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THE COFFEE CRISIS IN THE WESTERN HEMISPHERE
THE WESTERN HEMISPHERE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
JULY 24, 2002
Serial No. 107106
Page 2 PREV PAGE TOP OF DOCPrinted for the use of the Committee on International Relations
Available via the World Wide Web: http://www.house.gov/internationalrelations
COMMITTEE ON INTERNATIONAL RELATIONS
HENRY J. HYDE, Illinois, Chairman
BENJAMIN A. GILMAN, New York
JAMES A. LEACH, Iowa
DOUG BEREUTER, Nebraska
CHRISTOPHER H. SMITH, New Jersey
DAN BURTON, Indiana
ELTON GALLEGLY, California
ILEANA ROS-LEHTINEN, Florida
CASS BALLENGER, North Carolina
DANA ROHRABACHER, California
EDWARD R. ROYCE, California
PETER T. KING, New York
STEVE CHABOT, Ohio
AMO HOUGHTON, New York
JOHN M. McHUGH, New York
JOHN COOKSEY, Louisiana
THOMAS G. TANCREDO, Colorado
RON PAUL, Texas
Page 3 PREV PAGE TOP OF DOCNICK SMITH, Michigan
JOSEPH R. PITTS, Pennsylvania
DARRELL E. ISSA, California
ERIC CANTOR, Virginia
JEFF FLAKE, Arizona
BRIAN D. KERNS, Indiana
JO ANN DAVIS, Virginia
MARK GREEN, Wisconsin
TOM LANTOS, California
HOWARD L. BERMAN, California
GARY L. ACKERMAN, New York
ENI F.H. FALEOMAVAEGA, American Samoa
DONALD M. PAYNE, New Jersey
ROBERT MENENDEZ, New Jersey
SHERROD BROWN, Ohio
CYNTHIA A. McKINNEY, Georgia
EARL F. HILLIARD, Alabama
BRAD SHERMAN, California
ROBERT WEXLER, Florida
JIM DAVIS, Florida
ELIOT L. ENGEL, New York
WILLIAM D. DELAHUNT, Massachusetts
GREGORY W. MEEKS, New York
BARBARA LEE, California
Page 4 PREV PAGE TOP OF DOCJOSEPH CROWLEY, New York
JOSEPH M. HOEFFEL, Pennsylvania
EARL BLUMENAUER, Oregon
SHELLEY BERKLEY, Nevada
GRACE NAPOLITANO, California
ADAM B. SCHIFF, California
DIANE E. WATSON, California
THOMAS E. MOONEY, SR., Staff Director/General Counsel
ROBERT R. KING, Democratic Staff Director
Subcommittee on the Western Hemisphere
CASS BALLENGER, North Carolina, Chairman
ELTON GALLEGLY, California
ILEANA ROS-LEHTINEN, Florida
RON PAUL, Texas
NICK SMITH, Michigan
JO ANN DAVIS, Virginia
ROBERT MENENDEZ, New Jersey
WILLIAM D. DELAHUNT, Massachusetts
GRACE NAPOLITANO, California
ENI F.H. FALEOMAVAEGA, American Samoa
DONALD M. PAYNE, New Jersey
Page 5 PREV PAGE TOP OF DOCCALEB MCCARRY, Subcommittee Staff Director
PEDRO PABLO PERMUY, Democratic Professional Staff Member
TED BRENNAN, Professional Staff Member
JESSICA BAUMGARTEN, Staff Associate
JEAN CARROLL, Staff Associate
C O N T E N T S
The Honorable Adolfo Franco, Assistant Administrator for Latin America and the Caribbean, U.S. Agency for International Development
Franklin Lee, Deputy Administrator for Commodity and Marketing Programs, Foreign Agricultural Service, U.S. Department of Agriculture
Gabriel Silva, General Manager, National Federation of Coffee Growers of Colombia
Colleen Crosby, Partner, Santa Cruz Coffee Roasting Company
Robert Nelson, President and CEO, National Coffee Association of U.S.A., Inc.
Ted R. Lingle, Executive Director, Specialty Coffee Association of America
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LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
The Honorable Sam Farr, a Representative in Congress from the State of California: Prepared statement
The Honorable Adolfo Franco: Prepared statement and material submitted for the record
Franklin Lee: Prepared statement
Gabriel Silva: Prepared statement
Colleen Crosby: Prepared statement
Robert Nelson: Prepared statement
Ted R. Lingle: Prepared statement
THE COFFEE CRISIS IN THE WESTERN HEMISPHERE
WEDNESDAY, JULY 24, 2002
House of Representatives,
Subcommittee on the Western Hemisphere,
Page 7 PREV PAGE TOP OF DOCCommittee on International Relations,
The Subcommittee met, pursuant to call, at 2:30 p.m. in Room 2200, Rayburn House Office Building, Hon. Cass Ballenger [Chairman of the Subcommittee] presiding.
Mr. BALLENGER. The Subcommittee today meets to consider changes in the world coffee market and their impact on the Western Hemisphere.
In the span of just a few years, Vietnam has emerged as the second leading exporter of coffee in the world. This new Vietnamese production, coupled with over-production by Brazil, the world's leading exporter of coffee, has led to a glut in the coffee market. These two countries produce significant amounts of robusta coffee, which is of lesser quality and cheaper to grow than the arabica coffee produced throughout Latin America.
Last year, 115 million bags of coffee were produced globally, while only 108 million bags were consumed. This oversupply has driven coffee prices to their lowest level in 30 years to just a fraction of what they were a few years ago.
The coffee crisis is devastating the economies of many countries in Latin America and the Caribbean which depend on coffee as a critical export crop. Hundreds of thousands of laborers have lost their jobs, and many more are working for decreased wages. For most farmers, the production costs are too great to be recovered in today's market, and many are abandoning their crops.
Page 8 PREV PAGE TOP OF DOC In Colombia, coffee revenues have dropped by half in just 5 years. In Peru and Colombia, some coffee farmers are beginning to harvest illicit crops such as coca plants and poppies for opium. Some unemployed former agricultural workers are coming to the United States looking for work.
All this is of great concern to the Subcommittee because the countries affected by the crisis are friends and neighbors of the United States whose stability and prosperity matter a great deal to us, countries such as Mexico, Colombia, El Salvador, Peru, Guatemala, Nicaragua, Honduras and Venezuela.
