Coffee as a commercial product

Coffee is one of the most important commodities in global trade and is subject to the forces of supply and demand. This article describes marketing channels and systems in the producing countries; the picture is supplemented by information on transport, import and export conditions.

1.1. Coffee - an important agricultural commodity
1.2. Marketing in the country of manufacture
1.3. Marketing systems and channels
1.4. Impact of international and national policies on coffee prices
1.5. Production countries and their own consumption
1.6. Export of coffee
1.7. Quantities and composition of exports
1.8. Coffee as a transport commodity
1.9. Importing countries and their demands
1.10. Taxes and import duties

1.1. Coffee – an important agricultural commodity

Coffee is now grown in more than 70 countries and occupies a special position among plantation crops. These crops include perennial tropical trees and shrubs such as cacao, tea, rubber, bananas, jute, palm oil, coconut oil, sugar, and copra. They are cultivated on both large-scale and small-scale farms.

Although perennial plantation crops, with approximately 130 million hectares under cultivation, represent only about 8% of the world's total agricultural land of 1,532 million hectares (source: Statista, 2018), they are extremely important export commodities for many producing countries and create numerous jobs. Developing countries are particularly heavily involved in the export of these products. With the exception of sugar, they account for over 90% of global exports of the other goods mentioned.

Coffee is currently cultivated on over 10.5 million hectares (source: Statista, 2018). Cultivation is very labor-intensive. It is estimated that coffee production and processing secure the livelihoods of 20 to 25 million people in the producing countries. For many families, coffee cultivation plays a central role – it is an engine of economic development and often the only source of income. In many regions where subsistence farming dominates, coffee cultivation serves as a means of earning money, while other agricultural products primarily serve personal consumption. Furthermore, coffee cultivation ties people to rural areas and can thus prevent migration to cities. Worldwide, around 100 million people depend directly or indirectly on coffee.

Coffee exports generate a significant portion of the foreign exchange earnings many coffee-producing countries need to finance the import of consumer and capital goods or to service their debts. However, coffee exports now account for more than 25% of total export earnings in only four countries. Economic development, export diversification, and falling global market prices have reduced the revenues of many countries.

Approximately 95% of coffee is exported as raw material, while only about 5% is processed into products such as instant or roasted coffee. Roughly three-quarters of total coffee production is exported. Significant price fluctuations leave a noticeable mark on the balance of payments of the producing countries.

In 1986, record revenues of over US$14 billion were achieved worldwide from coffee exports. Between 1985 and 1992, annual revenues averaged US$8.5 billion – more than double the amount generated by exports of competing products such as tea and cocoa (together around US$1.6 billion annually). In 1993, foreign exchange earnings from coffee fell to below US$6 billion.This caused coffee to fall from second place (after crude oil) to eighth among the most important export commodities of producing countries. Price increases from 1994 onward allowed export revenues to rise again to around 12 billion US dollars, before they declined once more to just under 10 billion US dollars from 1999. In the coffee year 2001/2002, they finally amounted to only about 4.9 billion US dollars.

“Quality Improvement Programme” of the International Coffee Organization (ICO)
The Quality Improvement Programme (ICO Resolution 407) was introduced in October 2002 to improve the situation on the coffee market. Its aim is to increase the quality of green coffee by excluding inferior grades below a defined minimum standard from export. In the long term, this is intended to stabilize world market prices and increase foreign exchange earnings for producing countries.

The ICO is working hard to implement this program, and some producing countries have already introduced the measures. However, it remains to be seen whether all member states will succeed in implementing the decision, as participation is voluntary.

1.2. Marketing in the country of manufacture

The marketing of coffee can be organized very differently in the country of origin. How the coffee gets from the plantation to the roasting plant or for export is the result of social, historical, political, and geographical processes.

1.3. Marketing systems and channels

Depending on the type of coffee, the size and type of coffee plantations, and the processing method – i.e., whether it is processed dry or wet – very different sales channels emerge.
In principle, the following actors can be involved in the marketing of coffee: Cooperatives, growers, processors, exporters as well as dealers.

