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.