Market Reports

The true value of coffee

The ICO unveils its latest Coffee Development Report on the economic sustainability, inclusiveness, and resilience of the coffee global value chain in a year of unprecedented challenges.

The start of a new year marks a renewal of hope and prosperity for the world. In the midst of the unfolding economic recession as a result of the global pandemic and its disruption to coffee supply chains, the International Coffee Organization (ICO) has unveiled its Coffee Development Report (CDR) 2020 as a means to better understand the dynamics and governance of the entire coffee global value chain (C-GVC), its evolution, and provide recommendations for a more sustainable and inclusive sector. 

The report, based on sound empirical analysis, was particularly inspired by the seminal World Development Report 2020 of the World Bank, which focuses on understanding the impact of Global Value Chains (GVCs) in the world economy on livelihoods in developing and transition countries.

The ICO team, with the support of the German Federal Ministry for Economic Cooperation and Development through the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH prepared this second edition of the flagship publication.

Following the liberalisation of the coffee sector at the national and international levels in the last three decades, trade within the GVC has increased considerably and, similarly to other agricultural and industrial products, the coffee chain is increasingly associated with specialisation and high-efficiency operations, as well as durable and closer relationships between the actors involved. 

The new role of lead firms in the C-GVC and their close relationships with suppliers has changed the governance and power balance in the coffee sector. It has opened up new opportunities for coffee growers to upgrade, gain access to the global market, and acquire knowledge and technology to improve quality, sustainability and profitability.

Growth rates of coffee exports at constant value and in volume between 1991 to 1994 and the period between 2015 to 2018 by coffee form (%). Source: ICO

CDR co-author and former ICO senior economist Christoph Saenger stresses the importance of producing a document that was firmly anchored in the global development debate. “We wanted to make sure it’s not only read in coffee circles, but creates attention in the international community to bring awareness to the challenges presented to the sector, and mobilise support,” Saenger told the audience at the CDR virtual lunch.

“What’s interesting, is that we looked at producing and consuming countries together to have [a] complete picture and applied the GVC to the coffee sector, building on the ICO’s statistical data. I think the analysis helps to identify some ‘bright spots’ – sectors that permit GVC participation that enable high income for farmers. Creating the understanding of the ‘bright spots’ and how to replicate them in other countries is an important first step which will certainly be driven by policy makers, industrial and trade policies, but also financial institutions who will drive that change.” 

A key recommendation of the report is that a smart mix of market-driven initiatives and regulatory options, constructive dialogue and joint action between public and private sector stakeholders along with accurate and timely information to facilitate cooperation, are necessary to maximise the economic benefits for coffee farmers integrating the GVC. 

Rocco Macchiavello, Associate Professor of Management at the London School of Economics who provided critical inputs to the CDR, says Rwanda is one such example where foreign investors have been particularly effective at turning under-performing washing stations into high-capacity and efficient facilities that can link producers to high-value coffee markets.

“Rwanda is a country where literally hundreds of washing stations shot up in the last decade, and this development has been associated with an increase in quality product. We then saw the emergence of large firms that manage multiple washing stations, and the emergence of foreign-owned groups with professional management. This resulted in better efficiency, improved product quality, and relationships with farmers,” Macchiavello told the audience.

Impact channels of COVID-19 in coffee producing countries. Source: Based on World Bank (2014).

One thing to note, Saenger adds, is that not everyone can participate in such ‘bright spots’ that encourage value addition shared between multinational and farmers, so we need to make sure we can bring more farmers into such programs. “We need to equip the buyers of coffee through working capital to enable them to extend services to farmers, not only through buying but also providing extension, pre-harvest finance, and so on. I think that is also where multilateral development banks come in [to the picture],” he said.

Another significant example of shared value through partnerships is Colombia. The National Coffee Federation (FNC), the country’s main coffee sector association, supports coffee growers by providing support in research, technical assistance, capacity building and market access. A large majority of small-scale farmers sell their production to the FNC, and purchase guarantees introduced by FNC bring financial stability to coffee growers. As such, FNC has a key role in linking farmers to large buyers and high-value markets.

The expansion of the coffee GVC is driven by the private sector, but governments need to provide an enabling environment. Higher-income regions such as Europe and North America accounted for more than 96 per cent of roasted coffee exports and 53 per cent of soluble coffee exports in 2018, indicating that processing activities primarily occur in higher-income regions that rely strongly on green coffee imports from the producing lower-income regions.  

The report provides also key interesting recommendations to governments on the role they play, both as regulators and as enablers, in creating the right environment, to make the C-GVC not only sustainable but more inclusive to respond to the demand by consumers. 

Sebastian Lesch, Head of Division on Sustainable Agricultural Supply Chains, International Agricultural Policy, Agriculture, Innovation, at Germany’s Federal Ministry of Economic Cooperation and Development (BMZ), pointed out that the German government and the EU are working on a due diligence process that will enable to increase sustainable production and sourcing of coffee and provide higher opportunities for farmers to integrate the C-GVC and higher income. He also spoke about the imbalances in the value chain and to mitigate them, including the removal of tarrifis and use of blockchain technology.

