Executive Director Of The Specialty Coffee Association Of America Before The House Committee On International Relations, Subcommittee On The Western Hemisphere

July 24, 2002

 
Mr. Chairman, Members of the Committee.

Good Morning. I am Ted Lingle, Executive Director of the Specialty Coffee Association of America, or “SCAA.” It is an honor for me to be asked to speak about this important issue before you today. I hope that my testimony will be of some help to you in your efforts to address the coffee crisis.

Nearly my entire career has been spent in the coffee industry. My grandfather and father were coffee roasters, and I spent the first twenty years of my coffee career working at Lingle Bros. Coffee, Inc., a small wholesale business started by my grandfather and his two brothers in Los Angeles in 1920. Since 1991 I have held my current position at SCAA. SCAA is a nonprofit trade association representing the specialty coffee industry at every stage of production, from farmers to importers and from roasters to coffee retailers. My work brings me in contact with the entire coffee supply chain, from small growers in Hawaii and Latin America to local specialty roasters in downtown Santa Cruz like Ms. Cosby, from large roasters like Starbucks and Folgers to Mom & Pop coffee cafes on Main Street. As demonstrated by the worldwide growth in specialty coffee during the past ten years, this segment of the industry is becoming the catalyst for change for the entire coffee industry.

I am here to day to tell you about the conditions in the world coffee market that may soon precipitate a worldwide economic and political crisis with implications far beyond the impoverished farmers in Latin America.

 
Overview

Lets look at a few facts:

• On the producing side, coffee is grown in more than 50 countries and on more than 11 million hectares of land, a remarkable 1 % of the world’s land area. It generates nearly $7 billion in export earnings for developing countries and is second only to oil as the largest globally traded commodity.

• The coffee industry provides employment to over 25 million people in some of the poorest countries in the world, and smallholders on farms less than 5 hectares produce about 70 % of the world’s coffee.

• On the consuming side, as the world’s largest coffee consuming nation, importing about 20 million bags annually or approximately 25 % of world exports, the US is a major factor in international coffee commerce. When combined with the import volume of the European Union, which represents roughly 50 % of world exports, and Japan, which accounts for an additional 8%, the major industrialized countries consume over 80% of world coffee exports.

• Also on the consuming side, the industrialized countries that consume more than 80% of world coffee production are providing over $360 billion dollars in farm subsidies annually, almost $1 billion dollars per day, to protect their own domestic farm industries. These subsidies often prevent developing countries from venturing into agricultural products other than coffee.

• In addition, there is a growing imbalance between the behavior of export and retail prices. In the 1980’s, the final consumer spent around $30 billion annually on retail coffee sales; of this total, exporting countries took in $9-10 billion, representing 30-33%. Today, the latest estimates indicate that final consumption now accounts for around $55 billion in annual retail sales, with exporting countries receiving approximately $7 billion, representing only 15%.

The magnitude of the economic and social crisis facing coffee-producing countries in Latin America is staggering. Years of little to no natural asset investment (soil, land, water, flora, fauna) have left many coffee producing areas to become the poorest, most economically degraded, and socially unstable regions in their countries. As the price of coffee continues to drop in real dollar terms, many coffee producing areas are ripe for conflict, natural disaster, environmental collapse, and diversion into illicit activities. In attention to this “disadvantaged and left-out rural sector” has affected the competitiveness of other industry sectors in these regions, such as tourism and commerce, and it has exacerbated ethnic, regional, and class conflicts that affect the political stability and economic growth in many coffee producing countries. Colombia is a classic case in point of the need to coordinate US coffee policy with US foreign policy. While the US has committed hundreds of millions of dollars for economic assistance, US efforts have been significantly marginalized by Colombia’s loss in coffee export earnings, which currently exceeds $600 million annually.

