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Global Coffee Chain Essay


Introduction

Global Coffee Chain (GCC) has changed considerably over the last century. This is due to the historical importance of the product in the global south. It is a major foreign exchange earner. Indeed, over 90% of coffee that is consumed across the world is produced in developing countries (Porter 2004, p. 102).

Besides, there have been major changes particularly in the deregulation of coffee trade, patterns of consumption, marketing and corporate strategies adopted by various manufacturers of coffee across the world. Consequently, there have been changes in the relations of power among various actors in the GCC. Power relations have shifted from a balanced relationship of power between the farmers (producers) and the consumers to complex relationships (Ponte 2002, p. 1099).

This paper analyzes the power relations among the producers, roasters, and consumers of coffee in the GCC. The paper will posit that various changes that have been apparent in the coffee market have led to significant changes in power relations among the stakeholders. Particularly, the discourse will focus on deregulation changes in coffee consumption as well as the current corporate strategies adopted by various companies that retail coffee. Have the dynamics in the GCC resulted into significant changes in power relations among the actors?

Power Relations among the Actors within the GCC

Coffee Regulation and Power Relations

Global coffee chain has experienced various changes in trade regimes since the early 20th century. The changes have led to significant shifts in power-relations among different stakeholders. In fact, Ponte (2002, p. 1104) posits that coffee was among the first commodities that experienced controls as early as 1902.

The initial process of controlling GCC occurred in Brazil through valorization. In this process, the state or government was able to set and raise prices of coffee. This was the case in Brazil, which is the largest producer of coffee at the time with her production surpassing 80% of the global coffee production (Loader 1997, p. 27).

However, the process did not signify major power relations since it was abandoned after the International Coffee Agreement (ICA) of 1962. In this agreement, the producers of coffee became major stakeholders and were able to set a band price while at the same time using export quotas on coffee (Fitter & Kaplinsky 2001, p. 76).

This implied that quotas would not affect the global trade if the set ‘band prices’ were achieved. In addition, the quotas were instrumental in cushioning the producing countries when the coffee prices dropped below the target price. In this agreement, the producers had increased participation in the decision-making processes of the global coffee chain. Ponte (2002, p. 1105) articulates that the set prices would not apply to the producers when the prices of coffee was extremely high.

Despite the problems that typified this system, ICA played a significant of stabilizing the prices of coffee across the world (Strange & Newton 2006, p. 185). The rationale was that the consumers participated actively in the process of setting coffees prices and export quotas.

In addition, the producing countries began to exist as marketing units in which the governments had increased control relating to the exportation of coffee. Another important factor that led to considerable success of the ICAs was the fact that Brazil’s market share reduced significantly leading to inclusion of other coffee producing countries within the ICA framework (Loader 1997, p. 28).

While the success of ICA was clear, there were problems that the system faced especially relating to the power relations among the state actors. Particularly, the ICA experienced unprecedented problems as more and more countries began producing coffee. The rationale is that decisions about the export quotas became major sources of squabbles.

In addition, coffee importing countries that were not members or signatories to the ICA system increased in coffee trade participation resulting to lower prices than the target prices of the ICA (Taylor 2008, p. 56). This worried the roasters who were experiencing severe competition from other roasters who purchased coffee beans at low prices.

The roasters also had to contend with the changes in consumption of coffee especially in the United States. Ponte (2002, p. 1107) argues that changes in coffee consumption from soluble coffee beans to ground beans was a major cause of concern among the roasters within the ICA system.

The rationale is that the coffee producing countries were irresponsive to the changes and continued to supply Robusta coffee beans whose demand and market had reduced tremendously. It is important to highlight that importing countries who were not members of the ICA utilized unorthodox means to get the cheaper coffee beans than recommended by the ICA (Fitter & Kaplinsky 2001, p. 79).

This did not only make them more competitive than roasters within the ICA but also led to gradual abandonment of the agreement by the roasters. It is important to underscore the importance of cold war politics that characterized the GCC and the ICA. Particularly, the political relations of the USA vis a vis the Latin America changed dramatically in early 1980s leading to eventual collapse of the ICA.