Depending on the circumstances, these groups of people assume one or more functions. For example, the grower can carry out all steps up to export himself, or the exporter can also take on the processing because he has the necessary facilities.

The rule is: the smaller the production structures, the longer the marketing channels usually are. Historically, coffee mainly came from large plantations that sold directly to international traders. With the increasing number of smallholder farms, the growing importance of coffee cultivation for stabilizing rural structures, and the role of coffee exports as a major source of foreign exchange, increasingly complex marketing systems have developed over time.

1.3.1. Free marketing

The free marketing This approach, in contrast to controlled marketing, has largely prevailed. Here, the producer decides for themselves. When, What, in what quantities and to whom he wants to sell.

Planters, cooperatives, traders, and mill operators are responsible for processing and bundling the coffee into exportable quantities. Governmental or semi-governmental bodies limit themselves to encouraging and advising, coordinating, and exercising limited control.

1.3.2. Controlled Marketing

Since the late 1980s or early 1990s, marketing has been liberalized in almost all manufacturing countries. State-run or semi-state-run institutions had increasingly proven to be inefficient, expensive, and uncompetitive.

In the past, these institutions implemented the Purchase prices for raw coffee fixed and partly appeared as sole buyers and sellers or exporters on.
For example, so-called controlled “Marketing Boards” The marketing process in the English-speaking producing countries of Africa. The coffee farmers there were paid based on average sales revenues.

In the Francophone countries of Africa, the "Caisse de Stabilisation" (German: Stabilization fund) set the price to be paid to the coffee farmers. These institutions also regulated the distribution and transportation costs up to the point of shipment of the coffee.

In Central and South America, semi-governmental plantation institutions and organizations helped organize the purchase of raw coffee. Minimum purchase prices Prices could be set for the planters, while further price adjustments were left to market forces. It was at the producers' discretion whether to sell the coffee to private institutions or to the respective institute.

Furthermore, these organizations offered numerous Services such as quality assurance, consulting, technical support, loans, research, storage capacity, and replanting and development programs.

Nowadays, only in Colombia the “Federation Nacional de Cafeteros” in this form in the market; however, its influence is increasingly decreasing.

The theoretical approach of all systems that operated with minimum purchase prices consisted of a Buffer function The challenge was to balance highly volatile world market prices with the need for stable, reasonable producer prices. This was achieved either through skimming or subsidies.

1.4. Impact of international and national policies on coffee prices

Coffee remains one of the most important export products of developing countries. The coffee industry creates jobs, secures incomes, and keeps people in rural areas. Every change in coffee prices directly affects export revenues and thus has a direct impact on the socio-economic development of the producing countries.

These interconnected systems mean that political actors regularly attempt to intervene in pricing and the flow of goods. Coffee cultivation and exports are often unstable, and overproduction repeatedly leads to price weaknesses. Early attempts were made to influence supply and demand through market interventions in order to ensure stable prices. From the idea of ​​artificially restricting supply, not only national programs for coffee production and marketing developed, but also producer cartels and international coffee agreements between producing and consuming countries.

1.4.1. National coffee policy in producing countries

A coffee-producing country's national policy can influence production volumes, for example, by controlling investments. In addition, technical assistance, government storage, financial resources, or marketing services are sometimes provided to smallholder farmers. Promoting quality is becoming increasingly important – the focus is shifting from quantity to quality. Minimum purchase prices have now been largely abolished.

Export taxes are an important source of revenue for producing countries. These revenues are used, among other things, for economic development, debt servicing, financing agricultural individualization programs, and expanding the infrastructure for a high-performing coffee industry.Income taxes from individuals in the coffee sector, as well as other levies in the production and distribution process, also contribute to the state budget.

National coffee policy cannot escape international agreements or structural influences. International coffee agreements with quota and price mechanisms have historically required the implementation of corresponding regulations into national law.

