The Wall Street Journal-Coffee-bean oversupply deepens Latin America's
Monday, July 8, 2002 Peter Fritsch Associated Press LA DALIA, Nicaragua
-- Antonio Luna thought he had seen the worst life had to offer
during the 1980s, when his village in Nicaragua's coffee-rich northern
highlands sat in the crossfire of a guerrilla war between U.S.-backed
"contra" rebels and the Marxist Sandinista government. That was
before this May, when his family's home became a plastic tarp pitched
along the roadside here. Huddled with about 3,000 other unemployed
coffee pickers, Mr. Luna is a hungry refugee from a potentially
more devastating conflict than any he has known before: a global
brawl over the $55 billion coffee market.
The fight has left the world awash in java and has driven inflation-adjusted
prices for beans to their lowest levels in more than a century.
"We've had no work since February and are here begging for our lives,"
says Mr. Luna, a listless 33-year-old, surrounded by a group of
visibly malnourished, unshod children. They are living on wild bananas
and the charity of passersby. "At least during the war there was
food," he says. In lush coffee-growing regions from Central America
to Africa, the collapse of world coffee prices is contributing to
societal meltdowns affecting an estimated 125 million people.
In former Cold War proxy battlefields such as Nicaragua, the result
is a combustible brew of unemployment, hunger and migration. In
countries such as Uganda and Burundi, which get 70 percent of their
export earnings from coffee, the severe price drop has blunted benefits
from international debt relief. The oversupply of beans driving
the crisis won't ease quickly because so many small growers see
few alternative crops that are profitable and legal. In the U.S.
and the rest of the developed world, the price of coffee on supermarket
shelves has fallen -- but considerably less than the price paid
to growers. That translates into record sales and profits for some
of the corporations that process and market coffee, according to
Four giants -- Procter & Gamble Co., Philip Morris Cos.'s Kraft
Foods Inc., Sara Lee Corp. and Nestle SA of Switzerland -- control
about 40 percent of the world's coffee. They buy it in bulk and
then roast, grind and blend it into brands such as Kraft's Maxwell
House and P&G's Folgers. The low bean prices fueling corporate profits
are "causing entire rural communities to disappear and forcing desperate
peasants into everything from crime and illicit crops to illegal
migration," says Nestor Osorio, a Colombian who heads the International
Coffee Organization in London, which represents producing nations.
He predicts more tragedies like that which befell 14 out-of-work
coffee pickers from Mexico's Veracruz state.
They died of dehydration in Arizona in May 2001 while trying to
cross the Sonoran desert to a new life in the U.S. Until the 1990s,
the desire for international security made propping up coffee prices
a crucial instrument of U.S. foreign policy toward places such as
Nicaragua, where coffee supports more than 40 percent of the rural
labor force. The world's most-traded commodity after oil, coffee
was seen during World War II as key to thwarting the spread of fascism
among German immigrants in countries such as Guatemala. During the
Cold War, coffee wasn't only a morning pick-me-up but a bulwark
At the time of the 1962 Cuban missile crisis, Sen. Hubert H. Humphrey
told Congress that ensuring healthy coffee prices for Latin American
campesinos "is a matter of life and death. ... Castroism will spread
like a plague through Latin America unless something is done about
the prices of raw materials produced there." That year, 66 coffee-importing
and -exporting countries created the International Coffee Agreement.
The deal imposed strict limits on each exporting nation. Actively
promoted by the U.S., the world's largest coffee consumer, the agreement
artificially propped up prices for nearly three decades. But when
the Berlin Wall collapsed in 1989, so did the coffee deal. In its
place arose a new ideology of free trade, championed by the U.S.
Many producing nations ended coffee-buying and stockpiling programs
that controlled supply. That enabled Procter & Gamble, Nestle and
other large foreign buyers to purchase directly from relatively
small growers, giving the buyers more muscle to negotiate favorable
prices. The result: free-for-all coffee exports and a production
boom that continues to generate more beans than the world needs.
Brazil and Vietnam, which emerged as a coffee-growing giant in
the last five years, have flooded the market in a battle for dominance.
