Coffee Market Pessimism

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Prof. Don Boudreaux has an interesting thought about coffee buying over at Cafe Hayek.

Whatever the reason, it’s heartening to see the seeds of commerce sprouting in Rwanda, for no matter who or what planted these seeds and supplied them with their first drops of water, only the sustained growth of commerce will turn Hutus’ and Tutsis’ energies from conflict to cooperation – from predation to production. And sustained growth in commerce won’t happen without secure private property rights, freedom of contract, freedom of trade, and the free market that these blessings generate.

I'll second the notion that seeing Rwanda move out of its gory past is a great thing. It's the choice of products, though, that has me concerned. The good Prof makes mention of the benefits of a growing economic base, but I think he is too light on the "Fair Trade" movement and the role USAID played in sponsoring the coffee growth.

Coffee is currently overproduced on the world market. A glut of coffee has sent prices plummeting (as we'd expect), and has helped spur on the "Fair Trade" movement which advocates setting a floor on the price of coffee beans.

The issue I have is that the Fair Trade price is, by definition, above a more realistic market price for coffee. While this helps some growers increase their profits and provides some with a sense of satisfaction, it also induces more production. And more coffee growers the world does not need. If a glut sent prices falling, why is it a good idea to induce more market entry?

While I don't have a good source for this, I would tend to believe that the USAID people, thoughtwell-intentioned, helped spur on the movement towards coffee production. A choice that would appear decent as Rwanda is a good climate for the crop, and the demand for the product seems robust. The trouble is, more coffee producers in the world will simply extend the glut, keep prices low, and give motivation for the "Fair Trade" notion of setting a price floor on all coffee rather than just that grown with "sustainable methods". As long as the Fair Trade price is set to reflect what growers need to make a living, the less it will be an accurate reflection of the demand for coffee. This sort of process would strike me as one prone towards escalation: the price induces some people into entering who then find they cannot make enough money at the current fixed price, so pressure induces the Fair Trade group to raise the floor, which only induces more people into the market. The only other option would be to have the price floor fall, which would mean all the current growers facing big losses in revenue, and some having to leave the market (something none of them would take well; the reality of some growers being thrown again into unemployment/poverty not being something the Fair Trade folks really appear to want to deal with).

If the Fair Trade price and the urging of USAID moved Rwanda towards expanding coffee production, I'm not sure they've done the country a favor. Of course, if the temporary spurt of growth does have the spillover effects Prof. Boudreaux mentions ("more-secure property rights, on a firmer commitment to long-term integration into the global economy, and on increasing prospects for lasting peace") then it may well be worth getting involved in an unstable industry.

2 Comments

I tought an economics class a few years ago and used this very situation (coffee over supply vs. fair trade price floors) and the solution my students came up with - switch farmers out of coffee and into a more profitable crop! (Such good sense - too bad they weren't in journ school ...

But what to plant? That's the biggest problem, of course.

The key, I think, is to devlope the "anything into oil" http://lists.envirolink.org/pipermail/ar-news/Week-of-Mon-20030804/004435.html

technology as quickly as possible. The process described can use pretty much any biomass available. So imagine co-ops of Rawandan farmers growing whatever local and sustainable crop yields the lowest cost biomass and then turning it into oil @ $40 a barrel. Kills two birds with one stone - frees their economy from the need to come up with large amounts of hard currency to buy foriegn oil AND puts money into the pockets of local farmers. The co-ops have to own the refineries for the farmers to get the full benefit, of course.

This isn't pie-in-the-sky technodreaming, either: one of the cheif backers is ConAgra, one of the sharpest companies on the block.

Recent news reports have indicated some teething troubles for the actual refining plants in operation, but there doesn't look to be any deal-breakers so far. Might be ready in 10 years, maybe as few as 5.

Yeah, that's a long time, but how long do you have to wait to harvest your first coffee crop after the trees are planted?

The key for the better administration of your thoughts would always be useful for anyone that would be getting this. - Lindsay Rosenwald

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This page contains a single entry by published on January 28, 2005 12:27 PM.

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