Follow the money: Who does well when coffee sells?

Posted November 1, 2016

In order to understand coffee's economic value chain, it's important to understand the process each bean needs to go through in order to become the final product for the drinker. (Deseret Photo)

Like any other product or produce, coffee goes through quite a journey to make it to the consumer. To begin, coffee is a tropical plant and the beans grow inside small cherries that the plant produces. After the cherries are picked, the beans are removed, dried, and bagged before they leave the producing countries, such as Brazil, Vietnam, Indonesia or Colombia. The beans are then imported to their destination country, where they are roasted for flavor and aroma, blended to minimize costs and keep the flavor consistent (in the case of the industrial distributors), distributed, ground and brewed.

In order to understand coffee’s economic value chain, it’s important to understand the process each bean needs to go through in order to become the final product for the drinker. Each of these touch points adds to its value. This value chain is what made coffee’s “total economic output” in 2015 $225 billion in the United States alone, according to Ncausa. For every dollar in the coffee value chain, $0.04 often goes to the grower, $0.07 to the farm laborer, $0.08 for transportation and loss, and $0.11 to the retailer. The consuming country then adds $0.68 in value for roasting, grinding, packaging and distribution (as opposed to the $0.02 added by the producing country).

These numbers change significantly based on the producing country. Many pickers, as seasonal employees, are paid for each basket of coffee cherries they pick. In Guatemala, people from the mountain regions travel to the coast during the harvest to earn just a few dollars a day. Nicaraguans and Panamanians will travel to Costa Rica to earn $30 a day. However, in Madagascar, workers are often not paid in cash, but rather in kind.

The type of production also affects the value chain as well. Large plantations, like those found in Brazil, use machines to pick the cherries off the coffee plants. The bean quality is much lower, but the volume is what brings in profit. Although small-scale farmers produce more than half of the global coffee supply, the “marketing infrastructure” favors the mass-producing plantations over the small-scale producers. While larger plantations have the means to process the beans within their own facilities, the smaller-scale producers end up selling their beans at a lower price to middle men who create an extra step for the bean between the producer and the mills. Fair trade strives to eliminate unnecessary or redundant steps in order to bring more of the coffee value chain to the producers. However, some research shows that fair trade processes have not improved the lot of small growers or pickers.

Despite efforts to create new practices to narrow the gap between the value added to coffee beans in the producing country and the consuming country, disparity still exists. Researchers Benoit Daviron and Stefano Ponte claim that the disparity comes from a complex paradox: while the producing countries access the value chain by selling the material they produce (the coffee bean), the consuming countries access the value chain by selling advertising, the symbol of coffee, and the services that exist in the gourmet coffee spaces. This shift has made it so that many of the sustainable coffees still fail to bring a higher percentage of the value chain’s dollar to the grower or picker.

The distribution of the coffee value chain is ripe for a solution wherein all players choose to take part in creating sustainable and realistic changes. I have to admit that I do not know what these changes are. I just feel a strong sense that a higher percentage of coffee profits should go to those who grow and pick coffee and other agricultural products.

John Hoffmire is director of the Impact Bond Fund at Saïd Business School at Oxford University and directs the Center on Business and Poverty at the Wisconsin School of Business at UW-Madison. He runs Progress Through Business, a nonprofit group promoting economic development. Jessica Cooper, Hoffmire’s colleague at Progress Through Business, did the research for this article.

John Hoffmire teaches at SaÏd Business School at the University of Oxford.


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