The reason is that the Latin America (particularly Brazil) had became liberal in their decisions about coffee exports and perceived the US as a patronizing consumer. To that end, attempts to revive the ICA were futile as producing countries gained more power and autonomy in relation to production and sale of their coffee beans (Strange & Newton 2006, p. 188). This was the onset of deregulation of coffee trade across the world.

Deregulation of Coffee Trade and Power Relations

Although the ICA was a successful agreement that allowed various actors to participate meaningfully within the global coffee chain, its abandonment led to changes in power relations among the producers, roasters, corporations and consumers. During the ICA, many countries experienced balanced power relations but it changed dramatically upon deregulation of coffee production and exportation. Ponte (2002, p. 7) highlights that power relations changed leading to the dominance of consumers over the producers (farmers) and the exporting states. Consequently, the coffee market became more susceptible to price changes and the earnings accruing the producers decreased. Specifically, the indicator price of coffee reflected marginally against the prices of coffee prior to the abandonment of ICA in 1993. Ponte (2002, p. 1108) explicates that the indicator price was only 40% of the prices of coffee between 1985 and 1989 when the ICA failed. Despite the hike in coffee prices in the succeeding years owing to droughts and frosts in major producing and exporting countries, the price was only 20% of the coffee prices just before 1989 (Kaplinsky 2000, p. 102).

It is perceptible that the incomes accruing the producers dropped by 13% after the deregulation of coffee market because of the abandonment of the ICA (Ponte 2002, p. 7). The reason is that the ICA had been able to stabilize the coffee prices across the world. With the entrance of hugely unregulated actors in the coffee market and technological innovation, the coffee market began to post diminished earnings for the producers.

This is because of the consequent failure to control prices within the GCC. Ponte (2002, p. 1108) argues that the attempt to set up an agreement (Association of Coffee Producer Countries, ACPC) to control coffee prices was futile. Many countries including Brazil did not join the agreement.

This made the roasters and manufacturers to have increased power over coffee producers. As such, the coffee market post-ICA regulations became volatile so much so that the producers began setting prices before even harvesting their coffee beans (Loader 1997, p. 27). This did not only augment the speculative power of the manufacturers and corporations but also led to even more bargaining power of the corporations in the global markets.

Apparently, the failure of ICA trade regime reduced the ability of the exporters to impose export quotas and restrictions that could help the state actors to increase their power of monitoring the coffee prices. In addition, there was an increase in the economic perspective that marketing boards and the state ought to play marginal roles in the decision-making processes of exportation and production of coffee across the world.

Subsequently, the producers depended on the usual market forces (supply and demand) to fetch earnings (Kaplinsky 2000, p. 102). This reduced the ability of governments in exporting countries to cushion the farmers and producers leaving them vulnerable to major corporations.

For instance, Kenya abolished the Coffee Board of Kenya that was a major player in marketing Kenyan coffee. This allowed private corporations and companies to take control of the market (Busch & Juska 1997 p. 670). To that end, the consumers and corporations in the GCC acquired immense powers over Kenyan coffee producers and farmers.

Market Power of Corporations

Not only have power relations shifted significantly owing to the end of ICA but also they have more become complex than earlier. Due to the liberalization of coffee markets, the state actors do not serve as market units any longer. In addition, organizations that farmers joined have been unable to replace the government and state actors effectively.

The rationale is that the farmers have been unable to raise sufficient financial resources to compete effectively with other actors within the GCC (Busch & Juska 1997 p. 676). As such, they have become defunct and joined the international cartels in order to enjoy active participation in the decision-making processes.

This was also the scenario with other small international actors. Since they were unable to compete with large traders at the global market, they either joined them or went bankrupt. According to Ponte (2002, p. 8), the coffee market became more concentrated. By the end of 20th century, major corporations of coffee began to emerge.

Such companies as Neumann and Volcafe were able to control about a third (32%) of the entire market share (Crane & Davies 2003, p. 86). Besides, the top five coffee corporations controlled over half (51%) of the market share in coffee market (Crane & Davies 2003, p. 86).

In addition, the roasters experienced increased concentration with such companies as Nestle and Phillip Morris dominating the market of specific types of coffee (Gerrefi et al. 2005, p. 95). This rise of multinational companies within the GCC has diminished the role of the farmers and increased the domination of corporations on the production and exportation of coffee beans.

