Significancy of Agribusiness Concentration in Coffee’s Food System

If you are a coffee-lover, you may be interested in what processes a cup of coffee has come through to your hands. Almost all coffee beans are produced by family-managed  farmers in developing countries, such as Brazil, Vietnam, and Colombia, and pass very complicated routs between them and you: local coffee bean dealers in rural villages, exporting firms in producing countries, trading companies in your country, roasting and packing agencies, and your favorite cafes if you have some out. A chain of relevant subjects, such as those above, and correlation between them in food production and distribution are called the food system. As shown in the case of coffee’s food system, some food systems consist of worldwide networks connecting farmers in developing countries and consumers through food firms. In such international networks, as consumers are distanced from farmers in food systems, roles of agribusiness firms between them are significant because the firms need to reflect consumers’ demand for products on farmers’ production plans over boundaries. This system which benefits consumers, in turn, sometimes damages producers’ economies in developing countries, which results from a difference of bargaining power between farmers and firms. For example, in coffee’s food system, almost all intermediate businesses are concentrated on a few large-scale multinational corporations; therefore, some small-scale coffee farmers suffer from unfair contract conditions in trading with them (Tsujimura p.96). In this essay, it is investigated how such concentration of agribusiness has been built on coffee’s food systems, what effects the intensive agribusiness structure causes on the food systems in developing countries, particularly on farmers living there, and what is prospects for the globalized food systems.

Business concentration in agricultural industries frequently appears in food systems of developing countries for three reasons: a tropical climate in low latitude areas, a remaining relation with suzerain countries in the colonial period, and an economic aid of the IMF and the World Bank since 1968. The first reason is a geographic factor in developing countries; these countries’ climate are perfect for tropical farm products such as coffee beans. Major breeds of coffee beans have their biological origin in tropical areas of African countries like Ethiopia and Congo, so cultivation of them basically requires a high-temperature and high-humidity climate. Accordingly, agribusiness of coffee production is only around low latitude areas in which most developing countries are located. The second reason is the colonial history of some developing nations. A primary purpose of establishing colonies for European countries was production of tropical foods just like coffee beans and tea leaves, and international trades of these products was traditionally monopolized by a small number of enterprises; the same custom is left over current food systems of some tropical products (McMichael p.151). Finally, economic supports of the IMF and the World Bank on developing nations in the late 20th century has unexpectedly intensified agribusiness concentration in those countries. A general goal of the support programs was improvement of poor populations’ income in developing countries, most of which engaged in the primary industry; thus, the organizations proceeded technical and financial supports in agricultural industries by means of introduction of high productivity breeds and transition to more profitable cash crops, including coffee beans as a target crop. As a result of this policy, most farmers under the supports switched their farming style from self-sufficient one to commercial one, which also created extended business chances for agribusiness firms (Araghi p.182, Toyoda p.78). These elements in a business concentration process has together helped international trade corporations to grow into a huge scale which covers a whole food system from its top to the end.

Such an intensive agribusiness structure in developing countries works against farmers in price setting process. In fact, they lost their bargaining power in  negotiations for price setting. This is because individual farmers with relatively slight amounts of supplies has no influence against large-scale corporate groups which dominate almost all stages of a food system. This phenomena is illustrated by a case study of coffee’s food system in a rural farming area of Tanzania, namely Mt Kilimanjaro and its surrounding region, by Tsujimura. A whole food system of Kilimanjaro coffee is shown in Fig.1; within Tanzania, a regional food system consists of three subjects: farmers, dealers, and exporters. In this case, all local dealers and exporters are subsidiary companies of multinational trade corporations which put their headquarters on European countries, as shown in Fig.2; consequently, the stage (2) in Fig.1 is a pure inside trade although the trade officially forms a public auction style. As an example for the stage (1), in Lukani village, a main survey field of Tsujimura, local coffee bean dealers are only three groups while 355 houses sells coffee beans individually. This transaction is completely run by the dealers; the price is decided by subtracting whole distribution costs from a selling price at the stage (3).

Figure 1: Global Food System of Kilimanjaro Coffee

Note: Green Box=Tanzania, Yellow Box=Japan (ex.)

