Tuesday, March 04, 2003


as promised

long-time readers know i've lately been pondering whether the u.s.a. should step up and re-join the i.c.o. as part of the effort to stem the world-price depression in coffee known as the "coffee crisis," and thus alleviate the human misery that accompanies it.

the first part of re-joining the i.c.o. would be to get the government to tighten import standards, to increase the quality level and purity of the coffee that can be imported to the u.s.a.

this means fewer moldy beans, stones, insect parts, twigs, and other defective or inferior beans would appear in america's java. and struggling coffee farmers could get a better price for their high-quality beans.

i've had the privilege to correspond with renowned coffee expert and scaa chief ted lingle. he wrote me some very nice replies to basic questions i had about the current specialty coffee market and the i.c.o. in his reply he refers to some documents, which i will link to at the end for easy downloading. it's long, but it's good:

Dear Fortune:

Thank you for your interest in the coffee purity issue. I have attempted to provide you with a brief answer to your questions and have attached some background information for your further review.

1- how does the coffee crisis affect specialty coffee? isn't coffee in the specialty category getting a much-higher price than the "c" [standard commodity market contract price]? aren't coffee farmers who grow specialty coffee therefore immune to the current problems?

80% of coffee production comes from small holder farmers - individuals who own less than 5 acres of land and are producing fewer than 10 bags of coffee. Their economic livelyhood is tied directly to the average price they receive for the coffee beans they sell to millers, regardless of quality, as the millers must sort through 10 bags of coffee to produce 3 bags of specialty coffee. The price paid to small holder farmers is determined by the international commodity price for green beans, as they do not receive the price premiums paid for the specialty coffee beans sorted out from their coffee harvests. Of the 20% of coffee output produced on large farms, the farmers usually operate their own mills and are able to take advantage of the specialty coffee premiums through direct marketing programs.

2- how much of a farm/plantation/finca's growth is usually rated as specialty? even if i grow only some specialty coffee, isn't that enough to carry my whole farm?

Depending on the care used during harvesting, the altitude of the farms, the pruning and fertilization, and the available rainfall, approximately 30% of a farmer's output would qualify by cup and bean size as specialty coffee. It is simply not enough to economically carry a farm or plantation, regardless of size. To be economically viable for the farmer, his average price for all of his grades needs to remain above his costs of production, not just the amount he can sell for a specialty coffee premium price.

3- even if 90% of specialty growers are forced into bankruptcy, won't the coffee market be unchanged? we'll just pay slightly higher prices for the varieties etc. we love, right? so actually, the farmers of our favorite coffees will only benefit from the crisis, won't they?

What's at risk today for the specialty coffee industry is all of the specialty coffee origins whose costs of production are above current world prices. As you can see from the attached spreadsheet, these countries include Costa Rica, Guatemala, Colombia, Ethiopia, Kenya, and the Arabica production in Indonesia. This production represents only 20% of the world market but accounts for 95% of specialty coffee output, so if they are forced into bankruptcy, we lose the entiremarket. As these countries shift to more economically viable crops,the prices for the "varieties we love" will move into the Kona and Jamaica Blue Mountain price range, if they are available at all.

4- what are defects? do they affect roasting or cup quality? what do defects mean to the home roaster? the starbucks drinker? the independent roaster/coffee shop owner? the folgers drinker? the home espresso lover?

Defects are impurities in coffee that do not "transform" (carmelize) during roasting because their chemical make up is different than normal coffee beans. Basically they are black, unripe, and fermented coffee beans ...the sick, dying, and dead beans that are "triaged" from the sound beans during milling. Defects also include non-coffee material, such as sticks, stones, and husks, that are usually removed before and after roasting. For the drinker, these triage coffees represent "bitter and sour" tastes, which is why millers receive premiums for their removal. To be tendered against the New York "C" contract, coffee lots can not contain more than 13 defects per 300 grams. Specialty coffees have virtually 0 defects, which is why this is a difficult issue for specialty coffee users to understand.

5- what levels of defects are now allowed into the united states under the current import rules? what new standards would the proposed rules impose?

Current FDA regulations, "Grade 8," allow for up to 610 defects per 375 gram sample before the coffee lot can be detained by the inspectors. Back in the 1980's when FDA was actually making inspections, more than 27,000,000 lbs. were detained in a single 12 month period. We are proposing that this regulation be changed to "Grade 5," 86 defects per 375 gram sample, which will be consistent with the new ICO standards of purity for coffee.

