Perhaps the one thing that stands out the most in the international coffee trade is the obvious injustice towards African, Asian and Latin American coffee growers, who get some 7% of the value of roasted coffee sold in supermarkets.
The Fairtrade people have complained for years and have made some impact when it comes to farmers' returns for their coffee. An even more glaring issue is the coffee trade of countries such as Germany, which has grown so rapidly over the last decade that it now exports more coffee than all of Africa put together. According to the International Coffee Organisation, in 2011 African countries exported some 10-million bags (60kg each), or about 9% of total world production.
Germany exported, or more correctly re-exported, 11.9-million bags of coffee in the same year. The value of those re-exports was approximately $3.6-billion in 2011. In 2010, the last year for which coffee value figures were available, Africa's total coffee exports of around $2-billion weren't worth much when compared with German coffee exports.
The irony is that European firms don't even add a great deal of value to the coffee – they often merely re-export unprocessed green beans, which made up half of Germany's total coffee exports in 2011. Germany has done for coffee what De Beers has done for a century for diamonds, it aggregated without adding any value. The remainder of German coffee re-exports was sold as roasted (about three million bags) and a further three million is made into instant coffee, which Latin American coffee aficionados rudely call "non es café", which translates to: "It is not coffee."
Why Germany has become a linchpin in the international trade in coffee is fascinating to those who think that what it is doing is precisely the sort of activity that developing African countries ought to be doing. The problem is that roast coffee loses freshness quickly. While you do not have to roast the coffee in the place it is consumed, proximity along "the value chain" is considered important in explaining the strategic positioning that Germany has achieved.
This is one of the most commonly cited reasons why African coffee exporting countries have been confined to the export of unprocessed beans to countries such as Germany. Germany exports the vast bulk of its coffee to neighbouring countries in the European Union and some to the United States. Unlike Africa, its first-class logistical connections are efficient and it can get the product to supermarkets in Poland or Austria quickly and maximise shelf life.
Concentrated value chains
The trade in coffee gets more complex when one looks at the structure of the companies. The industry has traditionally been dominated by four large coffee traders: Ecom, Neumann, Louis Dreyfus and Volcafe. Together, they control about 40% of the world coffee trade.
Half the global market is for roasted and processed coffee, and is controlled by five companies: Kraft, Sarah Lee, Nestlé, Procter and Gamble, and Tchibo. Nestlé's Nescafé is said to control about 50% of the world market for instant coffee. The coffee market is highly concentrated and this helps explain why countries in the developing world that have tried to beneficiate their coffee have generally failed to do so – it is simply not enough. The barriers to Africa getting its beans roasted and sold are logistics and marketing.
Not rocket science
Most rich countries do not maintain high tariffs for roasted coffee and in most cases it is duty free from all sources, though not in Europe. Unlike complex food products or other beverages, the sanitary constraints on coffee are fairly limited even in a sophisticated market like Europe.
Roasting coffee requires no enormous skill or technology so what stops African countries from beneficiating their green coffee beans? The problem is that with almost every product there is a market constraint that limits African producers moving down the value chain to get more value added. There is certainly sufficient incentive. The price of good quality green beans is $3.30/kg while roasted coffee retails at between $18/kg and $25/kg in Southern Africa. So why is no value added in Africa?
Papua New Guinea, like so many African countries, spent a decade from the mid-1990s trying to export its high quality, low-caffeine and organic Arabica coffee into the world speciality market.
Despite its duty-free access to Europe and Australia, there were scores of constraints to even moderately well resourced companies with considerable government financial assistance to penetrate developed country markets. Most had to do with getting the product on to the market. Roasted coffee had to be marketed in a way that attracted customers. Therefore, large amounts of advertising were necessary. Exporters had to get special packaging material, which would preserve the limited shelf life but simultaneously allowed the coffee aroma to penetrate the packet in the supermarket.
The biggest constraint was getting the product on to the supermarket shelf. New coffee exporting companies have to pay for shelf access in many supermarkets and the product gets pulled if it fails to deliver the desired level of sales. Despite millions of dollars spent attempting to develop the roasted coffee market in both Europe and Australia, green beans make up more than 99% of Papua New Guinea's coffee exports. This experience has been replicated all over Africa.
The German coffee paradox is a direct result of the first class logistics that allow the export of freshly roasted coffees. This is difficult to achieve in more challenging environments such as Africa, where delays in delivery are common and can result in a greatly diminished shelf life for a roasted coffee product.
This, along with consumers who want particular European brands, has meant African countries have never been able to export roasted coffee.
'Non es café' wins
By contrast, countries such as Brazil, Columbia and Ecuador have succeeded in coffee beneficiation. They have played it smart and haven't played by the rules of free trade given to them by the US and Europe. These countries succeeded because they moved to the instant end of the coffee market. Brazil is now not only the world's largest exporter of green beans, it is also the world's largest exporter of instant coffee.
It achieved this through a series of policy measures in the 1960s and 1970s that imposed high export taxes on unprocessed coffee and allowed domestic producers of instant coffee to avoid these taxes.
The North American and European producers of instant coffee simply could not compete and many moved to Brazil to take advantage of the export tax regime.
Size really matters
The lessons of Brazil and the other Latin American countries are clear – beneficiation of coffee will only be done where there are local champions and commercial advantages created by government policymakers who understand markets and value chains. But in coffee, as in so many other endeavours, size really matters – and no country is bigger than Brazil. African countries simply do not have the same export volumes to follow exactly what Brazil did in the 1970s, but the ingredients for success are the same.
These are the views of Professor Roman Grynberg and not necessarily those of the Botswana Institute for Development Policy Analysis where he is employed