While affluent consumers in rich countries pay several dollarsfor a cup of latte at the local Starbucks, millions of small‐scalecoffee farmers are struggling as coffee bean prices have plummetedto historic lows. The juxtaposition of the designer coffee boom androck‐bottom raw material prices strikes market critics ascompelling evidence of unfairness and exploitation. They blamemultinational coffee roasters and retailers for profiting at poorfarmers’ expense, and they propose a number of schemes — including“fair trade” coffee, the use of new quality standards to restrictimports, and the return to political management of coffee exports ‑to help coffee farmers by propping up coffee‐bean prices.
The coffee market is clearly far from the textbook model offrictionless efficiency. Its adjustment of supply and demand issubject to long lags and overshooting. Nevertheless, the story ofthe current coffee glut is at bottom a story of falling costs andproductivity improvements on both the supply and demand sides. Inparticular, prices have fallen so low primarily because ofdramatically expanded production by low‐cost suppliers in Braziland Vietnam. And those low prices are a signal to high‐costproducers — for example, in Central America — to supply ahigher‐value product or exit the market.
However well‐intentioned, interventionist schemes to lift pricesabove market levels ignore those market realities. Accordingly,they are doomed to end in failure — or to offer cures that areworse than the disease. There are constructive measures that canhelp to ease the plight of struggling coffee farmers, but theyconsist of efforts to improve the market’s performance — not blockit or demonize it.