6- how will changing regulations to reduce the allowed level of defects help specialty coffee? doesn't the specialty grade already far exceed the defect levels allowed under the present rules?

Changing the regulations will help lift green coffee prices for coffee farmers worldwide. A recent ICO study suggests that this would amount to 2 cents per pound for each 1 million bags of triage coffees eliminated. Based on our estimates (see spreadsheet) this would result in an approximate 20 cents per pound worldwide. This would help keep the specialty coffee growers from shifting to other crops, which is what the current market is telling them to do now.

7- won't the big four [major corporate roasters like nestle, sara lee, kraft, and p&g] just manipulate any defect rules so that they can import cheaper coffee anyway?

The major roasters follow the law - the risks in not doing so are way too high. Therefore, the opposition to any change in the current rules is quite high - a "standard so low that it's no standard at all" fits their needs in keeping the commodity price as low as possible. There will always be "bottom feeders," and so the basic question is how low should the bottom be allowed to drop before the consequences extract too high a price from everyone else. Our view is that we have passed that point in coffee.

8- can't we just advertise so that everyday american coffee drinkers learn about specialty coffee? isn't that better than trying to regulate the overall market?

As this change is occuring now, we don't even need to advertise. The problem is that it is not going to happen fast enough to keep important specialty coffee origins in business. The reason the market cannot respond quickly enough is that there is "asymmetry of information" between the roasters who buy coffee by grade, paying steep discounts for defective coffee, and the consumers who buy coffee by brand, paying normal prices for sound coffee beans. If the coffee was labeled correctly, "coffee" versus "coffee by-products," the rate of change by consumers would keep pace with blend changes made by roasters. Free markets are based on "many buyers and many sellers" as well as "open transparancy" of product type and grades, but both conditions do not exist in today's coffee market.

9- won't the tighter standard prevent unusual-looking but good-cupping varieties from reaching the market? won't the strange-looking monsooned malabar, for example, be banned? wouldn't peaberries (sometimes labelled a defect) be banned?

Not at all! Defect standards have nothing to do with unusual-looking or odd shaped beans. They have everything to do with impurities that do not convert to normal coffee beans during roasting. Everyone in the trade knows what they are, which is why they sell for 20 cents on the dollar. No one sells good tasting coffee at a discount, regardless of its visual appearance; it is always just the reverse.

10- why should the u.s.a. move to institute the i.c.o. international standard anyway? why should we bother with a cartel? isn't the i.c.o. anti-consumer and anti-free market?

The ICO was never a cartel - it was an administrator of an international trade agreement based on quotas, just like the U.S. uses quotas to regulate imports of other agricultural products such as sugar. Today without economic provisions (quotas are no longer part of the agreement) the ICO serves as a coordinating body between nations on matters of coffee policy, such as what level of purity defines "coffee." The international coffee community, as reflected in ICO Resolution 407, believes the coffee crisis can be effectively addressed through implementation of standards of purity on what can be labeled as "coffee." Other agricultural industries do this routinely for the benefit of consumers, such as in wine or dairy products.

11- what is the connection, if any, between the w.t.o. and the i.c.o.?

The WTO sets rules of trade among all nations for all products. Most of the WTO rules on coffee, particularly definitions such as green, soluble, and roasted coffee grew out of agreements on coffee reached at the ICO jointly by producing and consuming coffee nations.

12- you say that without the new rules, vietnam and brazil will further dominate the market and we will lose many of the varieties we now enjoy. how could that happen?

If the only rule regarding the sale for processed (roasted & ground or instant) coffee is "caveat emptor" (without a warranty the buyer takes the risk), then coffee reverts to the level of a commodity and the low cost providers will end up the sole providers in the market. In effect bad coffee will end up driving good coffee out of the market place under the guise of "efficient producers." Consumers have too many other beverage choices to expect them to become discriminating coffee experts - this is what the industry professionals should be doing on their behalf. If we fail to act on their behalf, we will lose their confidence AND their dollar votes. The question for the trade is can we learn to operate with a "code of ethics" or do we continue to operate with a "code of silence."

Thanks again for your interest - it's not a simple story nor a pretty picture.

Ted



posted by fortune | 7:41 PM | top | link to this | email this: | | | 0 comments