of it in 2014 – over a million jobs are generated by the industry as a whole.

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A Plant Rooted In History

Though international trade to the extent seen today is very much a feature of recent times, coffee has been linking the world since well before the advent of globalisation. Global trade of the bean is thought to have been born when Yemeni traders brought the plant, native to Africa, for cultivation at home.

Coffee’s subsequent rise to global status is intimately tied up with the explosion in trade networks brought about by the spread of international empires. For example, Belgium – today the ninth-largest global coffee consumer – fed its newfound desire for the hot beverage with plantations across the Congo and Rwanda. The Ottoman Empire, meanwhile, was crucial in feeding a taste for it up the Eastern side of the Mediterranean and beyond.

The soaring global demand for coffee was down to much more than just its flavour and stimulating properties. For a long time, it was seen as a status symbol in Europe’s growing cities thanks to its exotic origins as a foreign import. It also benefitted enormously from seemingly unrelated tides of history: when the United States’ Revolutionary War began, for example, supplies of tea were scarce, and after the 1773 Boston Tea Party Americans made a point of altogether quitting coffee’s caffeinated forebear in an attempt to cast off their economic dependence on Britain. Were it not for such turning points – this one in particular having turned the US into a nation of coffee drinkers, who spent some $74.2bn on the stuff in 2015 – the coffee trade might not have the far-reaching impact it does today.

Grounds For Fairer Trade

Whilst the global coffee trade has come a long way from its markedly more exploitative past, it has famously been at the centre of a changing trend in consumer behaviour due to a widespread perception of continuing unjust trade practices. As consumers in developed countries enjoyed a surge in affordable global commodities into the latter half of the 20th century, they eventually turned their attention to the flipside of this global market, noting the wide gap between consumer and producer prices. ‘Fair trade’ labelling, born in the late 1980s, is one notable response to this, whereby producers are guaranteed a negotiated price before harvest begins. Coffee was brought into its fold early on, in 1988.

Depending on where one looks along the commodity chain, the distribution and marketing stretch of it tends to be dominated by a few large multinationals – like Nestlé, Starbucks, Keurig Green Mountain and Jacobs Douwe Egberts – whilst businesses along the processing and farming ends are usually much smaller and much more numerous. Fixed pre-harvest prices are seen as a way out for producers stuck in difficult trading circumstances whereby exporters hold a lot more weight in pricing negotiations.

Fair trade coffee has both captured and driven a desire to use consumer power to effect change in developing economies. A survey by London-based Assembly Coffee found that when it comes to what coffee to buy, whether it is ethically traded informed 28.2% of buyers’ decisions the most, second only to taste (with 37.3%). Virtuous survey responses should always be taken with a pinch of salt, though. A 2005 study in the Journal of Consumer Affairs found that whilst around 46% of Europeans claim to be open to paying more for ‘ethical’ products, the majority of participants were not ultimately willing to pay the actual ‘fair trade’ premium of 27% on normal coffee prices. The extent to which people have really become ‘ethical consumers’ is up for debate.

A Bitter Aftertaste?

There is still some way to go until those toward the start of the commodity chain can enjoy the same kind of power and security over their work that those at the end do. Coffee producing economies only receive about €5bn of the $70bn of yearly global coffee sales. This has repercussions for the small farmers, who were heavily dependent on coffee in places like Uganda. There, according to Oxfam, farmers only receive 2.5% of the final price that coffee sells for in the UK market.

$5bnout of $70bn in coffee sales go back to producing countries

Coffee is also known to be a relatively volatile market, at least over the last ten years. Most small-scale coffee farmers do not have the resources or opportunities to diversify away from the commodity, making them vulnerable to the temperamental whims of global market forces. Like any traded good, the coffee market reflects more than it shapes the socio-economic forces determining its positive and negative consequences for people in poverty.

Although practices like fair trade may have only made a partial impact on the lives of farmers and others in precarious financial situations across the production chain, however, coffee has certainly played an important role in spawning a new dimension to consumption. Coffee has to an extent been a leader in new trends such as ‘ethical consumer’ habits whereby individuals are beginning – if slowly – to build their attitudes towards poverty into their attitudes towards street prices.

Hot Competition

Whereas coffee production sees a huge number of small businesses selling to a handful of big companies, the reverse is true when it comes to consumption. In the UK, as in many Western countries, coffee shops are dominated by a few players. The biggest three – Costa, Starbucks, and Caffè Nero – operate 3,412 outlets between them, whilst the next largest, Coffee Republic, has just 230.

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The British chain dominates its soil now, but in 2008, the battle for the UK’s high streets was far more evenly split: Costa ran 881 outlets to Starbucks’ 664. In the eight years since, though, the homegrown brand has more than doubled its presence, leaving its American competitor trailing.

What explains this? Café marketing involves such a great deal of strategising and rebranding that it’s almost impossible to tell, but there is one important difference that may have been the deciding factor. A Market Force survey last year found that the two giants were neck-and-neck across every factor in customer satisfaction, from food quality to value for money, bar one: staff friendliness was rated 18% better in Costa. It seems Britons value personal interaction when it comes to choosing their brew. And since Starbucks became embroiled in a tax avoidance scandal a few years ago, it looks like the gap could grow even wider: after consumer boycotts in 2013, Starbucks saw its first fall in sales in sixteen years. Competition is fierce in the retail coffee world, so the most marginal of differences can make or break brands.

Tomorrow’s Cup

Café outlets are, of course, just one part of a nation’s coffee-consuming life. Grounds, beans and instant dried forms of the stuff fill supermarket shelves, and most homes in developed economies proudly house machines as simple as cafetières or as elaborate as automatic espresso machines.

Furthermore, more and more money is being spent on more and more elaborate consumer coffee equipment, and the experiences of this market over the last year suggests that this trend will continue to grow. Handheld sieves, portable electric grinders, and specialist manual grinders have become more popular and affordable as consumers experiment and learn more about brewing coffee and experiment with different methods.

However, the evidence suggests that the bigger trend in future coffee consumption will, in fact, be a shift away from home equipment into retail. The National Coffee Association (NCA) published detailed figures last year on how the upcoming younger generation – or ‘millennials’, to use the clichéd term – has shifted buying patterns over the last year. It reported that more and more of younger consumers are taking their coffee-drinking out of their homes.

They are not just delivering their spending power back into the hands of big retailers like Starbucks, though. The study betrays an increasing interest in more specialist coffee which, for now, means good news for smaller independent coffee shops. Between 2008 and 2016, for instance, consumption of ‘gourmet coffee beverages’ rose from 13% to 36% among 18-24-year-olds, and 19% to 41% among 25-39-year-olds.

The reason? The NCA suggests that people are “turning coffee consumption into a public expression of individuality”. Whether this is more of a social phenomenon or simply buyers discovering good-tasting products it is too soon to tell, but it seems that coffee consumption will continue to change at rapid speed.

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