1.4.2. International Coffee Organization (ICO)/International Coffee Agreements (ICA)

In the late 1950s, importing and exporting countries began communicating about joint price support measures. In 1958, a study group was established to lay the groundwork for an International Coffee Agreement (ICA). Negotiations at UN Headquarters were successfully concluded in 1962, and the first agreement was signed in 1963. It is noteworthy that both producing and consuming countries were equally involved in the drafting and implementation of the agreement.

The first agreement of 1963 was followed by further agreements in 1968, 1976, 1983, and 1994. On March 10, 2004, the International Coffee Convention of 2001 (valid until 2007) had 58 member countries: 42 exporting countries and 16 importing countries. At times, the ICO covered 99% of global coffee production and 90% of demand.

The goals of these agreements included balancing supply and demand, preventing sharp fluctuations in prices and quantities, securing employment and income in producing countries, and ensuring stable foreign exchange earnings. At the same time, they aimed to promote global coffee consumption and strengthen international cooperation.

Until the 1983 agreement, export quotas were the cornerstone of the treaties. Export volumes from member countries were regulated according to key specifications to keep coffee prices within a desired range. In practice, this meant that if prices were too low, export volumes were reduced until the resulting shortage drove prices up; if prices were too high, supply was increased, which lowered prices again. However, suspending the quota system led to very high prices.

The impact of the agreements was assessed differently across regions. While they contributed to price stabilization at times, the financial benefits remained questionable for many producing countries. The failure of the 1983 commodity agreement in 1989 led to problems and tensions created by the rigid export quota system.

• The quota system prevented production that met market demand.
• High-quality coffees were overpriced, while lower-quality coffees were offered cheaply in abundance.
• The separation into members and non-members led to price differences, with non-members being able to purchase cheaper coffee.

After 1989, attempts to establish a new agreement with intervention mechanisms such as export quotas failed. These efforts were abandoned in 1993. Subsequently, the manufacturing countries founded the Association of Coffee Producing Countries (ACPC)The aim was to maintain the ICO as a forum for dialogue and to strengthen cooperation among its members. New agreements were adopted in 1994 and 2001, this time without export quotas.

Today, the International Coffee Organization (ICO) comprises 77 members: 31 importing countries, 45 exporting countries, and the European Community. The 2007 agreement promotes the global coffee industry and its sustainable development. The ICO's tasks include compiling statistics, disseminating information, and providing advisory services to the European Union. Common Fund for Commodities, an institution that provides development aid for raw material projects.

1.4.3. Producer cooperation as a means of price stabilization

Cooperation between coffee-producing countries to reduce coffee exports has existed for over 50 years. In 1945, 14 Latin American countries founded such a cooperative. FEDECAME, in order to protect their coffee interests. After failed international talks in 1956, seven states signed the Mexico City Agreement, an export quota program. This evolved into the in 1958. Latin American Coffee Agreement (LACA), which regulated the exports of the 15 most important countries in Latin America.

In Africa, the 1960s saw the Inter African Coffee Organization (IACO) Their work aimed to align the interests of producers and promote quality, marketing, and knowledge among growers. In 1960, the African and Malagasy Coffee Organization (OAMCAF) an organization that bundled production and exports and represented member countries in international bodies.

Even in times without quotas, producer cooperatives formed ad hoc to influence prices. In 1966, producing countries intervened in the New York market; in 1973, 21 countries attempted to do so. Geneva Agreements, withholding nearly 10% of their deliveries. Four major states developed a Buffer Stock Plan (“Café Mondial”) 1973, which was abandoned in 1975 due to high prices caused by frost.

Other initiatives included the 19-member producers' cooperative from Caracas in 1974, the Bogotá group in 1978, and PAN CAFE From 1980 onwards, PANCAFE represented countries such as Costa Rica, El Salvador, Guatemala, Brazil, Mexico, Honduras, Colombia, and Venezuela, managing capital of approximately US$480 million for purchasing and storing coffee. Efforts to raise prices failed and were discontinued at the end of 1980. Subsequently, a workable agreement was reached within the ICO.

