BUSTED! Plenty Of Blame To Go Around.

Are the current low prices commanded for coffee anyone's fault in particular? In this first installment of it three-part series on the ongoing coffee crisis, specialty retail expert Donald Schoenbolt takes a look from his point of view at various theories on why producers have recently fallen on such hard times.

Overproduction has caused the prices of most green coffee to plummet 40% during the last year or so. There is reason to believe that the devastating effects the current price levels are having cannot be overstated. Newsweek put a human dimension on the chaos caused by world coffee overproduction. It reported that the 14 Mexican refugees attempting to cross illegally into the U. S. and found dead in the Arizona desert in June were failed coffee pickers trying to find their way to America, and a job. According to the regional press in Chiapas, Mexico seasonal laborers already living on the poverty line have seen a cut in wages prompting 500 families each week to migrate while raising the specter of malnutrition, as reported by Oxfam. There are illustrations like these available for almost every coffee growing region on the globe. The crisis is scary, and it is real.

"Why in the hell aren't farmers getting more if we're paying four bucks for a cup of coffee?" asked Robert H. Bates, a coffee expert at Harvard, in the Newsweek article. Karen St. Jean-Kufour representing the Association of Coffee Producing Countries (ACPC) raised the same issue/accusation at the Tea & Coffee World Cup Symposium held in Amsterdam in June 2001. She challenged the price U.S. consumers pay for a latte saying green coffee prices were down over 40% but U.S. companies had not lowered their price for coffee. Her remarks inferred that U.S. specialty companies were getting rich at the expense of the farmer.

The specialty community has raised the aspirations of coffee farmers throughout the world. We buy higher quality beans than the commercial coffee community, and we pay more per pound for those beans. As a community we have been sensitive and pro-active in areas of environmental conservation, and human resources, and we have done it without compromising our bias for the best.

Specialty coffee represents a small fraction of the American cup. The three largest U.S. coffee roasters each handle more coffee individually than does the entire specialty trade of 1,200 roasters who together roast only about 8% of U.S. imports. Certainly no specialty retailer sells near the volume of coffee beverage than do the great fast-food hamburger, convenience-store and doughnut retailers. No specialty store chain sells more coffee at retail than do the supermarket chains. Specialty coffee, the small but good guys in the coffee world, makes an attractive target because of its high public profile.

Retailers of specialty coffee beverages have substantial costs to bear in bringing their product before the public. As sad as it may seem, the monetary value of the coffee in the cup is a pittance to the value of everything else that goes into the presentation. The specialty coffee beverage price includes much more than the price of beans -- in that paper cylinder are other costs including but not limited to concept, financing, design, real estate acquisition, build-out, menu development, rent, staff development, salary and benefits packages, insurance, taxes, communication costs, professional services, goods and supplies. The coffee in the cup (even when exceptionally good coffee) costs less than the cost of the paper cup and lid alone. Anecdotally, while the 10,000 retailers of specialty coffee beverages in the U.S. may get upward of $2.00 for their average beverage sale, there are still hundreds of thousands who are selling a cuppa for about 89[cts.] on average. The retailing individual sustains an item c ost with condiments and paper goods of about 25[cts.] for a simple cup of well-prepared drip coffee. This does not include the other costs mentioned earlier. No one is being ripped by the price of a good cup of coffee, least of all the consumer who has taken this beverage to their heart believing that the delicious specialty cup is fair value for value received. I am anything but an apologist for things that are wrong and out of whack in the coffee business. The above simply constitute truths that some folks just don't realize or understand.

Here is another specialty coffee truth. There are notable specialty coffee retail success stories, but these are, in global terms, on a very small scale. Specialty coffee continues to be a high profile business populated for the most part by small independent operators. There is also an irony hidden in the siren song of specialty coffee, and the princely stuns supposedly made there. While closely held companies do not report earnings publicly, few publicly traded specialty coffee retailers are showing profits at all. Most are struggling to maintain themselves. Many of the publicly held companies have seen their stock perform miserably. There has been significant consolidation, and many closely held chains, as well as public companies have left the field feet first both in North America and overseas.

The home market for coffee is almost a distinctly separate business from beverage retailing. Here competition is fierce, and margins are razor thin. Here too there has been significant industry consolidation in an effort to gain profitability. We have seen the drop in retail prices commensurate with the diminution in retailer costs and the intensification of competition. At this writing Folgers is on sale in New York for 99[cts.] a unit ($1.22 lb.). A famous specialty food emporium has featured its roasted-on-premises all-Arabica house blend coffee in the same city at $3.99 lb. These are bargain basement prices for U.S. consumers. In the supermarkets of America, the largest venue for home use coffee, the consumer still buys best price most often.

There have been several voices raised blaming Vietnam's rise as a major coffee producer of cheap Robusta coffee as contributing to the world Robusta coffee glut and subsequent low green coffee prices for all species, and most varieties and origins. Vietnam's entry into the export coffee market with such sustained ferocity has put pressure on world coffee prices, but Vietnam has as much a right as any other nation to grow and offer coffee to world markets. The World Bank has actively promoted the development of Vietnam's coffee exports, as has the Asian Development Bank. These world agencies that encouraged and backed Vietnam's play have themselves played into the hands of a monumental over-supply disaster. There is more. The United Nations has sponsored programs in Bolivia and Colombia encouraging farmers to switch from cocoa to coffee farming. The International Coffee Organization provided funds to Angola for the revival of its coffee production after a long Civil War decimated production.

We all seek approval for our actions. In the age of spin, even mistakes are made to appear triumphs. Not surprisingly, the World Bank looks upon Vietnam's coffee victory with pride. "Vietnam has become a successful producer," the San Francisco Chronicle quoted Don Mitchell, principal economist at the World Bank as saying, "In general we consider it to be a huge success." The article, entitled "The Coffee Crisis," appearing on Sunday May 20, 2001, went on: "Although Mitchell acknowledges the damage to nations that cannot compete with Vietnam's one-dollar-per-day labor costs or Brazil's mechanized plantations such as Guatemala, with a three-dollar-per-day minimum wage, he said the losers must switch to farming other crops."

The world price for Robusta coffees has sunk under the weight of over supply. It has dragged the better Arabica grades down with them. Still we see specialty green coffee prices fighting the downtrend. Kenya AA, Costa Rica Tarrazu, Sumatra, Guatemala Antigua and the value-added specialties (Bird-friendly, organic, et. al.) are holding their price better than other more commercial green coffees through this crisis. This is due to their taste qualities, and their relative scarcity. Kenya AA, for example, is being offered in New York at "C" + 95[cts.] in 25 Bag lots. While these coffees may be worth more vis-a-vis the "C", they are not worth what they were an 18 months ago. If specialty coffee cannot keep money in the pockets of the farmer, in real terms, our failure will result in a growing scarcity of the best grades. This in turn may trigger higher and higher future green coffee prices for these specialty coffees as farmers look toward other avenues to support their families and more hectares of coffee go un tended. It is feared that, as a practical matter, some varieties of Arabica coffees could actually cease to exist in world commerce.

Don Schoenholt is c.e.o. & master-of-coffee at venerable Gillies Coffee Company, Brooklyn New York. Gillies is a roaster of sustainable coffee, a Founding Supporter of Coffee Kids and a member of the Smithsonian Institute's "Bird Friendly" shade-grown coffee program. Gillies was the first corporate supporter of Grounds For Hope.

Make sure to check next month's issue of Tea & Coffee Trade Journal for Part 2 of Donald Schoenholt's special series on the current coffee crisis, in which he will explore the fair trade phenomenon.