I particularly hope that our witnesses today can help us to understand not only what is happening, but what the United States may be able to do to help the countries in the Western Hemisphere suffering from these great changes in the coffee market.
Would you have an opening statement?
Mr. DELAHUNT. Yes. Thank you, Mr. Chairman. I appreciate you holding this hearing. Obviously, I am fully familiar with your passion and affection for the people in Central and South America. This is an important hearing because this is a very important issue.
The slump in world coffee prices is turning into an unmitigated disaster for Latin America. Across the hemisphere, families are cutting back on food. Children are not going to school, and medicines are becoming a luxury. There is little immediate relief and no easy solution.
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Some in Central America are comparing the coffee crisis to Hurricane Mitch, which in 1998 flattened sections of this already poor region, washing out entire villages. I would submit that the potential impact of this crisis is even worse, and we, the United States, cannot stand idly by for both pragmatic and moral reasons, because it does directly affect our national interests.
In southern Mexico and Central America, the crisis has led to an increasing number of migrants. Many producers told hundreds of thousands of itinerant workers not to show up for the autumn, 2001, crop since prices were too low for harvesting. It is difficult to quantify the direct effect of the coffee crisis on illegal migration to the United States, but in May of last year six of 14 migrants found dead in the Arizona desert were identified as coffee workers.
In Colombia, Peru and Bolivia, the situation is somewhat different. Small coffee farmers are increasingly tempted to turn to coca and poppy production. Coca and poppy crops are much more profitable than coffee, and the collapse of prices have made them even more so. In Colombia, the U.N. International Drug Control Programme reports opium poppies are appearing on what was once traditional coffee land.
Over the past 2 decades, South and Central America have endured rebel insurgencies, financial crises, hurricanes, earthquakes and corruption scandals. The lack of hope for the millions of people who rely on coffee for their livelihoods could present an even greater challenge, and we cannot afford to walk away.
Page 10 PREV PAGE TOP OF DOC Mr. Chairman, this morning there was a hearing with the principal witness being Senator George Mitchell before the Full Committee on a Marshall Plan for the Middle East. I know that my Ranking Member, who I am sure will come later, has for years now put forth a similar concept for Latin America. I suggest it is long overdue. It is long overdue, and we really have to enhance our engagement and make a long-term commitment to our neighbors to the south.
This crisis leads me to question the wisdom of trade policies over the past 15 years that have benefitted mostly large international firms at the expense of workers and small producers. I would hope that the Administration takes these effects into account when working on FTAA. I certainly will when voting on it.
I look forward to hear what USAID is doing to alleviate the effects of depressed coffee prices. Beyond feeding programs and immediate humanitarian assistance, I hope to hear that we have developed a comprehensive, long-term plan to provide opportunities and hope for rural populations affected by this crisis.
I also ask my colleagues to look at options beyond aid, including legislation that would improve the environmental policies of our trading partners, as well as protecting the rights of small producers and workers.
Again, Mr. Chairman, thank you for this hearing. It is an important hearing.
Mr. BALLENGER. And the senior Member of our International Relations Committee, Mr. Gilman?
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Mr. GILMAN. Thank you, Chairman. I would like to thank you for calling this important hearing and bringing this important issue to our attention. I have had a number of calls from constituents who are related to some of the Central American countries, and they have said it is a major crisis in Central America today.
With almost all of the public's attention being focused on our war against terrorism for the past few months, the economic disaster encompassing many areas of Central and South America caused by severe drought and extremely low coffee prices has been neglected. I am pleased that you are focusing attention on this problem.
Expanded coffee supply has caused coffee prices to drop to their lowest level in over 100 years. I understand that a major cause of this is when we boosted the Vietnamese coffee production, and that flooded the supply around the world. With coffee prices not covering the cost of production, farmers are abandoning or selling their farms to raise money to pay smugglers to take them into the U.S.
This crisis, the impact of which has been compared in financial terms with Hurricane Mitch, has triggered a massive migration from many areas of Central and South America, the social and economic cost of which may prove to be disastrous.
Mr. Chairman, I would like to thank our good witnesses for taking the time and effort to help us. With their knowledge and experience, in particular Adolfo Franco who is one of our former staff members and has worked with our Full Committee, and also Mr. Franklin Lee from the Agriculture Department and our other witnesses following this panel.
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I hope this hearing will provide us some insight into the actions that the Administration and Congress can take to help alleviate the anguish of those suffering from the current crisis in Latin America.
I am also concerned that the farmers who now have no livelihood are going to turn to raising some of the illicit drug crops, heroin and coca. We cannot afford to have that kind of increase. We have a hard enough battle right now trying to reduce the drug consumption coming out of that part of the world.
Thank you, Mr. Chairman.
Mr. BALLENGER. Congressman Farr, who is vitally interested in this and was one of the idea men in having this hearing? Sam, it is up to you.
Mr. FARR. Thank you very much, Mr. Chairman. I really appreciate you having this hearing, and I would like to submit for the record my statement and just make a few brief comments.
Mr. BALLENGER. Without objection.
[The prepared statement of Mr. Farr follows:]
PREPARED STATEMENT OF THE HONORABLE SAM FARR, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA
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Chairman Ballenger, Ranking Member Menendez, Members of the Subcommittee, Witnesses and invited guests:
I would first like to recognize the generosity of the Subcommittee for allowing me to participate in this important hearing. This hearing represents an important step in addressing a crisis that has been going on for too long, and which has had devastating effects in the developing world, particularly in the Western Hemisphere. In the past five years, producer coffee prices have declined by 70 percent. This has resulted in severe hardship for 25 million coffee growers worldwide, in over 50 developing countries, which depend heavily on coffee for export revenue. Latin America is particularly hard-hit in this regard. In Nicaragua, thirty percent of export revenue is from coffee; twenty-six percent in El Salvador; twenty-five percent in Honduras, twenty-one percent in Guatemala, and seventeen percent in Colombia.
Coffee, however, represents more than just export revenue for the countries of Latin America. Working as a Peace Corps Volunteer in Antioquia, the heartland of Colombian coffee-growing, I became intimately familiar with the central role that coffee has played in the economic and social infrastructure in countries like Colombia. The coffee industry provided for health services, schools, roads, and, of course, the backbone for rural livelihoods. The same could be said for rural communities throughout the Andes, as well as in Central America and Mexico. The collapse of the coffee market, however, has changed all that. With the cost of production exceeding the benefit of sales, farmers are abandoning the coffee fields. They are leaving their rural communities and moving into the cities, or across borders, in search of employment. The disappearance of a viable coffee sector has undermined years of social and economic investment by the industry. These people have not only lost their livelihoods, they have lost their way of life. As I am sure these witnesses will testify, the entire fabric of rural communities in Latin America is being destroyed by the coffee crisis.
