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African coffee isn’t worth a bean

The Fairtrade people have complained for years and have made some impact when it comes to farmers’ returns for their coffee. An even more glaring issue is the coffee trade of countries such as Germany, which has grown so rapidly over the last decade that it now exports more coffee than all of Africa put together. According to the International Coffee Organisation, in 2011 African countries exported some 10-million bags (60kg each), or about 9% of total world production.

Germany exported, or more correctly re-exported, 11.9-million bags of coffee in the same year. The value of those re-exports was approximately $3.6-billion in 2011. In 2010, the last year for which coffee value figures were available, Africa’s total coffee exports of around $2-billion weren’t worth much when compared with German coffee exports.

The irony is that European firms don’t even add a great deal of value to the coffee – they often merely re-export unprocessed green beans, which made up half of Germany’s total coffee exports in 2011. Germany has done for coffee what De Beers has done for a century for diamonds, it aggregated without adding any value. The remainder of German coffee re-exports was sold as roasted (about three million bags) and a further three million is made into instant coffee, which Latin American coffee aficionados rudely call “non es café”, which translates to: “It is not coffee.”

Why Germany has become a linchpin in the international trade in coffee is fascinating to those who think that what it is doing is precisely the sort of activity that developing African countries ought to be doing. The problem is that roast coffee loses freshness quickly. While you do not have to roast the coffee in the place it is consumed, proximity along “the value chain” is considered important in explaining the strategic positioning that Germany has achieved.

This is one of the most commonly cited reasons why African coffee exporting countries have been confined to the export of unprocessed beans to countries such as Germany. Germany exports the vast bulk of its coffee to neighbouring countries in the European Union and some to the United States. Unlike Africa, its first-class logistical connections are efficient and it can get the product to supermarkets in Poland or Austria quickly and maximise shelf life.

Concentrated value chains

The trade in coffee gets more complex when one looks at the structure of the companies. The industry has traditionally been dominated by four large coffee traders: Ecom, Neumann, Louis Dreyfus and Volcafe. Together, they control about 40% of the world coffee trade.

Half the global market is for roasted and processed coffee, and is controlled by five companies: Kraft, Sarah Lee, Nestlé, Procter and Gamble, and Tchibo. Nestlé’s Nescafé is said to control about 50% of the world market for instant coffee. The coffee market is highly concentrated and this helps explain why countries in the developing world that have tried to beneficiate their coffee have generally failed to do so – it is simply not enough. The barriers to Africa getting its beans roasted and sold are logistics and marketing.

Most rich countries do not maintain high tariffs for roasted coffee and in most cases it is duty free from all sources, though not in Europe. Unlike complex food products or other beverages, the sanitary constraints on coffee are fairly limited even in a sophisticated market like Europe.

Roasting coffee requires no enormous skill or technology so what stops African countries from beneficiating their green coffee beans? The problem is that with almost every product there is a market constraint that limits African producers moving down the value chain to get more value added. There is certainly sufficient incentive. The price of good quality green beans is $3.30/kg while roasted coffee retails at between $18/kg and $25/kg in Southern Africa. So why is no value added in Africa?…..

Mail & Guardian: Read the full article