An international crisis of this magnitude has political implications for the US, has potential for elimination of traditional coffee sources in Latin America for the US coffee trade, and has the probability of extreme price volatility for US coffee consumers. As the crisis continues to affect countries in Latin America, particularly Mexico, Guatemala, Honduras and Nicaragua, it has the potential to cost jobs for those Americans working in export oriented markets. The kind of poverty provoked by the coffee crisis promotes economic instability in Central American countries that leads to illegal immigration and costs US taxpayers in the Southern Border States from Texas to California billions of dollars annually in order to deal with the crime, health care, and educational demands of this displaced workers. In addition, as coffee and coca compete for the same land, crop substitution for increased exports of illegal drugs into the US becomes an increasing social problem and criminal justice cost to the US Government.

 
Source of the Crisis

Today that coffee market is in grave danger – threatened by a vast a growing oversupply of ever-lower quality coffee that have driven green coffee prices to historic lows. This is not the temporary boom and bust cycle coffee cycle of the past. It is structural. It is not, and will not be corrected by market forces in the short run.

The crisis has been caused by a large increase in coffee production over the past several years by two countries - Vietnam and Brazil. In the case of Vietnam, within ten years this country grew from a relatively insignificant producer to the world second largest – ahead of Colombia but behind Brazil, now producing well over 10 million bags annually and accounting for approximately 12% of world exports. The unprecedented growth of the Vietnamese coffee industry is the result of loans from the Asian Development Bank, the French Agriculture Development Agency, and the Government of Vietnam. The Vietnamese coffee trees were planted at a time when prices were relatively stable and coffee was a good cash crop. However, the funders lost sight of market economics and failed to consider the impact on prices of increasing supply by 10 to 15 % in so short a period. The problems with Vietnam’s coffee production go way beyond the issue of volume. It is also one of export grades. Unlike Brazil, which has traditionally established minimum export grades, Vietnam has virtually none. The intractable nature of this crisis arises because much of the coffee that has been added to the world market is of an extremely low quality.

Coffee grades are a measure of the defects remaining in the mixture of coffee beans after the harvest. It is what we in the trade describe as “triage.” It can be described as the “sick, dying, and dead coffee beans,” along with sticks, stones, leaves and other foreign matter that come out of the coffee fields as the trees are harvested. And, here I must turn to my props to make my point….. More and more of what we are seeing on the market today is what we in the trade refer to as “triage.” Normally, these sick, dying and dead coffee beans, along with the foreign are removed, cleaned out of the coffee prior to export. Sticks, stones, leaves, dirt and other foreign matter are also removed. While triage is a natural part of every harvest of every coffee producing country in the world, exports of triage coffees are not. To give you an idea of the magnitude of the difference, grading standards for wash mild Arabica coffees, the types produced in Latin America, at the New York Board of Trade allow for 15 defects for 350 grams, whereas grading standards for Robusta type coffees, the type produced in Vietnam, allow for 450 defects for 500 grams. These standards were actually lowered to accommodate coffees from Vietnam. And while there is a difference in price, because both items can be labeled as “pure coffee” in international commerce, the price levels tend to move in tandem, as one product can be a substitute for the other.

Although some exporting countries (and Hawaii) have strict standards of quality that do not allow significant number of defects in green coffee, the United States has no laws or regulations governing purity of coffee. The only thing that passes for quality control in the United States is an FDA “guideline” for import inspectors from the 1920s that urges inspectors only to reject in any coffee with more than 810 defects per 375-gram sample. To put that in percentage terms, the FDA guideline allows a mixture that contains up to thirty (that’s three, zero) percent defects to enter the United States and be sold as pure coffee. For comparison purposes, the lowest Hawaiian standard allows export from Hawaii of coffee that contains no more than 5 percent primary defects such as sticks, stones and defective beans.

In recent years, explosive growth in production and sale of low quality coffee has set off a chain reaction of overproduction and falling prices. Low prices mean farmer invest in less of the quality control required to remove defects from coffee. Less quality control means MORE coffee on the market. If defective beans and foreign matter are not removed from coffee the defects and foreign matter are sold as coffee. More defects mean more coffee. More coffee means lower prices. Bad coffee is driving good coffee from the market.