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I say that this hearing is an important step, because it represents an increasing awareness of the coffee crisis, and with an increasing awareness will come the political will to respond and make a difference in the lives of all these people. Before I continue, I feel obliged to underline that the coffee crisis is a global crisis, with important effects and consequences for much of the developing world. I stated before that many Latin American countries are heavily dependent on coffee for export revenue. The same is true, and in an even more exaggerated form in Africa, the birthplace of coffee. In Burundi, eighty-percent of export revenues come from coffee, in Ethiopia sixty-seven percent, in Uganda fifty-five percent, and in Rwanda forty-three percent. Clearly addressing the coffee crisis should figure prominently in U.S. assistance plans for Africa as well as Latin America. The role of Asia in the crisis must not be overlooked either. The arrival of Vietnam to the market as a major producer can be seen as the primary cause of the overproduction and consequent collapse in the world price of coffee. In ten years, Vietnam went from an insignificant producer, to the second largest exporter of coffee in the world (second only to Brazil). It must be recognized that the international community played a role in helping Vietnam increase its coffee production. Consequently, any plans to address the crisis must include Vietnam, and other major producers in Asia such as Indonesia. In sum, while we contemplate today what can be done to address the crisis in the Western Hemisphere, we should also be conscious of the global nature of this problem, and should seek solutions that can be applied on a global scale.
As for solutions, I believe that all of usproducers, roasters, consumers, governments and multinational organizationshave a role to play. I would like to highlight two concrete approaches. These are minimal and discreet actions which, I believe, will have significant effects on the coffee crisis. First, I recommend that those interested in helping small coffee farmersindividual consumers, and institutional consumers such as the House of Representativesmake an effort to purchase sustainable coffees. These are coffees that are certified by third parties and guarantee livable income to coffee farmers. Fair Trade is a good example of sustainable, certified coffee. Fair Trade guarantees the farmer a floor price of $1.26 per pound, more than double the world market price for coffee. The guarantee is based on a contract, which certifies that farmers are organized in democratic cooperatives and are farming in an environmentally sustainable manner. Other certification systems follow a similar model: Smithsonian, Bird-Friendly, Shade-Grown, Organic, Rainforest, etc. These certifications allow farmers to access premium markets, which provide them with sustainable incomes.
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Purchasing sustainable, certified coffees, however, is a longer-term solution. It is based on educating the consumer about where the product comes from and how it is produced. Consumers are becoming more educated about coffee, but this is a gradual process. Moreover, while Congress can help inform the public about the crisis, the purchase of sustainable coffees is primarily driven by consumer interest and action. In the meantime, we need to find solutions which have a more rapid effect on the crisis. One approach, which has been suggested by both producers and roasters, is to increase the purity standard of coffee imported into the United States. As the world's largest consumer of coffee, the consumption patterns of the United States will have a great effect on the market, both in actual fact, and in demonstration effect. Currently, the United States lags behind international standards in terms of the purity level of coffee imports. While the International Coffee Organization (ICO) and European countries require that ninety-five percent of coffee imports be coffee product (allowing only five percent to be non-coffee substancesblack or sour beans, sticks, rocks, etc.), the United States has a guideline that requires only seventy-five percent of imports to be coffee products. That means twenty-five percent of the bags of coffee imported into the United States is made up of bad beans, sticks and rocks. How do you think consumers would feel if they knew about these standards?
By raising the bar on ''triage'' coffee, as it is known, approximately 810 million bags of coffee would be removed from the marketplace. With an estimated 18 million bags of surplus coffee currently on the market, this action would significantly reduce overproduction. In addition, it would help create incentives for producers to shift to quality over quantity, which represents the future of the coffee market. As important, a new coffee purity standard will provide U.S. consumers with the wholesome coffee product they believe they're getting.
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I am very pleased that we have this opportunity to discuss these issues with such a distinguished and informed group of witnesses. I am particularly happy to see Colleen Crosby on the panel. Colleen was the first person to bring the coffee crisis to my attention. Her personal involvement and commitment to the cause of helping coffee farmers has consistently served as an inspiration to me and my work on this issue. I look forward to hearing from her, and from the other witnesses, who will give us a broad view of the crisis and their opinions on how best to respond. I am especially eager to hear the testimony of the National Coffee Association, which represents the largest coffee roasters. These roasters, who make up the overwhelming majority of the coffee market, will play a key role in helping to respond to the crisis. I know that some companies, such as Kraft and Proctor & Gamble, have begun investing in capacity-building for small farmers. I look forward to hearing more about this work, and how public-private partnerships can provide the basis for effective and comprehensive policy.
Let me thank, once again, the Chairman, Ranking Member and Members of the Subcommittee for allowing me to participate in this hearing. I look forward to a fruitful discussion today, and to working on concrete measures to assist coffee farmers and the coffee market in the future.
Mr. FARR. I think both of you gentlemen have been really leaders in Congress in being able to bring the attention of Latin American issues to the United States Congress.
I come to this hearing with my background of in the 1960s serving in the United States Peace Corps as a Peace Corps volunteer in Colombia. I remember when I was a Peace Corps volunteer there and we were working with the Alliance for Progress and working with the American Embassy and particularly with the Colombians.
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One thing the Colombians kept saying is more than any other foreign aid that you could send, you would most help this country if you would just allow us to get one cent more per pound of coffee. I thought well, that is probably just a typical thing to say when, you know, the people know there is one big export. I found out that there are lots of exports from these countries, but it rings more true now than it ever did.
Frankly, here we are as a nation in Latin America. We put a lot of money into trying to help. We have been down there with you, Mr. Chairman, seeing the effects of Hurricane Mitch in El Salvador, Nicaragua and the Honduras and Venezuela. We went back to El Salvador after the earthquake, and we have come back here in the Appropriations Committee and appropriated a lot of money to try to bail out and help with the infrastructure.
Then we concentrated on Colombia with Plan Colombia, which was, you know, last year about $1.2 billion I think, Mr. Gilman, and a lot of that went to purchase equipment to help in the overall attempt by Colombia to recover their country from violence and so on.
