Grounds for Complaint? Understanding the “Coffee Crisis”

May 6, 2003 • Trade Briefing Paper No. 16

While affluent consumers in rich countries pay several dollars for a cup of latte at the local Starbucks, millions of small‐​scale coffee farmers are struggling as coffee bean prices have plummeted to historic lows. The juxtaposition of the designer coffee boom and rock‐​bottom raw material prices strikes market critics as compelling evidence of unfairness and exploitation. They blame multinational coffee roasters and retailers for profiting at poor farmers’ expense, and they propose a number of schemes — including “fair trade” coffee, the use of new quality standards to restrict imports, 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 of frictionless efficiency. Its adjustment of supply and demand is subject to long lags and overshooting. Nevertheless, the story of the current coffee glut is at bottom a story of falling costs and productivity improvements on both the supply and demand sides. In particular, prices have fallen so low primarily because of dramatically expanded production by low‐​cost suppliers in Brazil and Vietnam. And those low prices are a signal to high‐​cost producers — for example, in Central America — to supply a higher‐​value product or exit the market.

However well‐​intentioned, interventionist schemes to lift prices above market levels ignore those market realities. Accordingly, they are doomed to end in failure — or to offer cures that are worse than the disease. There are constructive measures that can help to ease the plight of struggling coffee farmers, but they consist of efforts to improve the market’s performance — not block it or demonize it.

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