Tag Archives: Coffee

Ethics and Profits – what about the coffee growers?

No business, however great or strong or wealthy it may be at present, can exist on unethical means, or in total disregards to its social concern, for very long. Resorting to unethical behaviour or disregarding social welfare is like calling for its own doom. Thus business needs, in its own interest, to remain ethical and socially responsible. As V.B. Dys in “The Social Relevance of Business ” had stated-

“As a Statement of purpose, maximising of profit is not only unsatisfying, it is not even accurate. A more realistic statement has to be more complicated. The corporation is a creation of society whose purpose is the production and distribution of needed if the whole is to be accurate: you cannot drop one element without doing violence to facts.”

Business needs to remain ethical for its own good. Unethical actions and decisions may yield results only in the very short run. For the long existence and sustained profitability of the firm, business is required to conduct itself ethically and to run activities on ethical lines. Doing so would lay a strong foundation for the business for continued and sustained existence. All over the world, again and again, it has been demonstrated that it is only ethical organisations that have continued to survive and grow, whereas unethical ones have shown results only as flash in the pan, quickly growing and even more quickly dying and forgotten.

Business needs to function as responsible corporate citizens of the country. It is that organ of the society that creates wealth for the country. Hence, business can play a very significant role in the modernisation and development of the country, if it chooses to do so. But this will first require it to come out from its narrow mentality and even narrower goals and motives. However behavioural economists have found that many business people don’t behave in this type of profit-maximising manner in times of crisis – e.g a water shortage means businesses could charge more. If they do, consumers remember and retaliate down the road.

Ethical Consumers

As consumers start to develop a preference for ethical brands, e.g.. Fair Trade Coffee, create a market for such coffee. Firms are therefore pressured to shift toward supplying what consumers want. This is even the case if the firm’s management don’t care how or where the coffee is sourced. Changing consumer preferences force firms to change their ways. Even at higher prices consumers are often willing to pay a premium for ‘ethical’ products or the products of socially responsible firms. Being more expensive doesn’t necessarily mean the company will go out of business if consumers have a preference for ethical products. Higher-priced ethical firms remain highly successful under these circumstances. Instead of being protected by tariffs or subsidies, they’re protected by the preference of consumers.

Coffee supply chain.
However a recent article in the FT outlined the desperate state for coffee growers. The price of high quality arabica beans is trading just above $1 in the New York Commodity Exchange – this is half the value it was 5 years ago. This was due to Brazilian producers flooding the market. Although coffee prices in the cafes have increased the farmers are not the ones to benefit. The image below shows that the grower only gets 1p from the $2.50 and the coffee itself only accounts 10p.

There is a supply chain that takes ‘clips the ticket’ on the way through (see image) but the majority of the cost is associated with rent, wages and tax. The video Black Gold (a bit old now but has some good economics) looks at the growing industry in Ethiopia where they have some of the finest coffee beans in the world. Farmers there have been ripping up coffee plants and replacing it with ‘chat’ – a drug which is banned in the West – which fetches a much higher price.

Low interest rates but not the case in Uganda?

Major central banks around the world have maintain interest rates at record low levels since the global financial crisis in 2008. However, yesterday the Bank of Ugandan (Central Bank) increased its benchmark interest rate by 150 basis points to 14.5% in order to protect the currency and ease inflationary pressure. However interest rates did reach 23% in January 2012. The Bank of Uganda has intervened in the foreign exchange market to the extent that foreign reserves have decreased in the last year by 17% to US$2.8 billion but have been forced to increase interest rates as an alternative. Uganda is Africa’s biggest exporter of coffee with a current inflation rate of 4.9%. How some developed countries would love to have a bit of inflation.

BOU interest rates

Source: Trading Economics

Profit through Ethics

No business, however great or strong or wealthy it may be at present, can exist on unethical means, or in total disregards to its social concern, for very long. Resorting to unethical behaviour or disregarding social welfare is like calling for its own doom. Thus business needs, in its own interest, to remain ethical and socially responsible. As V.B. Dys in “The Social Relevance of Business ” had stated

“As a Statement of purpose, maximising of profit is not only unsatisfying, it is not even accurate. A more realistic statement has to be more complicated. The corporation is a creation of society whose purpose is the production and distribution of needed if the whole is to be accurate: you cannot drop one element without doing violence to facts.”