It seems to me that what is happening in the coffee crises is the production prices are down because the supply is up. The purchasers of that supply on that world market are American companies, so I am back to, you know, the right hand and the left hand need to be brought together here. We cannot as an American policy say that one of our most important policies in Latin America is trying to stabilize a country and at the same time drive down the principal product of those countries to a rock bottom low. It just does not make sense.
We have got to start developing our business practices to be consistent with our foreign aid practices and with what we think is just good humanitarian sense. The percentage of export coffee in Nicaragua is down 30 percent, and yet we are trying to get the production up to sustain that country that was hit by Hurricane Mitch.
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In El Salvador, production is down 26 percent on top of the fact that they had, you know, one of the worst earthquakes in this hemisphere in history. Honduras and Hurricane Mitch, a very poor country, down 25 percent, Guatemala down 21 percent and Colombia down 17 percent.
I suggest that there are two things that I think Congress can do. First of all, we ought to support helping these small coffee growers and individual consumers and institutions, and we ought to really look at all the public institutions in America that use taxpayer dollars to buy food and do whatever we can to insist, and that may be too strong of a word, but to encourage that these entities purchase sustainable coffee. It is good public policy. It is good expenditure of taxpayer money.
Fair trade is a good example of sustainable certified coffee. Fair trade guarantees a farmer a floor price of $1.26 per pound, more than double the world price for coffee. The guarantee is based on a contract which certifies that farmers are organized in democratic cooperatives and are farming in an environmentally sustainable manner. It meets essentially all the bells and whistles that we are using in our own ag bill in the United States.
The second thing that I suggest that we do is I think we ought to increase the purity standard for coffee imported into the United States. It is more a short-term solution, but as the world's largest consumer of coffee the consumption patterns of the United States will have a great effect on the market, both actual and fact.
The United States lags behind the international standard. This is what is really remarkable. I did not know this, but the international standards in terms of purity of coffee. The International Coffee Organization in European countries require that 95 percent of the coffee imports be coffee product, allowing only 5 percent to be non-coffee.
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From a wine producing state like California, I know what this is like. The same thing with selling grapes. When you take a raw product in the market, you have things that get caught up in the harvesting of that crop. In grapes, you know, you get rotten grapes. You get the vine.
Mr. BALLENGER. I hope the rest of your statement is not quite as long.
Mr. FARR. You get leaves. I am just finishing right now. Thank you very much.
Mr. BALLENGER. Okay.
Mr. FARR. What you do is you have all this stuff in the coffee as well.
Our guidelines are only 75 percent of the imports, so that means 25 percent of the bag of coffee imported to the United States is made up of bad beans, sticks and rocks, and we ought to change that policy.
Thank you, Mr. Chairman.
Mr. BALLENGER. I am sorry about the needle, but I know we are going to be short on time.
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Let me introduce you both and hope that we can start the statements, but I know there is going to be a call for a vote in just a minute.
First of all, let me introduce Mr. Adolfo Franco. On January 31, 2002, Adolfo Franco was sworn in as Assistant Administrator for Latin America and the Caribbean of the U.S. Agency for International Development.
Before joining USAID, Mr. Franco served as Counsel to the Majority on the International Relations Committee and is a former President of Inter-American Foundation, an independent government agency dedicated to the promotion of grassroots development in the western hemisphere. Mr. Franco holds both Bachelor's and Master's degrees in history from the University of Iowa and a law degree from Creighton University.
Our second member is Mr. Franklin Lee, who currently serves as Deputy Administrator for Marketing and Commodity Programs for the Foreign Agricultural Service of the Department of Agriculture. He is responsible for international marketing, agriculture intelligence and analysis of foreign markets, the Market Access Program and the Quality Sample Program, to name a few.
Mr. Lee received a Bachelor of Science degree from Southern University and a Master's degree in Economics from Louisiana State University.
Mr. Franco, if you would please go right ahead?
Page 21 PREV PAGE TOP OF DOCSTATEMENT OF THE HONORABLE ADOLFO FRANCO, ASSISTANT ADMINISTRATOR FOR LATIN AMERICA AND THE CARIBBEAN, U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT
Mr. FRANCO. Thank you. Thank you very much, Mr. Chairman, and thank you to my former boss, Chairman Gilman, for attending the hearing as well as Mr. Farr. I know your interests on the Committee and your record on Colombia, and particularly Latin America, is longstanding. We really appreciate the opportunity to be here and to give our testimony. I know Mr. Delahunt's commitment from my work on the Committee is longstanding.
This is a wonderful opportunity to appear before the Subcommittee on what I consider, and I share your view, is a vitally important issue that has dramatically and directly affected the welfare of millions of Latin Americans. The coffee crisis in its broader context poses a serious threat to the prospect for prosperity and continued stability in the Western Hemisphere. The crisis is of intense concern to the President of the United States and to our government, and it serves as the focal point for planned USAID programs in the future.
In Central America, specifically where economies remain reliant on coffee as a primary export and where the coffee crisis has converged with drought and other natural disasters, as the Members of the Committee have explained, it is not an overstatement to refer to the coffee crisis as the economic equivalent of the hurricane, as Members have mentioned. Due to the sharp decline in prices, it is estimated that farmers in Central America have lost more than $1.5 billion this year alone, and close to 700,000 permanent and temporary workers face layoffs by this fall.
Page 22 PREV PAGE TOP OF DOC For the short-term situation in Central America, USAID has taken important steps to alleviate the effects of the drought and the unemployment due to the coffee crisis. In Nicaragua, USAID worked with the U.S. Department of Agriculture and U.S. private voluntary organizations such as CARE, Save the Children and Catholic Relief Services to deliver more than $8 million in emergency food, medical and health assistance in late 2001 and an additional $2.9 million in emergency food and household supplies so far in 2002. In Honduras, USAID delivered nearly $3 million in emergency food and other commodities in 20012002. In Guatemala, USAID's humanitarian response has included over $6 million in emergency rations and medical supplies.
While these emergency measures are vital, as Mr. Farr has indicated, the focus of my testimony today is the broader context of the coffee crisis and how it has shaped in particular USAID's priorities in new directions for Central America and Mexico. The coffee crisis has reduced revenue available to national governments, weakened financial sectors and is serving as a primary fuel for overall social and economic instability across the countries of the region.
While the crisis has been acute in Central America, depressed coffee prices also make even more challenging the achievement of our government's objectives, such as those directed to helping farmers in the Andean regions where they seek to find viable economic options to coca, an area that I know Chairman Gilman has dedicated a great deal of his career to address.