 
Policies the United States could pursue to address the situation

The crisis is a structural one that is not going to resolve itself via market forces. In April 2001, the Presidents of 12 Latin American countries called attention to this situation in their Quebec Declaration in which they outlined the strategies for correcting the situation:

• Strengthen the mechanisms of cooperation and consultation between producing countries that allow the establishment of concrete solutions.

• Invite the United States of America and Canada to rejoin as members of the International Coffee Organization, so that within this forum, and in dialogue with producing countries, there is an analysis of the possible solutions to the coffee crisis.

• Instruct ministers to search for formulas for consensus, designed to confront the problem, including the organization of supply and demand for coffee, or measures such as the establishment of quality standards for coffee intended for export.

• Reach an agreement with multilateral, global and regional credit organizations that they will not grant loans or donations intended for further expansion of world coffee production.

• Promote the creation of suitable financial tools for the regional development banks, that will allow an orderly management of the world coffee supply, by way of, amongst others, instruments of price coverage and the financing of inventories in producing countries.

• The implementation of the initiatives and policies mentioned above would allow producing countries to promote the establishment of a Second Generation International Coffee Agreement.

SCAA has also become a leading advocate for establishing minimum coffee purity standards. Markets are most efficient when “tiers” and “transparency” are the regulating factors. We see this in any number of agricultural products from meats to eggs, from milk to juices, from produce to jams and jellies. Minimum purity standards in the United States would go a long way toward resolving the problem. Standards would ensure that U.S. consumers were not mislead about the content of the can of coffee, because they would know it met a purity standard to be labeled as “pure” coffee. Commercial roasters would not have a short-term incentive to buy triage for 10 cents on the dollar to create a “price blend” that ruins the coffee market for the long term. Specialty coffee roasters would continue to have access to a wide diversity of high quality coffee beans for their roasting operations. And, the coffee industry would not have to fight an uphill battle for consumer’s palates.

A recent resolution by the International Coffee Organization commits member countries to purity standard that is approximately 95 percent. If the US does not follow suit with similar standards, it is hard to envision the ICO’s action will have any impact in the world market place. More likely, the US will become the buyers of last recourse for the world’s low-grade coffees, and as a result US commercial consumption will continue to decline further exacerbating the crisis.

SCAA is also working with USAID to form a Global Development Alliance for market access and development assistance in coffee producing countries. We feel very strongly that for all of Latin America, except for Brazil, coffee needs to become a value added agricultural product, similar to grape production for the wine industry. Beyond threatening the farmers in Latin American and Africa, the crisis is also threatening the livelihood of U.S. coffee roasters and retailers. In particular, the businesses that make up the membership of the Specialty Coffee Association of America count on a reliable supply to high quality Arabica coffee beans that are not contaminated with defects and impurities. Even the producers of high-quality coffee, who sell the beans that are roasted for specialty coffee, receive an unsustainable price for their product. On a larger scale, when important suppliers of the specialty coffee industry are forced to close their doors, the entire industry is threatened with permanent change, since high quality beans become unavailable. Central American producers in particular, who historically produce very high quality coffee, will be hard-hit. Currently, many farmers are not even harvesting their crops since the amount they would receive would not even cover the cost of production; much less give them a profit as income. It is economically more feasible for them to let the coffee rot in the fields. If pure high-quality coffee is driven from the market the U.S. specialty coffee industry will cease to exist. A market-based solution requires coffee to become a family of differentiated products, whose prices reflect their individual costs of production and not general commodity market prices.

In conclusion

As the world’s largest coffee consuming nation, the US has more than a role to play in resolving the coffee crisis. It has a responsibility. The cost of maintaining our current “laissez-faire” posture on international coffee policy is increasing exponentially. We are precipitating a worldwide economic and political crisis with ramifications far beyond the impoverished farmers in Latin America. As a representative of the specialty coffee industry, we want to express to you our sincere appreciation for your timely interest and investigation of these issues. We are fast approaching a critical juncture in coffee’s future and sustainability in Latin America.