“For coffee farmers in Meru Central, every waking moment is a constant reminder of the good old days when the berries were synonymous with wealth. In the late 1970s…during the so-called “coffee boom”, many millionaires were made as the region, which lies at the foot of Mt Kenya, benefited from coffee sales. Coffee was to the area, nostalgic farmers say, what oil is to (the) Middle East.”
Smart Company (Daily Nation, May 6th 2008)
Smart Company was waxing nostalgic this week about Kenya’s famous coffee boom: that legendary time in the 1970s when the coffee price spiked and anyone fortunate enough to have bushes in the ground became, momentarily, a rich person. Kenya, too, benefited: in 1977 the economy grew at 8 per cent.
It didn’t last, though. And it is important to understand why not. What caused Kenya’s coffee boom? Brazil’s coffee bust. An unexpected frost in 1975 destroyed more than half of Brazil’s bushes, causing a sharp rise in the worldwide price of coffee. That was it: an act of nature. There was nothing Kenyans did to deserve the boom; it just fell out of the sky. Nor did we do anything particularly clever during and after the boom. So the party soon fizzled out.
The comparison between coffee and oil that is apparently made by ‘nostalgic farmers’ is ludicrous. The only thing the two commodities have in common is that they are in great demand by consumers. At the customer end, they are great businesses because the user apparently cannot live without them. At the producer end, however, things are very different.
Oil is a scarce commodity, found in precious few places and controlled by very few countries. Coffee is produced by tens of millions of farmers in fifty-plus countries in all corners of the world. This is the fundamental point: economic (and business) power comes from scarcity. What is scarce brings large rewards; what is commonplace gets a pittance. This seemingly obvious observation is ignored by a surprising number of people - not least the many Kenyans who, since the 1970s, seem to want to own a coffee farm.
Is there ’scarcity’ in the coffee industry? Yes there is - but it’s not at the farm level. The people who can build scarcity are the importers, processors and retailers of coffee. If you are a global trading house, you use your consciously developed business capabilities - supply chains, logistical expertise - to build uniqueness. And it counts: just five importers control around half the coffee trade. If you are a roaster - such as Nestle or Kraft - you use your brand name and marketing architecture to develop uniqueness. Again, ten such names control two-thirds of the processed coffee market. And if you’re a Starbucks, your ability to develop a unique global brand brings massive reward: you charge between three and five dollars for a cup of coffee which costs less than a dollar to bring to the table. All the way from Kenya.
So is coffee a great business? For Starbucks and Nestle, who understand uniqueness, yes. For the poor Kenyan farmer, not at all. We must learn to understand something about money: it is not made in the crowd.
You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
7 Responses:
August 8th, 2008 at 1:23 pm
Ah….sunny,what can a farmer in rural Kenya who depends on it for their lively hood and onlt knows how to grow coffee do,atleast give them some hope,kwani u aint as optimistic as most of us kenyans are
May 19th, 2008 at 3:21 pm
Nicholas:
I’m not trying to suggest that no-one should be a coffee farmer - clearly, someone has to be! What I am trying to point out is that as a farmer you are in a competitive field of tens of millions, whereas the real money is being made further down the value chain.
And if you are in coffee farming, you should start thinking hard about ‘uniqueness’ - berry varieties, marketing, quality control. Otherwise, you’re in a crowd, and a crowd is no place to make real money.
May 19th, 2008 at 7:49 am
Sunny
You may be right from the point of view of a ‘broker’ but what of the supplier point of view?
My grandparents were coffee farmers and this crop helped them educate their kids.It may not have made them rich but it was something that provided hope to them.
The small famer is important because he in turn creates employemnt for many others i.e. supplier of fertilisers, casual labourers who pick the tea, coffee millers, commercial banks
who lend to the farmers, etc. In my opinion this small scale farmer is an important part of the money cycle.
Besides, someone one still has to do the dirty work for Nestle and starbucks.
May 15th, 2008 at 5:25 pm
Sunny
My late grandfather after whom I’m named was a coffee farmer in Nyeri.
I remember in the 1990s when we visited his home. He used to complain about how coffee farming had become a loss making venture. At that time i was in my early 20s, so i did not know anything about branding and scarcity.
Worse the law then criminalised (does it still?) uprooting the crop.
I used to sympathise with his predicament though. At least he had a Kenya Railways pension and other investments in real estate that dulled the pain.
Nevertheless I’m sorry for other less fortunate farmers who suffered economically, and weren’t advised about issues like uniqueness.
May the ‘dot com’ farmers in all sectors take heed.
May 14th, 2008 at 1:44 pm
I know I have got many things wrong in my time, but this is the first time I have got “every single sentence” wrong - “egregiously wrong”!
Alexander: give other people some credit once in a while. I do know something about coffee, its trading arrangements, its various qualities (though clearly not as much as you do!). It is with that knowledge that I would never recommend to the AVERAGE Kenyan that coffee farming is a good business to be in. I know very well where money is made in the coffee chain, and why. So it is not a position I take out of ignorance. But, you are perfectly entitled to think otherwise. Just don’t kid yourself that your opinion is the only one that counts.
May 14th, 2008 at 12:13 am
I am sorry to state it so bluntly when I often prefer to remain politely assertive; sorry because my expertise lies in tea rather than in coffee.
Nevertheless, let me assert almost every *single* sentence in this article - easily the worst and least informed of this entire website - is wrong. Egregiously wrong.
The author obviously knows nothing about the changing coffee trade and coffee qualities, and about present market demands abroad. I am just glad he did not write about tea.
May 12th, 2008 at 2:09 pm
An e-mail I received about this article:
“I am a coffee farmer at Karatina. I have done so at a loss for the last 2 decades. I am in partnership with my father. In 1992-3, I tried to convince him it does not pay at our point in the value chain. He thought I was mad and banned me from ever ‘bringing a pen’ into farming again, “unless it can also bring the rain”, he said. We farm jointly but each of us has an account at the co-op factory and bank. In the name his health and peace of mind in the knowledge that he has a son who knows the value of land and tilling of soil, I resolved to continue the partnership and ensure that his account makes ‘profit’ every year and mine takes the losses (pays for everything). He has been happy and healthy, now at 101.
In the last 3 years, he has not been able to walk to the areas furthest from the house. So, I have been quietly uprooting coffee and putting the land under trees, to bring back oxygen and the rain. So far, 1,350 plants of the original 2,300 plants have become charcoal.
All this time I have been telling some members of my clan, with whom I have an investment club, to get away from the coffee ‘box’ they got into in the 60’s and 70’s. I have totally failed. My story has been exactly what you published in BD today. I am now making photocopies of your piece so that when I make my monthly pilgrimage there on May 31, I will tell them, “Look, even a Karasing’a here agrees with me”. Liberating minds never comes easy!”