Analysis from the Centre for the Promotion of Imports from developing countries (CBI), an agency of the Netherlands Ministry of Foreign Affairs, suggests that scarcity and demand trends in emerging economies will become key drivers of tea, coffee and cocoa markets, creating new opportunities for producers. Rising Asian demand is expected to lead to the emergence of increased south–south trade. In the analysis, published in November 2013, CBI highlights the scope for cooperation along the supply chain to raise finance in order to address impending areas of scarcity of supply, with the negotiating capacity of suppliers in this area potentially increasing.
The analysis notes that the economic recession in parts of Europe is leading “certain EU buyers to substitute higher-value coffee, tea and/or cocoa with lower quality products”.
In contrast, increasingly strict buyer standards are emerging for tea, coffee and cocoa, related to “health, safety, quality, MRLs [maximum residue levels], heavy metals, traceability and sustainability”: many producers having limited capacities to respond to these new requirements. Meeting these standards can require significant commitment of financial and human resources, particularly in view of the many different sets of standards applied and the lack of coordination across different standards.
While the CBI analysis maintains that certification in line with some of these requirements can give rise to a price premium, the major industrial chocolate manufacturer Barry Callebaut points out that users want sustainably certified cocoa “without increasing costs”, despite the high certification costs that farmers can incur.
The analysis notes that scarcity is making coffee increasingly a sellers’ market, while cocoa and tea remain a buyers’ market. However, reports from Kenya suggest that both coffee and tea farmers are facing serious problems – in November 2013, tea prices fell to a 7-year low, and coffee was “the worst performing agricultural commodity of the last two years”, with the downward trend in prices showing no sign of improving.
The CBI analysis argues that weak supplier power vis-à-vis large multiple retailers and multinational commodity trading companies can in part be addressed by strengthening producer organisations and through the introduction of cooperative marketing.
In the light of the trends identified, the CBI analysis highlights a number of possible areas for action by producers and exporters, including:
- negotiating improved long-term contracts, which should “stipulate the quality, quantity and price, the shipment period, the specific conditions of sale, the period during which the offer or bid is firm (valid)”;
- improving both contract management and logistics management;
- staying ahead of trends both in official controls and private sector requirements, with markets being clearly identified before investments are made in meeting specific standards;
- strengthening producer organisations and cooperative marketing, in order to capitalise on emerging scarcities;
- promoting multi-stakeholder cooperation in financing productivity improvements;
- capitalising on the wider productivity benefits arising from full commitment to standards compliance (e.g. GAP standards);
- capitalising on evolving consumer trends in production, processing and packaging of tea, coffee and cocoa products.
In terms of the emergence of south–south trade, major European multinationals in sectors such as cocoa are seeking to position themselves to secure their raw material supplies from African and other developing countries, in order to enhance their ability to supply rapidly expanding demand in Asian markets. It is unclear to what extent such trading arrangements will contribute to African producers improving their revenue positions as a result of rapidly rising Asian demand.
The positive price outlook of the CBI analysis contrasts sharply with the current plight of Kenyan coffee and tea farmers, suggesting that a major issue that is facing ACP tea, coffee and even cocoa producers is how to manage price volatility. It would appear an important policy challenge for the governments of ACP tea, coffee and cocoa producing countries to set strategies in place to manage price volatility, while enabling domestic producers to capitalise on evolving market trends.
While certification can bring price benefits, end users often require sustainability certification at no additional cost, as observed by Barry Callebaut. This raises wider questions related both to the future of price premiums as sustainability certification becomes the industry norm, and to the distribution of the costs of sustainability certification along the supply chain.