Business needs to remain ethical for its own good. Unethical actions and decisions may yield results only in the very short run. For the long existence and sustained profitability of the firm, business is required to conduct itself ethically and to run activities on ethical lines. Doing so would lay a strong foundation for the business for continued and sustained existence. All over the world, again and again, it has been demonstrated that it is only ethical organisations that have continued to survive and grow, whereas unethical ones have shown results only as flash in the pan, quickly growing and even more quickly dying and forgotten.

Business needs to function as responsible corporate citizens of the country. It is that organ of the society that creates wealth for the country. Hence, business can play a very significant role in the modernisation and development of the country, if it chooses to do so. But this will first require it to come out from its narrow mentality and even narrower goals and motives. However behavioural economists have found that many businesspeople don’t behave in this type of profit-maximising manner in times of crisis – e.g a water shortage means businesses could charge more. If they do, consumers remember and retaliate down the road.

Ethical Consumers

As consumers start to develop a preference for ethical brands, e.g.. Fair Trade Coffee, create a market for such coffee. Firms are therefore pressured to shift toward supplying what consumers want. This is even the case if the firm’s management don’t care how or where the coffee is sourced. Changing consumer preferences force firms to change their ways. Even at higher prices consumers are often willing to pay a premium for ‘ethical’ products or the products of socially responsible firms. Being more expensive doesn’t necessarily mean the company will go out of business if consumers have a preference for ethical products. Higher-priced ethical firms remain highly successful under these circumstances. Instead of being protected by tariffs or subsidies, they’re protected by the preference of consumers. Below is graph that I got from Stephen Hickson who presented at the NZCETA conference this year. Notice the changes in the Fair Trade price of coffee especially from 2011. Commodity prices can fluctuate wildly, and isolated, poor growers are often unable to take advantage of the sophisticated financial instruments employed by buyers to lower risk and volatility. The Fair Trade floor price gives farmers market information, financial stability, and access to credit. But as Stephen Hickson pointed out:

But that of course is not what people think… most people think when they buy FT coffee it is about the extra they pay going to the farmer (in fact not paying any extra would seem odd to some).

Fair Trade Coffee Price

Great site for infographics

A hat tip to colleague Richard Wells for this site – Column Five Media – which has some outstanding infographics. I particularly like the following:

* Grenade or Aid – US Military Spending versus Foreign Aid
* America’s Most Bizzare Taxes – Jock Tax, Candy Tax, Crack Tax.
* The CPI Market Basket – How the CPI is calculated and its impact on individuals
* How Coffee Affects the Global Economy – Value of exports and imports of coffee as well as coffee production.
* Europe Trails the US in Productivity – productivity figures for both countries and why Europe is behind. See graphic below.

Developing economies – barriers to trade

In teaching my AS level class Unit 4 -Trade – of the CIE course I have often used the Black Gold DVD which shows some good examples of barriers to trade. The part of the DVD that is particularly relevant is at the World Trade Organisation (WTO) talks in Cancun, Mexico in 2003.

In countries such as Ethiopia, small coffee producers have suffered as a result of the WTO. The International Monetary Fund (IMF) and the World Bank, established to facilitate global trade and regulate an international monetary system, have privatised public businesses and removed restrictions on foreign ownership in many developing countries who sign the IMF agreements in order to prevent default on international loans. Black Gold – The Economics of Coffee

Furthermore, as the farming sector in developed countries continues to get government subsidies – $300bn pre year – the IMF insisted that those developing countries receiving IMF aid had to stop any assistance to their own farmers. One wonders how these countries are going to achieve any sort of growth as subsidies wipes out the ability of developing countries competing on the international market. At the WTO in Cancun, ministers from across Africa packed out the conference centre calling for an end to subsidies. As Sam Mpsau the Minister of Commerce and Industry in Malawi stated:

“we would like the world trading system to be able to help us stand on our own two feet. Trade is more important to us than aid. We cannot live on aid forever”.

A 1% increase in the continent’s share of world trade would in itself generate $70 billion per year – five times more than what the continent now receives in aid.

Below is a trailer to the movie. Well worth getting.