I don’t want to sound heartless, but we need to stop subsidizing coffee production. As coffee prices are sitting at historic lows and destroying people’s lives, it is shocking to see the amount of discussion suggesting placing artificial price floors.
I understand that such mechanisms appeal to people who feel we need to do “something,” but supporting prices only exacerbates the problem by encouraging additional supply into an already oversupplied market. It is the equivalent of taking an aspirin to cure cancer; it may make you feel better in the short term, but it allows the real problems to grow beneath the surface.
How did we get here?
Coffee production is a long-term endeavor in which the actions we take today will have implications for years to come. Earlier in the decade, when prices were similarly crashing, Brazil took steps to support their market and shield them from the full force of the decline. These efforts had the effect of de-risking coffee production in the nation and allowed for the expansion of Brazilian coffee production. While many of the world’s coffee producers have struggled, slowly switching crops and pulling back on volumes, Brazil has been expanding into the declining market. From 2014 to 2018, Brazilian production increased by as much as Guatemala, Nicaragua, El Salvador and Ecuador’s 2018 combined total output, according to ICO data.
Having governments willing to support a base purchase price allows for better access to loans and a more straightforward investment calculus when amortizing new equipment and expansions over many years. Regardless of real demand for the product, this creates supply growth and further depresses prices in a vicious cycle. Over the past weeks, Colombia’s Fedecafé has called for a floor price of $2.00 FOB for all Colombian arabica. As the nation is in discussions with Brazil on support mechanisms, Brazil likely will also be considering similar “solutions.”
What can we expect from this?
If governments get in behind this idea, they will again be trying to treat the symptom instead of the cause of the coffee crisis. The root cause of our current low prices, oversupply, will only be exacerbated by such a move. As always, it will be the large farmers, who already have low costs, who will benefit most from expanding profits. Rather than reducing production to a level that market dynamics can naturally support, they will ramp up production again and supply even more into the saturated market. Increased production reduces large producers’ cost per pound and consequently makes smaller producers less competitive and more dependent on subsidization. The strategy will hurt the very people it was meant to help.
Looking at the other side of the equation, higher prices also mean less demand. If we force prices to increase, not only will we be increasing supply from today’s levels, we will also be pushing down demand and creating even more massive imbalances in the market that will haunt us for years to come. Price floors, like price ceilings, benefit a few at the expense of many. It is incredible to me that, after the tragic market-distorting effects of so many central price planning schemes around the world, that in the coffee industry, so many people see such intervention as desirable.
What should we be doing?
The harsh truth is that if we want coffee prices to recover, the supply and demand imbalance needs to be addressed. Implementing new schemes, like that suggested by Fedecafé, are precisely the opposite of helping. The ICO and governments would be better off looking at regions that will be unable to support coffee due to climate change and moving them to long term viable alternative agricultural products sooner. At the same time, they should be looking at reducing support for the coffee price and increasing support services for the people.
$0.30 per pound extra for coffee may mean $40 extra per annum for the small farmers that the scheme claims to help, but it may mean an extra $100,000 for a large producer. Is this really the kind of support we need to be providing? Imagine if that money was spent on projects that didn’t make things worse.