Gerrefi et al. (2005, p. 95) assert that there has been little if any integration between international traders and roasters. This allows the major corporations to dictate the prices, type and quality of coffee produced. Since the corporations have profit making agenda, they are able to determine the minimum level of supply of coffee within a country.

For instance, many roasters have set minimum supply of coffee from specific producing countries. This implies that the corporations are able to get sufficient supply of coffee beans notwithstanding the prices offer (Raynolds 2009, p. 1084). On the other hand, big corporations are responsive to consumption dynamics within the coffee market. As such, they can decide not purchase specific type of coffee due to changes in demand.

This in turn leads to losses and diminished earning among the farmers. Ponte (2002, p. 1109) says that this trend became popular in many exporting countries owing to the superior marketing and corporate strategies adopted by large multinationals. Due to their expansive revenues, the multinationals are also able to monopolize the prices of coffee in the market by setting the prices.

They also influence the policy-making processes of the governments in producing countries (Reed 2009, p. 17). This does not only make them major stakeholders in the production of coffee but also major influencers of the policies and regulations governing the production of coffee within a country (Daviron & Ponte 2005, p. 59). This illustrates the power relations between the corporations, state actors and farmers in GCC.

Dynamics in Coffee Consumption

Reed (2009, p. 17) postulates that the major roasters of coffee in the world have put up with the ever-changing tastes and needs of consumers. This is apparent in UK and US markets where major roasters have controlled the food retail stores. This does not only make them the major controllers of coffee quality and prices but also the determinants of the coffee supply chain.

Due to the increase in differentiation of coffee products and rise of ‘instant coffee’ stores, Daviron & Ponte (2005, p. 56) say that the roasters have adopted strategies that have made them even more dominant than earlier.

Since the consumption of coffee is fragmented in the markets, the coffee roasters have been able to brand their specific types of coffee to gain a competitive edge over their rivals. Ponte (2002, p. 1109) postulates that the companies have shaped the supply chain in a way that it allows them to access cheap and low quality beans.

Consequently, they blend the coffee beans with relatively higher quality beans to cater for demand of coffee especially in major markets. This has led to reduction in quality of coffee retailed in UK and US markets. Since the roasters have a near monopoly of the coffee supplied in global markets, the consumers have no power on the quality of coffee they purchase (Gibbon & Ponte 2005, p. 34).

As such, the market dynamics particularly regarding the consumption of coffee have shifted in favor of the roasters and the expense of consumers. To that end, consumers, producers and state actor have lost their power and have become dependent on the roasters to dictate the prices and the quality of coffee supplied and the get.

Power Relations in the Wake of Fair Trade Coffee

Due the immense powers amassed by the roasters and major corporations, there has been a major attempt to cushion both the producers and consumers from the profit motivation of the corporations. Over the last decade, the concept of fair trade has become popular across the world. It refers to standards that producers and marketers ought to adopt when participating in GCC (Talbot 1997, p. 60).

Particularly, the final products of coffee ought to bear the logo that certifies the coffee brands in line with the standards. As such, the consumers tend to believe that such branded coffee has a premium price that ends up compensating the coffee farmers in the global south.

Fair Trade Coffee has had colossal impacts on the power relations among the stakeholders. At the outset, the principles underlying this type of trade and practice dictate that coffee importers ought to register with the fair trade organizations and have their coffee certified. Besides, registration of the coffee requires the importers to pay significant fee upon importation (Mohan 2010, p. 121).

While this is a major step towards enhancing fair trade practices and regulating the power relations between importers and exporters, the importers have more bargaining power than exporters in this arrangement. For instance, the importers of fair-trade coffee may demand high quality beans at the same fair trade price (Niemi 2010, p. 269).

In other words, the importers still have the monopoly to decide on which exporter to buy their beans. Hence, they ‘arm-twist’ the exporters to produce high quality beans with threats to change their suppliers. To this end, the fair trade coffee has done little to balance the power relations between the exporters and importers.

Moreover, the power relations are still skewed between the retailers and roasters even in the wake of fair trade coffee and regulations (Mendoza & Bastiaensen 2003, p. 39). For instance, the retailers in developed countries have no obligations to follow the fair trade principles. In other words, they may sell their products highly even without disclosing their premium charges for fair trade coffee.