In mid-1989, all attempts to stabilize prices through international coffee agreements initially came to an end. This led to a massive collapse in raw coffee prices for several years. Following these failures, countries such as Guatemala, Costa Rica, El Salvador, Nicaragua, Brazil, Colombia, Indonesia, and African producers decided to withhold approximately 20% of their exports starting in the fall of 1993.

The Association of Coffee Producing Countries (ACPC) With 14 members, controlling approximately 75% of global coffee production—Angola, Brazil, Costa Rica, India, Indonesia, Ivory Coast, El Salvador, Kenya, Colombia, Democratic Republic of Congo, Tanzania, Togo, Uganda, and Venezuela—the organization agreed at the governmental level to stabilize raw coffee prices through restraint. The restrained quantities were later released back into the market. The institution's headquarters were in London but closed in 2002, thus ending its activities.

1.5. Production countries and their own consumption

Although coffee is primarily exported, it is also consumed domestically in many producing countries. Around 24% of global coffee production – equivalent to approximately 27 million bags – is consumed directly in the producing countries. In the Philippines, coffee is so popular that, in addition to domestic production, imports are necessary to meet the country's needs. In Haiti and Cuba, over 80% of the production is consumed domestically. In countries like Colombia, Brazil, Venezuela, Mexico, and other Central American nations, coffee holds special cultural significance. The beverage is also a popular drink in Indonesia, Ethiopia, and India.

In the producing countries, the best quality coffee is often reserved for domestic consumption, as significantly higher profits can be achieved on the world market with high-quality coffee. At the same time, from a European perspective, lower-quality coffee is transformed into a prized, locally typical beverage through individual roasting and preparation.

Countries have recognized that coffee consumption is strongly dependent on living standards and the level of industrialization. With increasing economic development, both coffee consumption and quality demands grow.

1.6. Export of coffee

Coffee exports from producing countries amounted to just under 78 million bags in 1997/98 and rose to 88.6 million bags by 2002/03. The export volume depends on various factors: the harvest yield, the price level, stock levels, export regulations, and the consumption patterns of purchasing countries.

The Arabica share of production, which was still at 80% in 1960/61, has now fallen to around 60%. Looking back, coffee exports increased sharply after the Second World War: in the 1960s, approximately 40 million bags were exported annually, rising to 60 million bags in the 1970s. Today, around 89 million bags of green coffee are needed annually to meet the consumption demands of importing countries.

1.7. Quantities and composition of exports

The largest coffee exporters are Brazil, Vietnam, and Colombia – together they account for up to 57% of global exports. Other important exporting countries include Indonesia, Guatemala, India, Uganda, Peru, Honduras, Ivory Coast, Mexico, Ethiopia, Costa Rica, El Salvador, and Papua New Guinea. Together with Brazil, Colombia, and Vietnam, these countries account for approximately 92% of global coffee exports.

Coffee is predominantly exported in its raw form. Approximately 6% of total exports are instant coffee, and only 0.1% are roasted coffee. Finished products are priced according to their raw coffee content.

• 1 part roasted coffee = 1.19 parts green coffee
• 1 part instant coffee = 2.60 parts green coffee

The most important producers of instant coffee are Brazil (approximately 50% of exports), followed by India, Colombia, Mexico, and Ivory Coast. Brazil also leads in roasted coffee with over 50%, followed by Mexico, Costa Rica, Colombia, and Vietnam.

In addition to exports from the countries of origin, there are also re-exports from the importing countries, which amount to around 20 million bags of raw coffee annually – over two-thirds of which are within Europe.