These challenges that stem from the coffee crises have the potential to undermine the political processes and the effectiveness of newly-elected governments in the region and could ultimately lead to greater regional conflict. Given the broader context of the coffee crisis and its particular impact and consequences for Central America, USAID has developed a significantly enhanced overall program to set priorities for promoting trade-led growth in the region.
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Our programs and priorities not only recognize Central America's difficulties, but also the unprecedented and as yet unrealized opportunities for promoting greater prosperity in that region. The commitment of the hemisphere's leaders to enter into a Free Trade Area of the Americas for 2005 and President Bush's announcement to explore a free trade agreement between the United States and Central America are excellent tools we can use in achieving a healthier economic environment.
The path to resolving the coffee crisis and to fostering greater economic prosperity in Central America and indeed throughout the hemisphere will be easy or difficult depending on the extent to which these countries can become more competitive in regional and global markets and increase their levels of trade and investment.
Working toward these various trade agreements will help create new income opportunities for those involved in coffee production and help ease the impact of low coffee prices. To assist countries on this path, USAID is launching this year a new trade-led rural economic growth initiative for Central America and Mexico termed the Opportunity Alliance.
To begin the Opportunity Alliance, USAID has immediately reallocated $8.5 million this fiscal year, including $6 million to jump start a regional quality coffee program. In fiscal year 2003, USAID plans to allocate $30 million for the Opportunity Alliance for Central America and Mexico to continue these programs.
Activities will focus on building trade capacity, diversifying the rural economies of Central America, including the continuation of the quality coffee program in the rural sector and reducing the region's vulnerability to disasters and environmental degradation affecting income.
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USAID's Opportunity Alliance is in direct response to the coffee crisis and the economic and social difficulties facing the rural poor. It provides broad based solutions to those most affected. These are the small-scale farmers in rural areas. It builds directly on successful USAID experiences in the field. Activities will help prepare Central American countries to participate in the Free Trade Area Agreement, the FTAA, and the U.S.-Central America Free Trade Agreement, CAFTA, should it become a reality, as is our vision.
We will expand a successful USAID-funded regional program that has helped Central America drop average tariff rates from 20 to 7 percent between 1990 and 2000, streamline Customs procedures and be in greater compliance with multilateral trade agreements, including key labor and environmental provisions that I know are of great concern to Members of this Committee.
USAID's Opportunity Alliance will also help broaden opportunity and foster sustainable improvement in the livelihoods of the poor through diversification of agriculture, including quality coffee and the non-agriculture arena to reduce over reliance on traditional crops.
In this region, rural households strategically pursue diverse sources of income, often including migration of family labor to urban jobs. Recognizing this pattern, USAID has developed a concept of diversifying the rural economy by viewing agricultural investments within a broader rural enterprise approach. This approach taps into Central America's potential for ecotourism, aquaculture, certified timber and other forest products, artisan crafts and rural services.
Page 25 PREV PAGE TOP OF DOC USAID's programs will provide demand-driven business development and marketing services to help small- and medium-sized farmers, including coffee farmers, improve competitiveness, as well as tap into new markets. This will expand successful programs such as those in Honduras where our work with non-traditional agricultural producer associations has led to significant increases in export sales and new jobs following Hurricane Mitch.
The Opportunity Alliance will also assist countries in better managing the climatic and environmental risks in the region. Coffee trees, for example, now play a significant role in holding the soil and preserving the watershed in many areas in Central America. Massive shifts out of coffee production could impact on the environment. Consequently, protecting the gains from trade-led growth through USAID assistance for disaster preparedness and mitigation and watershed management is vital to sustainable prosperity in the region.
Given the magnitude of the economic difficulties and the need to leverage our efforts, USAID is engaging the U.S. private sector and coordinating our response with key donors such as the Inter-American Development Bank and the World Bank.
As part of our coordinated response, USAID, the Inter-American Development Bank and the World Bank co-sponsored in April, 2000, a stakeholders meeting in Guatemala with Central American Ministers of Agriculture and about 250 coffee producers, directors of coffee buying and roasting companies and consumer and environmental organizations.
USAID and the banks presented a joint evaluation and set of coordinated recommendations that underscored the systematic nature of the coffee crisis without offering to bail out farmers unwilling to help themselves. Rather, the recommendations stressed the need for producers to improve competitiveness and to diversify production.
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Mr. Chairman, I would like to enter into the record the USAID/IDB/World Bank discussion document outlining our joint recommendations entitled Managing the Competitive Transition of the Coffee Sector in Central America.
Mr. BALLENGER. Without objection.
Mr. FRANCO. Thank you, Mr. Chairman.
Based on these recommendations, USAID has developed a new demand driven regional coffee program designed to assist Central American coffee producers in enhancing coffee quality, improving business practices, promoting market-based policies and securing long-term contracts and contracts. This regional program is an initial element of the Opportunity Alliance given Central America's natural geological and climatic advantages which present opportunities to raise the region's competitiveness in producing quality coffee and tapping promising specialty markets around the world.
As part of a broader global effort coordinated with USAID's other regional bureaus, USAID is seeking to engage corporate allies interested in investing jointly in local projects or signing long-term purchasing contracts with small-scale and medium-scale coffee producers. These are already examples of this cooperation in our region and other parts of the world.
As just a few examples, USAID has partnered with Conservation International and Starbucks Coffee to create new opportunities for small-scale farmers in southern Mexico via technical assistance, marketing and production assistance. USAID is also supporting efforts by the Specialty Coffee Association of the Americas to conduct international Cup of Excellence programs that help raise the quality awareness and ultimately bring small-scale producers closer to buyers.
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A recent competition in Nicaragua demonstrated that small-scale producers could produce high quality coffee and secure unprecedented prices for coffee through internet auctions. This is something that just happened a few weeks ago where we were able to link producers in Nicaragua to the Cup of Excellence program with buyers in the United States for coffee that sells in the United States for $11 a pound.
Additionally, USAID, working together with Proctor & Gamble, has begun to identify schools in Guatemala for social investment grants in coffee producing regions hit by the crisis.
The interests of the region, donors, consumers, environmental groups and industry have never been more intertwined as they are currently. USAID's coffee program, as well as the other element of the Opportunity Alliance, will take advantage of this convergence of interest, leverage resources and maximize the impact of our development activities.