In other words, they do not explain the amount of money charged as fair trade price that reaches the farmers in developing countries. According to Mendoza & Bastiaensen (2003, p. 43), only negligible percent of the fair trade prices charged by retailers on consumers reaches the farmers.

Dicken (1998, p. 45) pinpoints that the coffee prices remain high for consumers. Besides, the farmers receive negligible percent of money charged as fair coffee price (Talbot 1997, p. 67). As such, the retailers and importers have remained to be powerful actors in the GCC despite attempts to regulate the skewed power relations.

Taylor (2008, p. 69) says that fair trade coffee has demanded that the coffee producers and farmers should meet stringent criteria during the process of production. The principles of fair trade demand that the farmers should not use forced and child labor during the cultivation of coffee beans (Mohan 2010, p. 121).

Besides, the farmers should use specific herbicides and other farm inputs for their coffee to achieve the required standards at the global markets (Ballet & Aurelie 2010, p. 321). All these limits imposed on farmers imply that farmers have to spend increased amounts of financial resources in procuring the farm inputs.

This implies that the production cost of coffee has increased tremendously leading to marginal earnings by the farmers. As such, fair trade coffee has failed to achieve its objectives of cushioning the farmers. In other words, the farmers are worse off than when the coffee market had no fair trade practices.

To this end, coffee farmers enjoy diminished power on the price and earnings from coffee. Niemi (2010, p. 270) says that fair trade in Nicaragua led to an improvement in organic farming methods leading to high quality coffee produced and high prices. However, the earnings were marginal owing to high production costs imposed on the farmers (Ballet & Aurelie 2010, p. 323).

Conclusion

In essence, coffee is one of the major foreign exchange earners in developing countries. Nonetheless, the production, sale and consumption of the product have been typical of major power imbalances. Prior to the fall of International Coffee Agreement in 1989, coffee was regulated.

As such, there was a balanced power relation among the actors. Deregulation of coffee led to a shift in power relations in which major corporations and roasters dictate the quality, prices and production of coffee (Raynolds 2009, p. 1086). This is due to the reduced control of state actors in the production of coffee. Attempts to restore balance of power among the stakeholders have been futile. In particular, the formulation of Fair Trade Coffee increased the powers of the importers and retailers at the expense of farmers and consumers.

References

Ballet, J. & Aurelie, C 2010, ‘Fair Trade and the Depersonalization of Ethics’, Journal of Business Ethics, vol. 92 no. 7, pp. 317–330.

Busch, L & Juska, A 1997, ‘Beyond Political Economy: Actor Networks and the Globalization of Agriculture’, Review of International Political Economy, vol. 4 no. 5, pp. 668-708.

Crane, A. & Davies, I 2003, ‘Ethical Decision Making in Fair Trade Companies’, Journal of Business Ethics, vol.45 no. 8, pp. 79–92.

Daviron, B. & Ponte, S. 2005, The Coffee Paradox: Global markets, commodity trade and the elusive promise of development, Zed Books, London.

Dicken, P 1998, Global Shift: Transforming the World Economy, Guilford Press, New York.

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Niemi, N 2010, ‘Empowering Coffee Traders? The Coffee Value Chain from Nicaraguan Fair Trade Farmers to Finnish Consumers’, Journal of Business Ethics, vol. 97 no. 2, pp. 257-270.

Ponte, S 2002, ‘The Latte Revolution? Regulation, Markets and Consumption in the Global Coffee Chain’, World Development, vol. 30 no. 7, pp. 1099-1122.

Porter, M 2004, Competitive Advantage, Free Press, New York.

Raynolds, L 2009, ‘Mainstreaming Fair Trade Coffee: from Partnership to Traceability’, World Development, vol. 37 no. 6, pp. 1083-1093.

Reed, D 2009, ‘What do Corporations have to do with Fair Trade? Positive and normative analysis from a value chain perspective’, Journal of Business Ethics, vol. 86 no.3, pp. 3-26.

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Talbot, J 1997, ‘Where Does Your Coffee Dollar Go: The Division of Income and Surplus along the Coffee Commodity Chain’, Studies in Comparative International Development, vol. no. 32, pp. 56-91.

Taylor, M 2008, Global Economy Contested: Power and conflict across the international division of labour, Routledge, London.

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