“Our aim is to bring all sides to the table, put farmer income at the centre of discussions, which is paramount, cover-off differentiation, the effects of climate change, have the private sector on board, and look at transparency in the value chain,” he said.

Other themes in the report highlight the upgrading opportunities for Arabica and Robusta coffee producers, the need for inclusiveness, the coffee GVC’s contribution to the UN Sustainable Development Goals, and on the resilience of the coffee GVC to stressors such as climate change and the current global pandemic. Aoife Hanley, a researcher at the Kiel Institute for the World Economy, says the world is looking for solutions and it is possible to find solutions using the 30 years of ICO data and regression techniques to look for “strong and striking patterns” and see the trajectory of the past to predict the future. “There are some things that can be done to assist the degree of which producing and importing countries can capture more value from green coffee exports,” said Hanley.

One such suggestion the CDR analysed was international tariffs of industrialisation of origin countries, and whether it helps or hinders these countries. 

“Tariffs are always singled out as an important aspect of value creation because they act as severe impediments for growers and producers in many sectors, not just coffee. Tariffs matter a lot and the good news is they can be changed,” Hanley said.

Functional upgrading of agricultural practices to get goods to ports for sale in producing countries was also considered a key variable to help countries capture more value from the coffee produced, such as the conditions of roads, harbours, and ports that can impact the exporting green coffee.

“The other thing that goes hand in hand is industrial capacity, which can be exploited, and value can be levered from it,” Hanley said. “There’s a lot of mechanisation involved [in coffee production] so there needs to be some industrial capacity before countries can capture value from produced Arabica or Robusta. Therefore, we can see if you have a strong and thriving cocoa industry like Ghana and you have the capacity and machinery to deal with that, there’s a big spin-off effect because you can leverage your industrial base. There are some success stories that have managed to do that well, such as Vietnam, Ecuador, and the Philippines, who have been able to create soluble coffees from either cultivated Robustas or imported coffee in the country itself.”

Process upgrading at farm-level and in the roasting industry has led to higher efficiency and productivity. The results are lower costs per unit and increased competitiveness of some green coffee origins. Other key drivers to capture added value are political stability and highly diversified economies, such as resources from extracted industries like crude oil.

“One has to be mindful of the other industries that are active in the economy because they can give or take quite significantly from coffee to capture value,” Hanley said. “They can make it difficult for coffee growers to employ people at a competitive price because they get attracted to these other industries.”

International trade in coffee has become more complex. Today, more countries are participating in the global trade of coffee compared to 30 years ago. High-income, non-producing countries have significantly increased exports of coffee. International trade in processed coffee forms, such as roasted and soluble coffee has grown more substantially than that of green coffee. This growth has been mainly driven by a small number of countries that capture a large value share of the GVC. Key findings of the report include that the value of annual cross-border coffee exports (including green, roasted, and soluble) has more than quadrupled from US$8.4 billion in 1991 to US$35.6 billion in 2018 with non-producing countries, including the UK, having played a significant role. 

Rebecca Pandolph, Chief of the ICO Statistics section of the report, says a notable feature of the global coffee market is sustained low and volatile prices, which continued into the 2019/20 crop year.  However, Pandolph says the period around the time the global pandemic started saw a huge influx of stockpiling and panic-buying, resulting in a surge of demand for imports in March/April 2020. This then flattened out with the ongoing pandemic, price fluctuations, global economic downturn, and limited recovery in out-of-home consumption as countrywide social distancing measure remain in place, resulting in an overall decline of global demand by the end of 2020. 

“Unlike demand, however, production was not particularly affected, mainly because most coffee was harvested before the start of the pandemic. We expect to see more of an impact in current season 2020/21 with lower yields and quality going down, however governments have taken many measures to keep production and supply up,” she said. 

Global coffee trade was mainly impacted by shipment delayers, container availability, and fewer workers in ports, with exports from producing countries falling by 5 per cent to 127 million bags. For producer countries, their total export earnings in 2019-20 declined by 4 per cent to around US$18 billion, although on a per unit basis, roasted coffee exports saw a significant increase as the average unit value rose to 1.95 US cents per pound.

Coffee year 2019/20 was a year of unprecedented challenges. Global coffee prices have trended downwards since November 2016 when the ICO composite indicator averaged 145.82 US cents per pound. Global output in 2019/20 is estimated at 169.34 million bags, 2.2 per cent lower than in 2018/19, with global coffee consumption estimated to fall by 0.9 per cent to 167.59 million bags.

The coffee sector is highly sensitive to climate variations, but a new threat to the fragility of the C-GCV is the COVID-19 outbreak. Supply chain disruptions triggered by pandemics and health crises, but also by climate change or emergencies, have the potential to severely hamper exports of coffee, thereby affecting foreign exchange earnings and jobs in producing countries, the downstream operators of the GVC, as well as consumers.

A hard copy of the Coffee Development Report 2020 can be purchased online at www.internationalcoffeecouncil.com/cdr2020 and is also available to download for free.

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