The Coffee book takes the reader through the rich history of coffee that was discovered in Ethiopia that started out as food being roasted and mixed with various ingredients and over time gained popularity as a drink in 1000-1300 C.E. (p13.) that is similar to the one we drink nowadays. Over time coffee gains popularity and its cultivation begins on Arabian Peninsula, once introduced, coffee houses open and this is beginning of the drink that is remembered as the social drink in many cultures. As it’s still new it gets blamed for causing riots and seditious speech and being unhealthy in parts of world. This causes it to be banned for a period of time. Starting from 1658 major colonial powers start production in their colonies (pp 14 and 31). Plantations flourish and popularity keeps increasing and bans are lifted which allows coffee to travel the world and establish whole new market. The growth and expenditure of the drink has conquered many cultures. Main changes in the production of coffee are mainly the spread of the crop, creation of plantations and beginning of the industry based on the culture that has developed.For coffee to reach the end consumer there is a long path that it has to take, as the book illustrates (P.94) there are multiple steps in the pathway in between the crop growing in a plantation and being drank from a cup.
Fig. 1. Concentration of market power in the global coffee chain (2004)
Referring to figure 1 we can observe that the multiple steps mentioned in the book can be cut down to main four which the book describes in detail (pp 91-95) farmers and workers that grow the crop and then extract the bean out of the cherry, traders that purchase the coffee beans from them and then export the beans to consuming nations roasters that give the green coffee bean roasting so that it’s ready to be grinded up and used in a drink, and finally grocers that purchase from the roasters, market the coffee and sell to the consumers.
There are approximately 25 million farmers and workers that work in small firms, independent or larger scale Brazilian estates producing product that is homogeneous and selling it mainly to 4 largest international traders (Neuman, Volcafé, ECOM, Dreyfus) that control 39% of the market share. There aren’t any barriers to enter or exit the market as anyone can become a grower. These firms are price takers meaning that no single firm can influence the market price, therefore the 25 million farmers and workers are close to a perfect competition market structure.
Referring to figure 1 the 4 main traders sell the beans to 3 main roasters (Philip Morris, Nestlé, Sara Lee) that hold 45% market share. As these few traders have introduced the market with coffee and established over time (p.18) they control the market and can set the market price that they are willing to buy the crops at and sell them to roasters, this means that trader market is considered oligopolistic.
Looking at roaster firms in figure 1 they would be in a oligopsony market structure as they are few dominant firms that constantly purchase all of the industry’s output meaning that they will purchase all the coffee beans that traders will sell. As the roaster firms purchase all of the product they can decide on the price they pay for it as no one else will purchase it if not them. They even have control over the price they sell to grocers, therefore they control the market.
Grocers similarly as roasters are also in oligopolistic market meaning that small number of largest firms are able to control the market by setting the prices for coffee that the consumers purchase from them and as the coffee market is inelastic as there will always be constant demand for coffee they can greatly profit from increasing the prices.
When a consumer purchases a pound of coffee in the local supermarket only a fraction of the amount he pays goes to the farmers, to be exact for each dollar a consumer spends farmers get only 4 cents (p.97). This is very well illustrated by the book because you can see that the producing nation only receives 32 cents from that dollar in total. The rest is added by the consuming country. These 4 cents for every dollar that the farmer receives equals to approximately 3$ or less per day (p.86). Industry’s executives have been spending millions on marketing (p.119) but they haven’t considered increasing the pay that the the growers receive. The book mentions a suggestion for this unfair situation that was started out by idealistic young people in 1997 called Fair Trade (p.149). The concept behind this is that the roasting is moved from the consuming nation to the producing nation, various unnecessary costs are cut and farmers receive higher pay. This greatly increases the producing country’s development as roasting is generating income and farmers are able to afford better conditions and have even popularised the Fair Trade products world wide. One thing that could be improved about Fair Trade is that their labeling system isn’t informative enough for the consumer to learn anything about the product they purchase, just that the product is Fair Trade (Danzig, 2011).