Why a mandatory minimum price for green coffee won’t work

coffee and money scales
  • Green coffee prices are lower today than they were in the 1980s
  • As industry concerns mount about farmers’ welfare and living income, some argue for a mandatory minimum price 
  • However, a one-size-fits-all approach to pricing would fail to account for nuances, possibly creating new risks for coffee farmers that could harm them in the long run

IN RECENT years, calls for a mandatory minimum price for coffee have gained traction, fueled by concerns about farmer livelihoods, market volatility, and income inequality. 

However, while the intentions behind such proposals are noble, the reality is that implementing a mandatory minimum price for coffee is fraught with challenges and unintended consequences that could do more harm than good.

The historical trajectory of coffee prices reveals a concerning trend: adjusted for inflation, today’s prices languish below their 1980 counterparts. 

The average price of coffee between 1960 and 1989 was $8.38/kg. In contrast, the average price across the 1992 to 2019 was $3.74/kg. 

Supply control and price setting in global coffee was managed by the state until 1989. When this shifted to a market-based approach, coffee flooded the market and green coffee prices crashed.

In the years since, industry dynamics have ultimately reinforced this trend. Lower disposable incomes make increasing prices a risky choice for coffee shops. As a result, barista wages and farmer incomes both remain low and stagnant, caught in the crossfire of oversupply and low prices.

Meanwhile, the price of roasted coffee has been increasing exponentially over the years. This is what is known as “The Coffee Paradox” – coined by Daviron and Ponte in 2005

Mandatory minimum price advocates prone stability

Proponents of a mandatory minimum price argue that establishing a floor price for coffee would provide farmers with greater income security and help lift many out of poverty.

The volatility of coffee prices on the global market, influenced by factors such as weather patterns, currency fluctuations, and speculation, often leaves farmers vulnerable to price fluctuations and income instability. 

In recent years, organisations have been increasingly calling out this systemic issue. “OXFAM, for example, raised their concerns on farmers being underpaid in their 2012 and 2018 annual reports,” says Robert Thurston, a Professor of History and Managing Director at Oxford Coffee Company. 

Mandatory minimum price advocates posit that it could help ensure greater income security for farmers, ensuring that they receive a fair and stable price for their coffee beans. 

By establishing a minimum price floor, proponents believe that coffee farmers could also better cover their production costs, invest in farm improvements, and improve their standard of living. This in turn could incentivize more sustainable and environmentally friendly coffee production practices, and keep next generations engaged.

The model also suggests a more equitable distribution of value along the supply chain, with a greater share of profits going to farmers. Finally, some say it could potentially stabilise the market, providing greater predictability for farmers and buyers alike and reducing the risk of market crashes or price collapses. 

However, critics argue that it is rooted in an outdated understanding of economic dynamics that fails to account for the industry’s multifaceted nature. 

“A minimum price for coffee doesn’t allow coffee farmers to thrive, because the cost of production varies. The minimum price doesn’t align with the specific economics in each country,” says David Pohl, coffee consultant.

A one-size-fits-all approach to pricing would fail to account for nuances, potentially putting certain farmers or regions at a disadvantage.

But it’s more nuanced than that

Considerations like inflation, huge differences in the cost of production, what technology is available, and differences in productivity across different countries and regions all make setting a minimum price challenging. 

With origins competing for sparse buyers in a context of oversupply, mandating a minimum price for coffee becomes seemingly impossible. Buyers also face pressure from competitors paying and charging less for coffee, which puts downward pressure on the rest of the supply chain.

“Minimum coffee price roadmaps developed by diverse councils and international organisations look great on paper,” says Robert. “But I fail to see how this can be implemented in practice.”

Setting a mandatory minimum price could also distort market dynamics and undermine the principles of supply and demand. In a free market, prices serve as signals that balance supply and demand, incentivising efficient allocation of resources and promoting market equilibrium. 

By artificially inflating prices, a mandatory minimum price could lead to oversupply, hoarding, and inefficiencies in the coffee market, ultimately harming both producers and consumers.

Moreover, enforcing a mandatory minimum price would require a robust regulatory framework and oversight mechanisms, which may be challenging to implement effectively. Compliance with price regulations could also incentivise informal or illegal trading practices, undermining efforts to promote transparency and fair trade in the coffee industry.

Initiatives like Fair Trade, which sets a minimum price, have been successful, but they still face challenges. The diversity of coffee-producing regions necessitates tailored solutions considering local economies, production costs, technology degree and productivity, and each community’s unique challenges.

“The way forward is more than setting a minimum price,” says Robert. “It’s to get small coffee farmers to diversify their income streams. I’m afraid that there will be fewer small coffee producers if they don’t have other incomes besides coffee.”

Initiatives that promote sustainable farming practices, value-added processing, and market diversification could be more helpful for coffee farmers to build resilience and adapt to changing market conditions. 

If instead of focusing solely on price interventions, the industry focused more on addressing underlying issues like access to credit, technical assistance, market information, and infrastructure development, it could perhaps achieve more sector stability.

While the idea of a mandatory minimum price for coffee may seem appealing as a solution to address farmer poverty and income instability, the reality is far more complex. Getting consensus in practice from a global, multi stakeholder industry is a challenge that will be hard to overcome.

Coffee Intelligence

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