USAID's coffee response and broader efforts under the Opportunity Alliance are a strong signal of its commitment to our friends and neighbors in Central America and Mexico. This initiative is highly complementary of President Bush's vision for a new foreign policy for Latin America and trade policy objections in the region that will lead to the signing of a Free Trade Agreement for the Americas in 2005, as well as to ongoing regional initiatives such as Plan Puebla Panama.
More importantly, by promoting greater economic opportunities, trade, investment and market integration, the Opportunity Alliance will be an essential element of our efforts to directly address and counteract the root causes of economic migration, illegal immigration and regional instability.
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Thank you again, Mr. Chairman, for the opportunity to participate in this hearing today. I welcome your questions, as well as those of the other Members of the Committee.
[The prepared statement of Mr. Franco follows:]
PREPARED STATEMENT OF THE HONORABLE ADOLFO FRANCO, ASSISTANT ADMINISTRATOR FOR LATIN AMERICA AND THE CARIBBEAN, U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT
Thank you, Mr. Chairman, for the opportunity to appear before the Subcommittee on the Western Hemisphere today on a vitally important issue that is dramatically and directly affecting the welfare of millions of Latin Americans. The coffee crisis, and its broader context, pose a threat to prospects for prosperity and continued stability in the Western Hemisphere. The crisis is of intense concern to the United States, and it serves as a focal point for current and planned USAID programs in Latin America.
With coffee an important export for over 50 developing countries, the effects of coffee prices dropping to the lowest levels in 30 years have been felt globally. But the coffee crisis has been most severe and felt most acutely by our friends and neighbors in this Hemisphere, where 44 percent of Latin America's permanent cropland is used to grow coffee. In Central America, where economies remain reliant on coffee as a primary export, and where the coffee crisis has converged with drought and other natural disasters, it is not an overstatement to refer to the coffee crisis as the economic equivalent of a hurricane. Consequently, today my testimony focuses primarily on USAID's response to the coffee crisis in Central America, which is a principal element of USAID's Opportunity Alliance for Central America and Mexico, a new initiative designed to focus resources on catalyzing trade-led rural economic growth.
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A worldwide oversupply of coffee is primarily responsible for the steeply depressed prices for farmers, resulting in substantial losses of income for workers in the coffee sector, numbering more than two million in Central America alone. Over the past five years, the world coffee market has undergone significant changes on the supply side, reflecting a steady increase in world production and export levels. This oversupply is due largely to production increases in Vietnam and Brazil, and is compounded by the change in consumer demand away from lower grade commercial coffees.
At the epicenter of the crisis, in Central America, it is estimated that farmers have lost more than $1.5 billion this year alone, and more than 400,000 temporary workers, and 200,000 permanent workers face layoffs by the fall of 2002. Making the situation even worse, many of the region's coffee growers are small farmers living in remote rural areas who are already poor and vulnerable. As a result, in countries like Guatemala, alarmingly high levels of acute child malnutrition are being observed. The lack of other opportunities in the coffee-growing areas means that unemployment and income loss from the coffee crisis has led to flight from the rural areas. Mass migration from countries like Nicaragua to Costa Rica, and increased illegal immigration to the U.S., are exacerbating already high levels of crime and violence in urban centers.
The coffee crisis is reducing revenue available to national governments, weakening financial sectors, and is serving as a primary fuel for overall social and economic instability across the countries of the region. The challenges stemming from the coffee crisis go beyond the coffee sector, and are more than economic. The challenges have the potential to undermine political processes and the effectiveness of newly elected governments in the region, and could ultimately lead to greater regional conflict.
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While we are deeply concerned about the long-term impacts threat to stability, we should also be concerned about the immediate effects that we are seeing now, and over the past two years USAID has taken important steps to alleviate the effects of drought and the coffee crisis. In Nicaragua, USAID worked with the U.S. Department of Agriculture and U.S. Private Voluntary Organizations such as CARE, Save the Children, Catholic Relief Services, and the Adventist Development and Relief Agency to deliver $8.2 million in emergency food, medical, and health assistance in late 2001, and an additional $2.9 million in emergency food and household supplies so far in 2002. In Honduras, nearly $3.0 million in emergency food and other commodities was delivered in 20012002. In Guatemala, USAID's humanitarian response has included over $6.0 million in emergency rations, medical supplies, diarrhea and pneumonia treatments, nutrition education, and child vaccinations.
While these emergency measures are vital, the focus of my testimony today is the broader context for the coffee crisis, and how it has led to the development of USAID's Opportunity Alliance for Central America and Mexico, an initiative that recognizes not only Central America's difficulties associated with the coffee situation, but also the unprecedented and as yet unrealized opportunities for promoting greater prosperity in the region. The agreement of the Trade and Economy Ministers responsible for trade at the last World Trade Organization (WTO) Ministerial at Doha, the commitment of the Hemisphere's leaders to enter into a Free Trade Area of the Americas by 2005, and President Bush's announcement to explore a free trade agreement between the U.S. and Central America are excellent tools we can use in achieving a healthier economic environment.
The path to resolving the coffee crisis, and to fostering greater economic prosperity in Central America, and indeed, throughout the Hemisphere, will be easy or difficult depending on the extent to which these countries can become more competitive in regional and global markets and increase their levels of trade and investment.
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To assist countries on this path, USAID is launching this year a new trade-led rural economic growth initiative for Central America and Mexico called the Opportunity Alliance. To begin the Opportunity Alliance as rapidly as possible, USAID has re-allocated $8.5 million in FY 2002, including $6 million to jump-start a regional quality coffee program. In FY 2003, USAID plans to allocate $30 million for the Opportunity Alliance for Central America and Mexico. Activities will focus on building trade capacity; diversifying the rural economy, and reducing the region's vulnerability to disasters and environmental degradation effecting income.
USAID's Opportunity Alliance is in direct response to the coffee crisis and the economic and social difficulties facing the rural poor. It provides broad-based solutions to those most effectedsmall farmers in rural areas. It builds directly from successful USAID experiences in the field. Trade capacity activities will help prepare Central American countries to participate constructively as members in the World Trade Organization, the Free Trade Area Agreement (FTAA), and U.S.-Central America Free Trade Agreement (CAFTA) should it become a reality, and to make necessary reforms in commercial law, property rights, and contracts enforcement. This trade capacity assistance will expand a successful USAID-funded regional program that has helped Central America drop average tariff rates from 20 to 7 percent between 1990 and 2000, streamline customs procedures, and be in greater compliance with multilateral trade agreements, including key labor and environmental provisions.
