More like black tinPosted: August 4, 2013 Filed under: Uncategorized | Tags: black gold, coffee, economics, Ethiopia, GDP, global market, globalisation, globalization, ICA, International Coffee Agreement, macroeconomics, politics, price, Tadesse 1 Comment
I recently watched a documentary entitled Black Gold, about the global coffee market and its impacts, specifically, on a group of farmers in Ethiopia as part of a macroeconomics class. Here are my thoughts in response.
I found this documentary quite interesting from a variety of aspects. To me, the theme is that economics (global or local) is about politics … and vice versa. Take Mr. Tadesse at the eight minute mark of the documentary speaking to the crowd of farmers he represents. He walks them through the economics of how the average price for a cup of coffee is $2.19 and that a kilo of coffee beans produces 80 cups of coffee, thus a kilo of coffee beans is valued at $230. Yes, these farms are only paid $0.23 per kilo, implying that there is a 1,000% profit that is being consumed by the “middle man”. This argument clearly lays out to the farmers why they need Tadesse representing them as the head of the co-op, trying to remove the middle-man and thus bring further profits to the farmer. This could easily be a speech by a politician to a corn farmer in Iowa. Of course what Tadesse is leaving out is that the value of a kilo of unroasted coffee beans on a farm in Ethiopia is very different than the value of a cup of coffee. The middle men to in fact add value and deserve some profit in the process. Someone needs to hand-pick (at $0.50 a day) out the bad ones, then transport them to a shipping port, move them across the world to another port, unload and transport to the roaster, roast the beans and repackage them, transport that to the retailers who grind them and heat and water to make coffee. Coffee that is put in a cup, in an air-conditioned building with tables, chairs, and Wi-Fi. That’s a great deal of additional value provided along the way and it is reasonable to expect those value providers to make a profit doing it. But that doesn’t rally the farmers and convince them to pay Tadesse’s salary and travel expenses.
Please don’t get me wrong, there’s a lot to be said for the farmers in this case. They clearly are not getting their fair share of the profit chain that they create. One can easily draw parallels to what is going on domestically with fast food workers and the minimum wage. Capitalism and the principles of economics teaches us how the invisible hand of the market will find the right wage and nobody can argue that even at the wages they make now (fast food workers and/or coffee growers) people are still willing to do the work, so the wage is balanced. Hopefully though, more and more consumers will realize that we are humans with a social contract with other humans and that paying people a living wage is in everyone’s best interest. We’ve read in our textbook how as wages go up, buying power increases, driving output which, if controlled properly, can grow overall GDP. The documentary makes this point towards the end by saying that if Africa’s share of world trade increased by 1% it would generate $70 billion, which is 5x the amount of aid the continent receives in aid. A compelling case, but it gets us back to politics. Every country tends to look out for the best interests of its own economy and it may end up being financially better for a country like the US to send aid to Africa instead of allowing them better terms in the global market. This is, of course, entirely different than what is morally right for the US to do.
It’s a complex game as coffee beans are grown by farmers in dozens of countries, all with different currencies, cost of livings, etc. Yet, they all get funneled into the same global market. For most consumers, a coffee bean is a coffee bean, regardless of its origin, hence a global price per kilo is reasonable. If these farmers from disparate countries were to unionize (for lack of a better term), they could then attempt to set a global price that would be much higher, by controlling production of coffee in each of the countries. This is clearly what the International Coffee Agreement was designed to do when it was originally signed in 1962. Of course at that time, the demand for coffee was shrinking and the post-WWII politics of capitalism vs. communism were in full swing, so an agreement was made to not only limit production of coffee but also limit demand in countries like the US, thus increasing the price. However, as with so many other things, the market changes and when demand not only rose over the next few decades, but then changed to prefer a milder bean (Arabica vs. Robusta) caused the types of beans in demand to change, which impacted coffee-growing nations differently depending on which varieties they exported. For example, Brazil, a large producer of mostly Robusta beans was not pleased with the shift to Arabica beans. This conflict causes the ICA to breakdown in 1989, leading to the average indicator price to plummet to ~$50.
The other issue that comes into play, as we learned in class, is the exchange rate. Even when the ICA was in place, you still had the issue of exchange rates. A global price of say $200 does not necessarily translate into the same standard of living for all coffee producers in all regions of all countries, unless all those nations pegged their currency to the dollar. Perhaps Tadesse was on to something: when the documentary was made, the global price was up to ~$110. In recent years, it spiked as high as over $300, but has since fallen back to $118 as of today. What I wasn’t able to determine was as those prices tripled did that mean the price paid to the farmer triple? Not necessarily.
I do feel better about my decision to buy “fair-trade” products whenever possible. In fact, at ~27 minutes into the documentary, we saw one of my favorite roasters in Tadesse’s cabinet, Dean’s Beans. I’ll be sure to continue to do what little I can to help improve the system for these global farmers.
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