That has left the global market with an annual coffee excess of
almost two billion pounds. At the end of the 1980s, coffee-exporting
nations received about $10 billion of a $30 billion annual retail
market. Today, the total market has nearly doubled, but with big
buyers able to play growers against each other, exporting countries
receive less than $6 billion, according to the International Coffee
Coffee prices on New York's Coffee, Sugar and Cocoa Exchange --
which provides the industry with its benchmark for beans -- currently
hover around 50 cents a pound, down more than 80 percent from their
brief peak of $3.15 in May 1997. But production costs in Central
America are about 80 cents a pound. That adds up to insolvency for
many farmers. "On my farm, I usually have about 100 permanent workers,
but now I have just 20," says Jose Angel Buitrago, who has grown
coffee in Matagalpa, Nicaragua, for 30 years. "I'm out of money,
and in the next few weeks I'll have to let them go, too.
They'll end up on the highway begging for food." When they have
work, coffee pickers earn less than $2 a day in most of Central
America. Mr. Buitrago is lucky to have held out this long. Neighboring
farmers have already abandoned the business, leaving their land
overgrown with weeds. The social impact on countries still emerging
from the debt crises and wars of the 1980s and 1990s is profound.
In Central America and Mexico -- where some of the world's highest-quality
coffee is grown -- the World Bank estimates that 600,000 permanent
and temporary coffee workers have lost their jobs in the past two
Relief agencies estimate more than 1.5 million peasants in the
region lack food. In Guatemala, where a 36-year civil war with rural
guerrillas ended in 1996, relief workers say about 6,000 children
of out-of-work field hands face starvation -- a situation exacerbated
by a fierce drought. U.S. government officials say struggling coffee
growers in Colombia who had resisted the drug trade are now turning
to heroin poppies for a living.
The collapse of coffee prices has been a boon for the big companies
that process the beans and sell the final product. While prices
paid to growers have tumbled more than 80 percent since 1997, average
retail prices for ground roast coffee in U.S. cities have fallen
only 27 percent, according to the U.S. Bureau of Labor Statistics.
Accordingly, the price differential between international wholesale
and U.S. supermarket prices ballooned to $2.54 in May, compared
with $1.50 five years ago.
Increasingly, big corporate buyers are substituting less expensive
"robusta" coffee from Vietnam and Brazil for the higher-quality
"arabica" variety commonly grown on the cloud-wreathed mountain
slopes of Central America. "Up to 75 percent of a typical can of
coffee is now made up of the cheap stuff, which they then cut with
Central American or Colombian (arabica) beans so your coffee doesn't
taste like a shoe," says Eric Poncon, director in Nicaragua of ECOM
Group. ECOM, a major coffee trader and unit of Brazil's Esteve SA,
does business with Kraft and the other big coffee sellers. Some
of the industry's leaders have taken note of the widening gap between
the haves and have-nots. In March, Howard Schultz, chairman of Starbucks
Corp., urged fellow coffee executives in a speech at the National
Coffee Association's annual meeting to "share the blanket" of prosperity
The Swiss Coffee Federation has called for an "ethical coffee tax"
of more than one cent per pound to be invested in community programs
in the developing world -- a proposal the industry hasn't rushed
to embrace. Human-rights advocates and others in the so-called fair-trade
movement have pressured big companies to pay coffee prices that
will sustain poorer growers. Some upscale coffeehouse chains, including
Starbucks, now pay a premium for quality coffee.
But bigger buyers typically don't. Rather than pay above-market
prices for coffee, says P&G spokeswoman Tonia Hyatt, the maker of
Folgers prefers to provide community aid. She says the company's
offices in Mexico, Brazil and Venezuela contributed a combined $10
million last year for things such as community health centers and
schools. "We care very much and want everyone in coffee to have
a sustainable business along the whole line," she says. Kraft, Sara
Lee and Nestle say they, too, go out of their way to help small
growers. Sara Lee says it tries to buy at least 10 percent of its
coffee from small planters and cooperatives. Nestle buys 13 percent
directly from farmers, "ensuring that they receive the full value
of their crop," says spokesman Francois-Xavier Perroud. But he adds
that increasing demand for coffee "is the best way to ensure a long-term
future for the farmers."