USAID's Opportunity Alliance will also help broaden opportunity and foster sustainable improvement in livelihoods (income) of the poor through diversification of agriculture, including quality coffee, and the non-agriculture arena to reduce over-reliance on traditional crops. In this region, rural households strategically pursue diverse sources of income often including migration of family labor to urban jobs. Recognizing this pattern, USAID has developed a concept of diversifying the rural economy by viewing agricultural investments within a broader rural enterprise approach. The approach taps into Central America's potential for ecotourism, aquaculture, certified timber and other forest products, artisan crafts and rural services. USAID's programs will provide demand-driven business development and marketing services to help small- and medium-sized farmers, particularly coffee farmers, improve competitiveness as well as tap new markets. This will expand successful programs such as in Guatemala, where tens of thousands of rural residents were raised above the poverty line with USAID assistance for the Peace Accords, and in Honduras, where our work following Hurricane Mitch with nontraditional agriculture producer associations led to significant increases in export sales and new jobs.
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The Opportunity Alliance also will assist countries in better managing the climatic and environmental risks in the region. Coffee trees, for example, now play a significant role in holding the soil and preserving the watershed in many areas in Central America. Massive shifts out of coffee production, even in nonproductive and noneconomic areas, could have impacts on the environment. Protecting the gains from trade-led growth (e.g., quality coffee) through USAID assistance with disaster preparedness and mitigation, and watershed management is vital to sustainable prosperity in the region. USAID also will work on protecting vulnerable coral reefs and helping Central American countries control and manage forest fires.
Given the magnitude of the economic difficulties, USAID will maximize its engagement and coordination with the U.S. private sector as well as with key international financial institutions. USAID worked closely with the Inter-American Development Bank (IDB) and the World Bank in developing a coordinated framework for responding to Central America's coffee crisis. In April of this year USAID, IDB, and the World Bank co-sponsored a stakeholders meeting in Guatemala with Central American Ministers of Agriculture and about 250 coffee producers, directors of coffee-buying and roasting companies, and consumer and environmental organizations. USAID and the banks presented a joint evaluation and set of potential recommendations. These recommendations underscore the systemic nature of the crisis while offering no ''bail outs'' to farmers unwilling to help themselves. Rather, the recommendations stressed the need for producers to improve competitiveness and to diversify production.
Mr. Chairman, with your permission I would like to enter into the record the USAID/IDB/World Bank discussion document outlining our joint recommendations entitled ''Managing the Competitive Transition of the Coffee Sector in Central America.''
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USAID's new demand-driven regional coffee program is designed to assist Central American coffee producers to enhance the quality of coffee, improve business practices, promote market-based policies, form new market linkages, and secure long-term contacts. Under the regional program, the USAID program and industry alliances will play a catalytic role in helping small- and medium-sized farmer organizations identify and market higher quality and specialty coffee to U.S., European, and Asian coffee markets, as well as assist them to diversify their export base.
This regional coffee program is an initial element of the Opportunity Alliance given Central America's natural geological and climactic advantages which present opportunities for raising the region's competitiveness in producing quality coffee and tapping promising specialty markets around the world. USAID is engaging corporate allies interested in investing jointly in local projects, or signing long-term purchasing contracts with small- and medium-size coffee producers. As just a few examples of this cooperation, USAID has worked in partnership with Conservation International and Starbucks Coffee toward creating new opportunities for small-size farms in southern Mexico via technical assistance, marketing and production assistance. USAID also is supporting efforts by the Specialty Coffee Association of the Americas (SCAA) on international cup-of-excellence programs. These programs are already helping Nicaragua's small-scale producers secure unprecedented prices for coffee through internet auctions. Additionally, USAID, together with Proctor and Gamble, have begun to identify schools in Guatemala for social investment grants in coffee producing regions hit by the crisis. By working closely from the outset with industry, USAID's assistance to producers will be demand-driven and based on market potential and will encourage coffee producers that cannot be competitive to diversify out of coffee to other commodities. Diversification from coffee to other farm and non-farm sources of income will be facilitated similarly by providing business development and market access services in alliance with private industry. The interests of the region, donors, consumers, environmental groups, and industry have never been more intertwined as they are currently. USAID's coffee programs, as well as the other elements of the Opportunity Alliance, will take advantage of this convergence of interests, leverage resources, and maximize the impact of our development activities.
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USAID's coffee response and broader efforts under the Opportunity Alliance are a strong signal of its commitment to our friends and neighbors in Central America and Mexico. These initiatives are highly complementary to U.S. foreign and trade policy objectives in the region, as well as regional initiatives such as Plan Puebla Panama, the joint U.S. accord with Central America (CONCAUSA), and the U.S.-Mexico Partnership for Prosperity. More importantly, by promoting greater economic opportunities, trade, investment, and market integration, USAID's Opportunity Alliance is an essential element of the U.S. Government's effort to directly address and counteract the root causes of economic migration, illegal immigration, and regional instability.
Thank you again, Mr. Chairman, for the opportunity to participate in this hearing today. I welcome questions from you and members of the Subcommittee.
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Mr. BALLENGER. Mr. Lee, we look forward to your testimony. Go right ahead.
If you will pass the microphone to Mr. Lee?
Mr. FRANCO. Oh, yes.
Mr. BALLENGER. This is a cheaper place. We do not have but one microphone.
STATEMENT OF FRANKLIN LEE, DEPUTY ADMINISTRATOR FOR COMMODITY AND MARKETING PROGRAMS, FOREIGN AGRICULTURAL SERVICE, U.S. DEPARTMENT OF AGRICULTURE
Page 38 PREV PAGE TOP OF DOC Mr. LEE. Thank you, Mr. Chairman. I would like to have my full statement entered into the record, but I would like to read just a few remarks and highlights on those remarks.
Mr. BALLENGER. Without objection.
Mr. LEE. Mr. Chairman, Members of the Subcommittee, I am very pleased to be here today to discuss the world coffee situation with the Subcommittee.
The U.S. Department of Agriculture would like to be as helpful as possible to the Subcommittee with regard to information on coffee imported into the United States. The USDA's Foreign Agricultural Service tracks the supply and demand of coffee and forecasts production for the current year. USDA sets quality and grading standards for many food and agricultural products. However, USDA has no such standards for coffee.
