Term Paper: Coffee Industry: Economics and Investment

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[. . .] Related to this tragedy is the rise and fall of The Colombia Coffee Federation (FNC), a labor union reminiscent of the Aldea Global Federation in Nicaragua, mentioned above. The Colombian Federation began its existence in 1928, and acted on a representative basis on behalf of small coffee farmers who had little influence in the political world (Frank, 2001). These were profitable years, and farmers had no difficulty gaining in terms of profit and of politics.

During the 1970s, and several global economic factors coming into play, Colombia's FNC however soon lost much of its power. Trade factors such as the free-market system, deregulation, privatization, whereby industrialized countries practically overpowered the local systems, resulted in this loss of power for the local Federation. Local trading legislative power was thus undermined by these forces.

In Colombia, as in the other coffee producing countries, overproduction of coffee also became a problem, as already mentioned. Coffee production in Colombia increased to estimates of 750,000 to 900,000 farms in 1972 (Frank, 2004), which resulted in a price decline. This in turn resulted in a loss of over 200,000 farms by the mid-1990s with the ever-increasing oversupply of coffee in Colombia. The problem was exacerbated by other traditional coffee producers also increasing their production, while new producers were also starting to flood the market. Frank (2004) mentions that 60 countries produced some 132 pound bags of coffee, against the world consumer rate of 108 million bags.

Again, a low regard for quality as opposed to cheap buying price attracted large multinational buyers such as Nestle, Phillip Morris, and Proctor and Gamble. Colombia's meticulous and quality oriented farming methods, while still producing top quality coffee, are simply no longer economical enough to suit the requirements of the industrialized world. Coupled with this is the rise of countries such as Vietnam as producers of cheap beans, where production and farming costs are also very low. These factors resulted in a steady decline in the standard of living once customary for Colombian coffee farmers. Not surprisingly, those profiting most from the new economic circumstances are the largest chain traders Starbucks and the larges multinational buyer Nestle.

The current conditions for coffee production and investment in Colombia are thus interesting. Again, the natural resources in terms of climate and soil for producing top-quality coffee are abundant. As in Nicaragua, the enterprising investor could empower farmers to produce their usual best, which could then create a different market entirely from the one flooded by cheaper brands emerging from Vietnam and bought by retail chains. This could once again create a favorable economic climate for Colombia and its people. Furthermore the socio-political conditions in the country have to be incorporated in any investment enterprise. Nicaragua and Colombia could be used as a dual investment opportunity, in which a profit can be made from delivering a quality product with a pride that has been lost in the industrial rush for profit above all else.

While Nicaragua and Colombia rank among the world's highest quality coffee producers, France, Hungary and the United States appear to be major consumers of this product. It also appears that the last mentioned three countries would benefit from a more expensive market of higher quality coffee. In this way nothing is detracted from the profitable cheap market while a significant improvement can be effected for producers of quality coffee. In fact, the year 2004 has begun to see such a commitment by the above-mentioned Starbucks, with the expansion of its coffee retail to France.

France

According to Business Wire (2004), Starbucks Coffee France focuses primarily on quality for their coffee purchases. The French taste for coffee is largely a determining factor in this, and the large retailer is therefore obliged to add quality to its strategy if it is to be successful in France as a coffee consuming country. As such, Starbucks Coffee France SAS, have also used local quality checking strategies in order to customize their products to the French market. In this the company has worked with small specialty companies in order to ensure a smooth transition into the French culture and quality of coffee.

In terms of community service, Starbucks has entered into a partnership with the French charity organization Les Restaurants du Coeur. In this way the company is demonstrating a wish not only to make a profit, but to also channel some of this profit to worthy causes. As already mentioned, the company is not only committed to the specific community in which it operates, but also to the quality of its product (Business Wire, 2004).

To show their commitment to coffee farmers in origin countries such as those mentioned above, Starbucks pays more than the commodity price to ensure the highest quality product. The fact that such a large company is doing this perhaps is a hopeful sign for countries such as Nicaragua and Colombia. Indeed, the French coffee tradition requires a high quality product, and in this way both large retailers and quality coffee farmers can profit once again. It thus seems wise to add France to a list of investments with regard to coffee (Business Wire, 2004). The example of Starbucks and the many associations it has with smaller coffee establishment in Paris indicates a high confidence level in this market.

Hungary

Coffee in Hungary, and specifically in Budapest, seems to have served an important social function in the past. Indeed, it is believed that at the turn of the 20th century, there were some four hundred coffee houses in Budapest alone. Coffee houses in Budapest were for example used much as coffee houses in the United States and France today: as important cultural centers to discuss the arts, politics and life in general (Hungarian Quarterly, 1997). Indeed, some of the best Hungarian literature is based upon the culture of the coffee house. This includes Lajos Nagy's Cafe Budapest, published in 1936.

Sadly however, the political and revolutionary forces after World War II resulted in the destruction of this tradition in favor of less "bourgeois" values. Thus the tradition of drinking coffee as a public activity appears to have declined in Hungary. Yet Hungary is still an avid coffee consumer, and the nostalgia of the coffee house might profit from an attempt at revival.

A similar effort as that of Starbucks in France might therefore be profitable in this country and others like it. Again, higher quality, more expensive coffees could be combined with cheaper offers to suit every taste and pocket. In the 21st century, the time has come to abandon prejudices from the past and once again embrace the best of the past and combine it with the best of the present. This is what Starbucks is doing in France. Hungary is therefore also a fertile possibility for investment, depending on relative political stability.

The United States of America

The United States, as has been mentioned above, is the largest consumer of coffee worldwide. This country therefore seems to offer the best investment opportunities for both large and small investors. As the largest consumer as well as producer of generic coffee brands however, the country also faces considerable controversy with regard to the coffee trade in terms of price regulation and unfair policies towards farmers while profiting the big players in the business. Giant American companies such as Sara Lee, Kraft, Procter & Gamble and Nestle have been accused of selling coffee beans at $3.60 per pound while coffee farmers earn 24 cents for a pound of the same beans. In this way coffee farmers are left with little more than slave labor while large companies benefit financially (Jeffrey, 2003). The economic practice of free trade, as well as globalization and privatization that serve corporate greed have been blamed for this phenomenon. This discrepancy is also to blame for the tremendous pressure on farmers to produce increasing amounts of coffee for decreasing prices, and further flooding markets. This exacerbates the crisis not only in terms of economy, but also in terms of the environment and social standard of living. Furthermore socio-economic problems are created for the United States, as illegal immigration from Central America has increased as a result of the coffee crisis. In this way the American economy suffers, making unfair trading and labor practices ultimately unprofitable and self-defeating.

This discrepancy in coffee prices and farmer earnings is the problem that Starbucks, also originating in the United States, have been attempting to address with the practice of fair trade (Jeffrey, 2003). Starbucks, as has been mentioned, purchases and encourages the purchase of fair trade coffee. This allows a steady price for coffee producers, amounting to about $1.26 per pound. In turn for this coffee producers guarantee agreed upon environmental practices in their farming methods, ensuring sustainability and the least impact to the environment.

According to Jeffrey (2003), fair trade constitutes only 2% of the global coffee market, but is growing in promising measures. In 2001 for example it grew by 12% worldwide… [END OF PREVIEW]

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