Tuesday, May 21, 2019

Agriculture terms of trade

The FT has a good article on the challenges facing the global coffee producers. At the heart of the problem is the shocking disparity in the terms of trade between the coffee growers and the retailer.
Although the growers’ stories are often used in the marketing of individual coffee brands, consumers are largely oblivious to the current plight of the farmers, assuming that the increased price they are paying for their morning brew is — at least partly — passed on to the producer. But in an everyday £2.50 brew, the coffee itself accounts for about 4 per cent, or around 10p — rent, labour and tax taking a much larger portion of the cost. “The cost of coffee is really marginal [for the retailer],” says Jeffrey Young, chief executive of consultants Allegra Strategies. “Even if your coffee beans go down 30 per cent, the cost of cups and workers has gone up, the rent has probably gone up and everything else has gone up.”
Given that the price share of the coffee bean includes the cost of farmer's labour, inputs, and logistics cost, the farmer's returns net of all costs is minuscule. In fact, just the profit captured by the likes of Starbucks is several multiples of the farmer's returns. 

This also raises the point about the massively skewed terms of trade between primary activities and secondary and tertiary ones, and agriculture producers and consumers in general. Granted the differences in value addition and the nature of economic systems, it is the mind-boggling order of magnitude of difference between the returns to the two kinds of activities that is a matter of great concern. Isn't it a supreme irony that the ingredient which makes coffee what it is, is also the cheapest input, by a long extent, into making a cup of coffee?

Another big takeaway from this illustration relates the idea of increasing farm incomes by disintermediating the value chain from the farm gate to the commercial buyer. While coffee may be an extreme case of upstream value capture, the broader point applies just as well to other crops, and I am inclined to believe that the broker disintermediation gains are likely to be small and not significant enough for smallholder farmers. So the pathway of enhancing farm incomes by disintermediating value chains may be a high-effort but low-return one. More on this in the next couple of days.

1 comment:

KP said...

Dear Gulzar,

Are'nt the arguments getting tautological ??? Here's my comment on Ross Barkan's article in Baffler on Uber (below) - that could very well be a parallel with Coffee and a conclusion that is ironic. (and an aside, No, this is not to attempt to bring the Trump presidency down to only this parallel, the reason for its popularity needs explanation rather than just vitriol).


Ross Barkan writes beautifully, the segue between the symbolism of Trump versus the "abstract" value / profits of Uber, drive a strange parallel. But, I am skeptical that this makes any impact in an economy where "risk" based products - things of logic, objectified abstractions - which barely have any tangible reality (but real consequences), are the basis of enormous profits, traded on the justification that trading in risk services the economy by indicating where the risks are and hence acquire the status of "products" whose trade are of value (humongous at that) to society. Uber is a classic case of power based on a position in a network, that does not automatically imply that the contingency is indicative of its contribution. But, by that argument, so is the pricing structure on the entire supply chain of any agricultural commodity, that is branded, take Coffee for instance. Extending this logic, isn't this the logic of the market - Money validates and it validates the money - tautological ???

"Underpaid drivers produce the value, undertaking the expense of purchasing and maintaining their vehicles as stockholders absorb all the wealth. Uber has no incentive to heed the demands of their drivers. As long as capitalism produces the conditions for unemployment and underemployment, a labor force will be at the ready, prepared to struggle for survival. Uber’s real aim is automating its labor force out of existence, getting self-driving cars onto the market as soon as possible. Eliminating human beings still may not help Uber turn a profit (the economics of the enterprise are that warped), but it could salvage some stock value. Again, their success won’t be tied to any kind of innovation they pioneered. The hope, like any good grifter, is to piggyback off the breakthroughs of someone else. Uber’s creators simply tied an unregulated taxi company to an app made possible by smartphone technology they played no role in conceiving. If the company eventually tanks—the IPO is off to a grim start—it will be beside the point for them. They had their pay day. Just as Trump got his presidency, they got a lifetime devoid of obligations and consequences. They were, as F. Scott Fitzgerald once wrote, careless people who smashed up things and creatures and then retreated back into their money."

regards, KP