Kraft has helped educate Peruvian growers, among other programs,
but it, too, believes that its "most important contribution" is
to promote demand, says spokeswoman Patricia J. Riso. Coffee consumption
in the U.S. is growing by about 1 percent a year, but that offers
no panacea. Per capita consumption in the U.S. is about 20 gallons
a year, down from about 37 gallons in 1970.
Sara Lee's coffee-and-tea division had sales of $2.9 billion last
year and income "after accounting for non-recurring items" of $495
million -- its best financial results in at least five years, says
spokesman Joost J. den Haan. P&G'S coffee business, with about $1
billion in annual sales, had "a record year" in 2001, according
to the company's annual report. P&G declines to comment on coffee
profitability, as do Nestle and Kraft.
But Nestle did say that coffee sales by volume hit a record in
2001. To farmer Buenaventura Gutierrez, sitting in the dusty headquarters
of the Nicaraguan Coffee Growers Union in downtown Jinotega, corporate
talk of sustaining small planters sounds hollow. "In two or three
years, most of our industry will be gone," he predicts. "This is
dangerous because we are still coming out of a revolutionary, guerrilla
environment in this part of Nicaragua." No one believes Nicaraguans
are inclined to take up arms again. But the coffee crisis is complicating
a fragile political situation and eroding confidence in the free
market. Coffee-related protests and the restructuring of coffee
debt have become daily thorns in the side of the new administration
of Nicaraguan President Enrique Bolanos.
In the impoverished countryside, frustration is keeping alive the
political hopes of former President Arnoldo Aleman and former Sandinista
leader Daniel Ortega. The rehabilitation of coffee fields after
the devastation of war and Sandinista mismanagement was a pillar
of the government of Violeta Chamorro, who defeated Mr. Ortega at
the polls in 1990. "We all just wanted to forget politics and get
back to work," recalls coffee grower Miguel Gomez, a former Sandinista
official. In the 1990s, some plantation owners who hadn't been in
the coffee business took advantage of loan programs offered by the
government and a regional development bank.
"Though coffee has been in Nicaragua for well over a century, a
lot of the businesses are relatively new, with very small capital
bases and lots of debt," says Julio Solorzano, a coffee grower and
special adviser to the Ministry of Agriculture. The borrowing continued
through the mid-1990s as frosts affecting Brazil's huge crop helped
boost international prices temporarily. By 2000, Nicaragua's 32,000
farms had boosted coffee crops back to 1979 levels. But by then,
falling prices had rendered grower debt, estimated at $100 million,
more difficult to pay off.
While the cash-strapped government is trying to help growers postpone
repayment of some of what they owe, there is little money to help
starving field hands, officials say. Mr. Solorzano, one of the struggling
growers, struck a deal with his remaining workers: They get paid
two weeks salary for every three weeks they actually work. His employees,
rather than lose their jobs, agreed to let him try and make up the
difference at some point in the future.
Other farmers talk of switching crops. They are discouraged, however,
by the experience of farmers who have grown peanuts and sesame.
Those growers now find themselves on the verge of bankruptcy after
trying to compete against U.S. farmers receiving generous subsidies
from Washington. With a lack of competitive alternative crops, "the
only viable diversification alternative for workers is mass migration,"
says Mr. Poncon, the coffee trader. An estimated 400,000 Nicaraguans
now live in Costa Rica, many of them recent arrivals. They scrounge
for work in competition with Costa Ricans unhappy to be their hosts.
The coffee crisis has prompted some fanciful proposed solutions.
In Mexico, state oil company Petroleos Mexicanos has been looking
at the possibility of using excess coffee to absorb oil spills.
Other ideas include using coffee as animal feed and as fuel. International
charity Oxfam has suggested a mass destruction program funded by
a windfall tax on the big international companies -- an approach
the companies reject. The answer for a handful of Nicaragua's best-run
farms is selling to the so-called specialty coffee market, which
pays a premium for top-quality branded coffee.
But this niche market is small -- about $100 million a year --
and the high-end brands have a hard time winning supermarket shelf
space when pitted against powerful marketers such as Procter & Gamble.
The U.S. National Coffee Association is hoping to stimulate more
consumption by focusing "on more scientific research on the health
benefits of coffee," says Robert F. Nelson, the trade group's president.
"There's a lot of bad science out there," he says.