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Crisis in a Coffee Cup

The price of beans has crashed.
Growers around the world are starving. And the quality of your morning
cup is getting worse. So why is everyone blaming Vietnam?

Fortune: Monday, December
9, 2002

By Nicholas Stein

Nestled among the rugged
hills of Vietnam’s Central Highlands, 200 miles north of Ho Chi Minh City,
Buon Ma Thuot is a remote and isolated village in a remote and isolated
land. The only road in and out of town is a narrow, winding, muddy track
interrupted by gaping potholes and meandering yaks. Until the mid-1990s
the region was notable only for a key battle in the final days of what
Vietnam calls its American war. A replica of the first North Vietnamese
tank to roll into Buon Ma Thuot sits in the center of town as a monument
to South Vietnam’s “liberation.” But in the past decade almost everything
else here has changed. The rain forest that once blanketed the region is
gone–pulled up and burned down to get at the fertile soil beneath. The
population has exploded. And the streets now reverberate with the buzz
of motorcycle traffic and the hum of commerce. The development is exemplified
by Phuc Ban Me, a gaudy resort complete with a hotel, a sprawling water
park, and a karaoke bar built in the shape of a cave.

    The catalyst
for Buon Ma Thuot’s growth was a plant associated more often with the lush
climes of Latin America than the jungles of Southeast Asia: coffee. Between
1990 and 2000, Vietnamese farmers planted more than a million acres of
the crop. Annual production swelled from 84,000 tons to 950,000, enabling
Vietnam to surpass Colombia as the world’s second-largest producer (Brazil
is the first). Vietnam may not have Juan Valdez, but its coffee is probably
in the can in your kitchen pantry.

    In 1997,
after a frost in Brazil sent the price of green (unroasted) coffee on New
York’s Commodities Exchange soaring above $3 a pound, Buon Ma Thuot’s coffee
sector suddenly had more money than it could spend. But the coffee renaissance
in Vietnam proved short-lived. In 1999 prices began to fall, sinking last
December to 42 cents a pound, their lowest level in a century. For three
consecutive years prices have not even covered the cost of production.
Many of the region’s farmers are heavily in debt. Some have replaced their
coffee plants with corn or pineapples. Others have simply abandoned their
farms. Phuc Ban Me gets few visitors these days, and its water park stands
vacant, a reminder of the excesses of the boom.

    Vietnam’s
coffee industry is not the only one suffering. The prolonged price slump
has ravaged many of the world’s 25 million coffee growers. In Central America,
where the costs of production are triple those of Vietnam, the repercussions
have been particularly severe. The U.S. Agency for International Development
estimates that at least 600,000 coffee workers have lost their jobs. Conditions
are equally dire in Africa, where impoverished nations such as Uganda,
Burundi, and Ethiopia rely on coffee for the majority of their export revenues.
Nestor Osorio, executive director of the International Coffee Organization,
calls this “the worst crisis ever” for coffee, the second-largest globally
traded commodity, after oil.

    Vietnam
is not just a victim of the crisis. For many, it is also the chief culprit,
responsible for flooding the market over the past five years with millions
of bags of unwanted coffee, upsetting the fine balance between global supply
and demand for its own short-term gain.

    But the
depressed prices plaguing coffee growers are not simply the result of a
cyclical glut. They are also caused by two systemic changes within the
global coffee world: the collapse of the cartel that kept prices at sustainable
levels for nearly three decades, and the development of new coffee-processing
technology, which prompted a shift away from high-quality arabica beans
to cheaper, lower-quality robusta. The former was brought on by complex
geopolitical developments. The latter can be traced to the coffee divisions
of four multinational conglomerates–Nestle, Kraft, Procter & Gamble,
and Sara Lee–which buy nearly half of the world’s coffee and own some
of the best-known brands, including Nescafe, Maxwell House, Folgers, and
Chock Full o’ Nuts. In the past, these Big Four coffee roasters blended
small amounts of robusta with arabica to pare their purchasing costs. But
technological advances have allowed roasters to neutralize robusta’s harsh,
unpleasant taste. To reduce costs further, the Big Four have significantly
upped the percentage of robusta in their blends, substituting it for arabica
they once purchased from small farmers in Latin America and Africa.

    Most
of the robusta comes from Brazil and Vietnam, which together have seized
a greater share of global exports, up from 29% in 1997 to 41% last year.
“Brazil and Vietnam offer excellent coffee at very reasonable prices,”
says Frank Meysman, head of Sara Lee’s worldwide coffee business. “It will
be difficult for other countries, particularly in Central America, to compete.”

    The
switch to cheaper beans in the past five years has provided a windfall
for the Big Four. Though none of the companies releases financial results
for its coffee divisions, all acknowledge they have enjoyed record coffee
profits.