Coffee buzz

"Every time you buy a cup of coffee at Starbucks, two people are getting screwed: you and the coffee farmer." It went on to state that even though coffee prices are currently very low, Starbucks has kept its prices sky high.

To qualify as Fair Trade coffee, its buyer must: 1) pay a minimum price per pound of $1.26, 2) provide credit to farmers, and 3) provide technical assistance such as help transitioning to organic farming (to read more, go to http://www.globalexchange.org/economy/coffee/).

The market price for a pound of coffee is more like 50 cents. So Fair Trade coffee costs much more. The buyer pays more and has to provide benefits to the farmers in addition. What should this do to demand for Fair Trade coffee?

Not surprisingly, supply curves are upward sloping (in almost all cases). That is to say, when something costs more, people buy less of it. Is coffee any different? I didn't have any reason to assume so, so I went digging deeper into the website. Sure enough, I found this piece of information: The Fair Trade Labeling Organizations International recently released figures that show a total production by groups on the Fair Trade Coffee Register of 165,000,000 pounds in year 2000, whereas total sales were only 30,000,000 pounds. This leaves an additional 135,000,000 pounds of Fair Trade coffee produced by cooperatives that are not receiving a Fair Trade price.

That is to say, there is not enough demand to buy up the supply of Fair Trade coffee at the Fair Trade price. There is a surplus of Fair Trade coffee. The result is either that coffee farmers hold on to this coffee without selling it, which would be very costly, or sell it at a lower price, bringing their price closer to the market price.

This is in fact why the price of coffee is so low right now. Supply has been increasing for some years, because coffee farms have raised their productivity. Again, demand curves are downward sloping. When a good is less scarce (the quantity supplied goes up), the price goes down. This is what has been happening in the coffee industry. The Oxfam website admits as much: "The underlying cause of the crisis in world coffee prices is readily apparent. Coffee production is consistently outstripping consumption, with the result that excess stocks are driving down prices," (http://www.oxfam.org.hk/english/news/previous/coffee_paper.doc).

Eventually, prices will go down far enough that growing coffee isn't profitable anymore. What happens then? Well then it's time to find something else to do. If there isn't demand for what you're supplying, supply something else.

The same story explains why agriculture has been declining as a portion of US GDP for the last two hundred years. It's not because we're bad at it _ it's because we're so good at it. Productivity growth has been such that using new capital and technology, one worker today can produce many times more than that same worker 25 years ago.

So we can either produce the same amount with far fewer workers, produce much more with the same amount of workers, or somewhere in between. And we have fallen somewhere in between -- we produce more agricultural goods, but with fewer workers (and less land). The remaining workers have moved on, first to the manufacturing sector, which for a long while was growing as a portion of US GDP, but now is declining because of the same type of productivity growth, then to the service economy, which is growing as a portion of US GDP.

The problem is that these transitions, while necessary in the long run, are painful in the short run. They are painful to US farmers who can't pay off their debts and have to change their way of life, move to the city, and acquire new skills. They are even more painful to Kenyan or Columbian coffee farmers who have no welfare system to rely on, no savings because they didn't make very much in the first place when coffee prices were higher, and fewer avenues through which to acquire new skills and new employment.

What's the solution? In the US, we have an elaborate safety net to help cushion this blow. Part of the New Deal was a system of production quotas for farmers, so that many farmers leave large tracts of land unplanted and receive a check from the government for doing so. This is intended to limit supply to keep the price up. The US government also buys large supplies of grain each year and distributes it through USAID and PL 480. This may keep the price of grain up, but it's fighting a battle against history. It is no long term solution. In addition, it distorts the allocation of resources and creates glaring inefficiencies -- such as perfectly good, fertile land, left unplanted.

This is the kind of solution that Oxfam proposes -- "The obvious solution is to bring supply back into line with demand and to stabilise prices at more remunerative levels." But Kenya and Columbia probably don't have the political and economic resources to maintain such a system. It is also undesirable and untenable in the long run. The only long run solution is to provide new opportunities for employment, and that takes more than a 1000 word article, especially in countries like Kenya and Columbia where the problems are so deep and vast.

Fighting against supply and demand is a tough battle to wage. Supply and demand are big bullies and never take no for an answer. In the end, you'll have to work with them and not against them.