Source: Tsujimura p.73

Figure 2: Dealing and Exporting Share of Kilimanjaro Coffee

Subsidiary	Dolmen	Taylor Winch	ACC	Olam
Parent	ED&F Man	Volcafe	Schurter	KC Group
Headquarter	U.K.	Switzerland	U.K.	Singapore
Dealing Share	20.7%	14.8%	14.6%	10.8%
Exporting Share	33.8%	15.9%	8.4%	8.3%

Note: ACC=African Coffee Company. Volcafe was merged into ED&F Man in 2004.

Source: Tsujimura p.93

In addition, the price at the stage (3) itself is unfair for Tanzania’s local farmers. Tsujimura (p.81) continues an international trade price for coffee beans is based on a futures price at the New York Board of Trade (NYBOT) where the price for coffee beans is decided mainly by an expected yield in Brazil and a speculation trend, regardless of any factors in other producing countries. Moreover, this international price fluctuates as shown in Fig.3 because of a synergy between speculation and uncertainty of Brazil’s yield like weather; for instance, if unreasonable weather in Brazil is forecasted before a cropping season, investors will flood into buying, anticipating a rise in a coffee price at the NYBOT, which expands a fluctuation range. Overall, Tanzania’s farmers have to respond to an unreasonable and changeable price which they are not responsible for.

Source: International Coffee Organization

Also, it is pointed out that the food system of Kilimanjaro coffee contributes unjustly small amounts to Tanzania’s national profit in international trading. According to a statistic of 1998’s international trade of Kilimanjaro coffee with Japan, the biggest importer of the coffee, an annual disposable income in Tanzania was only 35.87 million US dollars whereas Japan got more than 1 billion US dollars (Tsujimura p.104). Even though such a disparity of income distribution is inevitable for a difference of economic scales, this gap is still unreasonable, considering that it is said 70% of coffee’s good flavor is accounted for by high quality of beans.

Finally, it is concerned that a current food system of coffee might eliminate some farmers’ incentives to produce a variety of beans with good quality; instead, the world’s coffee market might be filled with a single profitable breed in the future, and then other flavors would get beyond an affordable price for the general public. This expectation sounds even realistic in comparing annual productivity and required minimum price standards of for maintaining business between Brazilian and Tanzanian farmers. An average productivity among whole farmers in Tanzania is 172 kilograms per hectare in a cropping season while that in Brazil almost reaches at 4000; a required minimum NYBOT price for Tanzanian farmers is 150 US cents per pound though Brazilian farmers need only 50 (Tsujimura p.91). These huge gaps are explained by a distinction of their target demand. Beans produced in Tanzania are luxury goods with their original flavors, while ones in Brazil are for daily-use with reasonable quality and prices.

In conclusion, relations between concentration of agribusiness in developing countries and coffee’s food system are analyzed from three points of view: origins, present issues, and prospects for the future. Firstly, current intensive business structure of coffee production in developing nations is turned out to be due to their suitable climate for coffee production, a remaining tradition of the European colonial age, and a shift to commercial farming style triggered by international financial institutions. Then, a case study in Tanzanian coffee’s food system shows an existence of unfair contracts in coffee trading business, where a variety of beans are not appreciated well in their price setting. Consequently, such an unreasonable food system possibly causes a poor diversity in flavors of coffee. This is also your own problem if you are a coffee-lover.

References

Araghi, F.. 2000. Hungry For Profit -The Agribusiness Threat to Farmers, Food, and the Environment-. By Fred Magdoff et al.. Monthly Review Press. P.173-193.

International Coffee Organization. Retrieved July 1st, 2012. http://www.ico.org/

McMichael, P. D.. Hungry For Profit -The Agribusiness Threat to Farmers, Food, and the Environment-. By Fred Magdoff et al.. Monthly Review Press. P.147-172.

Toyoda, T.. 2001. International Development in the Age of Agribusiness -Trade of Agro-Food Products and Multinational Corporations-. Nobunkyo.

Tsujimura, H.. 2009. Economics of Coffee-Bitter Reality of Kilimanjaro-. Ota Press.