Market Reports

ICO economic report: A new perspective

ICO economic report

The ICO reflects on the 2020 edition of the Coffee Development Report, the second edition of its flagship publication, and highlights the bigger picture of the global coffee value chain.

The rise of global value chains (GVCs) over the past 30 years has resulted in more complex and geographically fragmented supply chains for a vast variety of goods, ranging from smartphones to agricultural products. Whether ‘spider-like’ with internationally-sourced parts and components assembled at a factory or ‘snake-like’ with value created step by step along the supply chain, GVCs today account for half of global trade, according to the World Bank.

Traditionally, coffee has been viewed as a tropical commodity linking producing countries in the south with consuming countries in the north. Member states of the International Coffee Organization (ICO), the inter-governmental organisation for coffee, are categorised as exporters or importers based on criteria developed in the 1960s. However, with increasing globalisation of processing and consumption of coffee across countries and geographies, these categories have become blurred. In fact, coffee is by no means an exception in the era of GVCs. Production and international trade have changed dramatically with economic dividends in the form of higher productivity, employment, and economic growth, but also with increased exposure to shocks, as demonstrated by the COVID-19 experience.

The 2020 Coffee Development Report, ICO’s economic flagship publication, launched in October and available online, assesses the coffee sector through the lens of GVCs. Taking a GVC perspective enables us to move beyond the dichotomy of exporting/importing countries and the traditional notion of bilateral trade. The new vantage point more accurately reflects the complex reality of international trade in coffee and coffee products, the changing value distribution, and removes blind spots from previous analyses.

Dr. Cansin Arslan
Dr. Cansin Arslan is an Economist (consultant) at the ICO.

The ICO Economics and Statistics units have teamed up with the renowned Kiel Institute for the World Economy, as well as partners at the International Food Policy Research Institute and the London School of Economics, to map the evolution and drivers of coffee GVCs, providing new insights into the economic sustainability and resilience of the global coffee sector.

GVCs are characterised by hyper-specialisation. This includes production tasks carried out in different countries, high-efficiency operations, and closer and durable firm-to-firm relationships that allow for knowledge and technology transfer across borders. Within the coffee GVC, the raw material produced in tropical countries crosses borders several times, with value added at each step on its journey from farm to cup. For instance, Germany – a traditional importing country – receives coffee from Vietnam, the largest green Robusta exporter, adds value, and re-exports processed coffee to end consumers in various countries worldwide.

However, coffee-producing countries and non-traditional consuming countries are also increasingly undertaking export-orientated processing activities. This development is driven by internal consumption as well as regional and global trade. Our analysis of 30 years’ worth of ICO trade data reveals a substantial expansion of export values (inflation-adjusted) of all forms of coffee from US$8.4 billion in 1991 to US$35.6 in 2018 (see Figure 1). Yet the highest growth in value terms is observed for processed coffee – roasted and soluble. Both forms accounted for higher shares of coffee exports in 2018 (29 per cent for roasted coffee, 14 per cent for soluble coffee) compared to 1991 (8 per cent for roasted coffee, 11 per cent for soluble coffee), highlighting the increased complexity of coffee GVCs and growing importance of trade in ever more diverse processed coffee products.

A further geographical breakdown shows that advanced regions, such as Europe and North America, account for almost all the roasted coffee exports and more than half of the soluble coffee exports. However, Asian and Middle Eastern countries have considerably increased their soluble coffee exports and their respective share in total exports worldwide. South and Central American and African countries could not benefit to the same degree from value addition and increasing trade in processed coffee.

Dr Christoph Saenger
Dr. Christoph Saenger is the Senior Economist at the ICO.

The econometric analysis of global trade in coffee identifies drivers of GVC participation. Richer countries with a significant industrial base and established brands are more likely to expand exports of roasted coffee, the category with strongly increasing value added. Robusta-producing countries have successfully entered soluble production. Vietnam, for instance, increasingly engages in functional upgrading thereby contributing to global supply of soluble coffee. As a result of the increased availability, inflation-adjusted per-unit value of soluble coffee exports has decreased since the 1990s.

On the other hand, the data reveals that Arabica-growing countries are less likely to participate in functional upgrading. Typically, green Arabicas are transformed into roasted coffee but export markets remain difficult to access due to technical challenges related to production and shipping of more perishable roasted coffee as well as the strong presence of incumbent brands from rich countries. This is further exacerbated by the existence of tariff and non-tariff trade barriers – the latter also negatively affects Robusta producers.

Our analysis shows that, within coffee GVCs, Arabica-producing countries are more likely to be associated with product upgrading or ‘decommodification’ of green coffee. In this case, value-addition occurs through increased product quality, often as a result of integrated supply chain relationships between farmers and traders or roasters as well as foreign direct investment (FDI) inflow. Closer and long-lasting relationships facilitate technology transfer and access to capital and inputs along value chains and in particular for farmers. This in turn leads to higher levels of productivity and ensures consistent supply of the coffee of desired attributes, such as quality and sustainability.

Results from Colombia show that GVCs increased profits in the value chain by about 30 per cent. Half of the additional surplus remained with the participating farmers. We find that sustainable sourcing commitments by traders and roasters as well as voluntary sustainability standards, which are integral elements of coffee GVCs, also measurably drive positive social and environmental impact. For example, by mitigating the impact of climate change and fostering gender equality, GVCs thereby contribute to achieving the Sustainable Development Goals of the United Nations.

ico economic report
Figure 1: Global coffee export values by form (inflation-adjusted). Source: ICO

Despite the substantive growth in the sector driven by GVCs and many successful initiatives by the industry, participation in GVCs and associated economic, social, and environmental benefits have remained limited to certain regions and/or producers. Along with low prices since 2016, millions of coffee growing-households in developing countries are increasingly at risk. The COVID-19 pandemic exacerbates the situation.

Against this backdrop, the 2020 ICO Coffee Development Report formulates recommendations on how to integrate coffee producers in GVCs and defines a set of trade and industrial policies that reduce trade barriers, increase FDI flows and foster the resilience against shocks, with a view to foster a living income for coffee farmers. The findings of the report will not only be widely disseminated among ICO Members, the coffee industry and within the international development community but also feed directly into the new action-orientated ICO Coffee Public-Private Task Force process. This ensures that we move from ‘admiring the problem’ to solving it.

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This article appears in the November/December 2020 edition of Global Coffee Report. Subscribe HERE.

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