The fact that producing countries primarily export green coffee is due to their inability to compete with the advanced coffee industries of consuming countries. They lack market-ready products, modern technology, and efficient marketing strategies. High investments in roasting and packaging technology, as well as logistical hurdles, hinder market access. Roasted coffees often consist of blends from different countries, meaning that producing countries would have to import green coffee to deliver comparable standards.

Opportunities exist especially for "single-origin products" – high-quality specialty coffees from a specific country, organic coffees or fair-trade coffees, which enjoy an excellent image worldwide.

1.8. Coffee as a transport commodity

Before the coffee ends up in the roasting machines of the processing industry, it has traveled thousands of kilometers from the producing countries.

Coffee used to be transported in wooden barrels, later in sacks stacked on ships for crossings lasting weeks.Over 25 years ago, containerization became widespread: coffee was shipped in containers that had previously been transported to the countries of origin with export goods.

For about ten years, coffee has increasingly been delivered as loose bulk goods in containers. Special bulk containers with filling openings or standard containers with polyethylene "big bags" were tested – the results were positive:

• better utilization of container volume
• significantly more cost-effective handling
• Saving on bags and reducing environmental impact

Bulk shipping has proven economically viable: producing countries have adapted their infrastructure for container loading, and roasters in consuming countries have the necessary equipment for handling loose goods. Nevertheless, the bulk container is now considered obsolete due to its high cost and inflexibility.

Nevertheless, quality assurance is crucial: The filler in the country of origin must guarantee that the goods are in perfect condition, because the recipients in the consuming country usually do not open the containers.

High-quality specialty coffees, coffees for stock market trading, or goods for truck transport to neighboring countries are still shipped in sacks.

1.9. Importing countries and their demands

Global coffee consumption currently stands at nearly 108 million bags per year. Of this, importing countries require approximately 80 million bags as the basis for roasted and extracted coffee. Domestic consumption by producing countries exceeds 27 million bags (see Chapter 4.5).

The main areas of consumption are in Europe, North America, and Asia. Japan continues to see growth in consumption, while Europe is only showing a slight increase. In the USA, consumption growth is once again being observed after years of decline.

Consumption habits and levels vary considerably between importing countries. Similar neighboring countries often exhibit comparable consumption patterns. Differences lie in blends, roasting levels, and preparation methods. Traditional relationships between consuming and producing countries, some dating back to colonial times, are a key factor.

• Western and southwestern Europe prefer Robusta,
• Scandinavia and Italy rely on a high proportion of Brazilian coffees,
• Central Europe uses both washed and unwashed Arabica coffee beans.

Innovative roasting methods and the internationalization of taste are increasing the importance of Robusta coffees. In Central and Eastern Europe, inexpensive, hard Robusta varieties dominate.

Coffee consumed in the producing countries often does not meet the quality standards of the export market, as it is usually a product that could not be sold.

1.10. Taxes and import duties

Government levies such as customs duties and taxes on coffee have historically decreased significantly in consumer countries. Apart from sales/value-added tax, many countries do not impose any further levies. Some countries levy import duties, and a few also impose additional consumption taxes.

Import duty

• Germany has abolished tariffs on raw coffee containing caffeine.
• Within the EU, no customs duties have been levied on raw coffee containing caffeine since July 1, 2000.
• Canada, the USA, Japan and New Zealand also do not levy import duties on this type of product.

Indirect taxes

• Special excise taxes on coffee exist only in a few industrialized countries.
• Historically, they date back to the colonial era, when coffee was considered a luxury item.
• In Europe, coffee tax is only levied in Germany, Denmark and Belgium.
• Germany: 1 kg roasted coffee €2.19, 1 kg instant coffee €4.78.
• Coffee-containing products are taxed proportionally, depending on their dry coffee content. This can lead to distortions of competition between domestic and foreign manufacturers.

VAT

• Range in Europe: Denmark 25%, Norway 24%, Austria &Italy 20%, Finland 17%.
• Germany: 7%, Great Britain &Ireland: no VAT.
• In Germany, approximately one third of the final consumer price for coffee is accounted for by government taxes.