Germany Exports More Coffee than All of Africa!

Why African coffee isn’t worth a bean!

Perhaps the one thing that stands out the most in the international coffee trade is not its obvious injustices of African , Asian and Latin American coffee growers which get  some 7% of the value of roasted coffee sold in super-markets. 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 like 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 Organization, in 2011 African countries exported some 10 million bags (60kg each) or about 9% of total world production. Germany, without actually growing  one bean, exported or more correctly re-exported, 11.9 million bags of coffee in the same year. The value of those German coffee re-exports was approximately USD3.6 billion in 2011. In 2010, the last year for which coffee value figures were available Africa’s total coffee exports of around USD 2 billion, not worth a bean when compared to the German coffee exporters.

In coffee- Germany rules OK!

The irony of all this is that European firms often don’t even  add a great deal of value to the coffee- they often  merely re-exported unprocessed green bean, which was half of Germany’s total coffee exports in 2011.  Germany has done for coffee what De Beers has done for a century for diamonds, they aggregated without adding any value. The remainder of German coffee re-exports was sold as roasted  (about 3 million bags) and a further 3 million is made into soluble coffee ie Nescafe which Latin American coffee aficionados rudely call ‘Non es cafe’, or translated to mean ‘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 looses freshness quickly and hence 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 reasons so commonly cited for why African coffee exporting countries have been confined to the export of unprocessed beans to places like Germany. Germany exports the vast bulk of its coffee to neighbouring countries in the European Union and some to the USA. Unlike Africa, its first class logistical connections are both quick and efficient and it can get the product on the supermarket shelf in Poland or Austria and maximize shelf life.

Concentrated Value Chains

          But the trade in coffee gets more complex when you look at the structure of the companies one trades with. Most of the industry has  traditionally been  dominated by four large coffee traders ECOM, Neuman, Luis Dreyfus and Volcafe which together control 40% approximately of the world coffee trade.  Tchibo which advertises itself as only using pure Arabica and not lower priced, low quality robusta coffee.  Half the global market for roasted and processed coffee is controlled by five companies Kraft, Sarah Lee, Nestle, Proctor and Gamble and Tchibo. Nestlé’s Nescafe is said to control about 50% of the world market for instant coffee. While the coffee market is relatively highly concentrated and this helps explain why countries in the developing world which have tried to beneficiate their coffee have generally failed to do so it is simply not enough because unlike high tech export sectors, roasting coffee while requiring skill is not rocket science. The barriers to Africa getting its beans roasted and sold are both logistics and marketing.

Roasting coffee- not rocket science!

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 that one considers there is a market constraint that is often binding that limits African producers moving down the value chain to getting more value added. There is certainly sufficient incentive as the price of good quality green beans is USD 3.30/kg in April 2013 while roasted coffee in the supermarket in southern Africa retails at prices at USD18-25/kg. So why no value added in Africa?

Papua New Guinea, like so many African  countries,  spent an entire decade from the mid-1990’s onwards trying to export its high quality low caffeine, organic Arabica coffee into the world speciality market. Despite its duty free access to Europe and Australia there were scores of constraints to even moderately well resourced companies with considerable government financial assistance from penetrating developed country markets. Most had to do with getting the product onto the market. Roasted coffee had to be marketed in such a way that attracted customers. Therefore large amounts of advertising were necessary in each market.  Exporters had to get special packaging material which allowed a vacuum pack to preserve  the limited shelf life but simultaneously allowed the coffee aroma to penetrate the packet in the super market. The biggest constraint was getting the product on to the supermarket shelf. New coffee exporting companies have to pay for getting shelf access in many supermarkets and the product would be pulled from the super market if it failed to deliver the desired level of sales.  Despite millions of dollars in subsidies spent in attempting to develop the roasted coffee market  in both Europe and Australia today more than 99% of total PNG exports of coffee remain green beans. This experience has been replicated all over Africa.  

This ‘German coffee paradox’ is very much a direct result of the first class logistics that allows the export of freshly roasted coffees something that is difficult to achieve in more challenging environments like Africa where delays in delivery are common and can result in greatly diminished shelf life for a roasted coffee product. It is also the product of consumers who want particular European brands and has meant that African countries have never been able to  export.  

Brazil’s ‘Non-es-cafe’ wins

           By contrast countries like Brazil, Columbia and Ecuador have succeeded in coffee beneficiation where Africa has not. They have both played it smart and not played by the rules of free trade given to them by the USA and Europe. These countries succeeded because they  moved to the soluble or ‘Non Es Cafe’ end of the coffee market. Brazil is now not only the world’s largest exporter of green bean, s it is also the world’s largest exporter of soluble coffee. This it achieved through a series of policy measures in the 1960’s and 1970’s which imposed high export taxes on unprocessed coffee and allowed domestic producers of instant  coffee to avoid these taxes. This gave a very substantial local Brazilian firms that started producing.  The North American and European producers of ‘non-es-cafe’ simply could not compete and many moved to Brazil to take advantage of the export tax regime. Being the world’s largest producers as well as the second largest consumer of coffee meant that these companies stayed and increasingly used it as a natural platform for their exports.
          Size really matters

If Africa wants to beneficiate the lessons of Brazil and the other Latin Americans are clear- this will only be done where there are local champions and commercial advantages created by governments along with policy makers who understand markets and value chains. But in coffee, as so many other endeavours size really matters, and no-one is bigger than Brazil. African countries simply do not have the same export volumes to follow exactly what Brazil did in the 1970’s but the ingredients for success are the same.

   These are the views of Professor Roman Grynberg and not necessarily those of the Botswana Institute for Development Policy Analysis where he is employed.