Today's world coffee situation is characterized, as you pointed out so eloquently, by record production and low world prices. Producers around the world face a bleak situation. Many are being forced to abandon their coffee trees or lower their production costs in order to survive. Governments also face difficult consequences. Rising unemployment and reduced export earnings are hurting the budgets of many countries.
This year, this crop year, 20022003, world coffee production is forecast to increase at a record 10 percent over last year, fueled mostly by the increases from production in Brazil. The global supply, which includes carry in stocks plus production, are forecast to reach nearly a 6-percent increase over the previous year, again fueled by the increase in production from Brazil. We have not seen supplies at this level since the early 1990s. According to our assessment, this situation is not likely to lessen any time soon.
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Although world coffee exports are forecast up by nearly 4 percent, and again this is fueled by production in Brazil, the bottom line is that export growth is not going to boost prices, given especially that the rise in production, along with record price and static consumption levels, will mitigate that.
World coffee consumption has been stable in both the world and in the United States in recent years. Due to a lower supply situation, coffee prices continue to decline. Brazil's arabicayou pronounced the word correctly, siris down 17 percent from last year and down over 75 percent from 1997.
According to some reports, inflation adjusted prices for coffee beans are now, as one of the Committee Members mentioned earlier, at a 100 year low. That is absolutely correct. These low prices are severely affecting countries that depend heavily on coffee export earnings.
Producers in Central America and Africa have been particularly hard hit as coffee exports are crucial to export earnings. Some countries in Africa reportedly realize 60 to 70 percent of their export earnings from coffee. Some countries have been trying to help farmers by assisting them to diversify into other crops, but farmers are reluctant to give up their coffee trees. It has taken them many years to get their trees into production, and in some countries there are very, very few alternatives, as you pointed out.
I appreciate the opportunity to present this information to the Committee. I will be happy to answer any questions that you may have. Thank you.
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[The prepared statement of Mr. Lee follows:]
PREPARED STATEMENT OF FRANKLIN LEE, DEPUTY ADMINISTRATOR FOR COMMODITY AND MARKETING PROGRAMS, FOREIGN AGRICULTURAL SERVICE, U.S. DEPARTMENT OF AGRICULTURE
Mr. Chairman, members of the Subcommittee, I am pleased to be here today to discuss the world coffee situation.
The U.S. Department of Agriculture would like to be as helpful as possible with regard to information on coffee imported into the United States. The United States is a net importer of coffee, the largest single user in the world. Our private sector imports coffee from all over the world to keep pace with domestic demand.
USDA's Foreign Agricultural Service tracks the supply and demand of coffee and forecasts the production for the current year. USDA sets quality and grading standards for many food and agricultural products. However, USDA has no such standards for coffee.
PRODUCTION AND SUPPLY UPDATE
Today's world coffee situation is characterized by record production and low world prices. Producers around the world face a bleak situation. Many are being forced to abandon their coffee trees, or lower their production costs in order to survive. Governments also face difficult consequences: rising unemployment and reduced export earnings are hurting the budgets of many countries.
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This crop year, 2002/03, world coffee production is forecast at a record 122.1 million bags (1 bag = 60 kilograms or 132.276 pounds), up 10 percent from the previous year's level, fueled largely by record production in Brazil.
In addition to Brazil, major production increases this year compared to last include: Mexico, up 500,000 bags; Nicaragua, up 300,000 bags; Thailand, up 157,000 bags; Kenya, up 130,000 bags; and Madagascar, up 100,000 bags.
Producers being pinched by low prices have reduced tree maintenance, which has led to lower yields. Countries where production is forecast to decline in 2002/03 include: Vietnam, down 1.75 million bags; Dominican Republic, down 200,000 bags; Indonesia, down 200,000 bags; Zaire, down 170,000 bags; Honduras, down 150,000 bags; India, down 150,000 bags; Costa Rica, down 114,000 bags; and Colombia, down 100,000 bags.
Total global supply (carry-in stocks plus current production) in 2002/03 is forecast to reach 143.6 million bags, up nearly 6 percent over the previous year, and again largely as a result of the large Brazil crop. We have not seen coffee supplies reach this level since 1991/92. Brazil is expected to account for about 37 percent of total supplies, with Colombia's and Vietnam's share forecast at 8 percent each. In comparison, during 1991/92, Brazil's share of total supply was 34 percent; Colombia's, 16 percent; and Vietnam's share, only 1.5 percent. This oversupply is not likely to lessen anytime soon.
Although world coffee exports are forecast up nearly 4 percent over last year's, the bottom line is that export growth will not boost prices, given rising production and near-record supply levels. Total coffee exports in 2002/03 are forecast at 92.0 million bags, up nearly 4 percent over 2001/02, with Brazil accounting for most of the increase.
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I would like to take a few moments to highlight the current situation in the two leading Western Hemisphere coffee producing countries.
Brazil's coffee production forecast in 2002/03 (July-June) is a record 46.9 million bags, up 39 percent, or 13.2 million bags from the previous year. The arabica coffee production is forecast at 35.5 million bags, while robusta production is forecast at 11.4 million bags.
Brazil's coffee exports are forecast at 28.6 million bags, a 15-percent increase compared to last year. Brazil's coffee is expected to remain competitive internationally due to the availability of product, low domestic prices, and the steady devaluation of the Brazilian currency compared to the U.S. dollar.
Colombia's coffee production for 2001/02 was estimated to reach 11 million bags, up from 10.5 million in 2000/01. This increase, in the face of low global prices, is because 200,000 hectares of coffee trees renovated during the 19982000 period under a National Coffee Federation incentive program are now entering into full production. However, in 2002/03, production will not benefit as much from this factor and will begin to decline due to reduced use of inputs.
Page 43 PREV PAGE TOP OF DOC Production in 2002/03 is forecast at 10.9 million bags. If low international prices persist, further decreases in production are almost certain. The historically low international coffee prices over the past year and a half, which on average are below the break-even point for growers, have forced farmers to sell off assets to generate working capital. The combination of reduced farmer assets, difficulty in obtaining credit, and lack of resources in the National Coffee Fund make any recovery in Colombia's coffee sector largely dependent upon a recovery in international prices.
In addition, low international prices have eliminated the contributions made by growers and exporters to the National Coffee Federation. As a result, many of the social and production-related programs supported by the Federation have been almost completely eliminated, with the remaining programs dependent upon fund transfers from the government and loans from overseas financial entities.
I would now like to comment briefly on the price situation.
Due to the over supply situation, coffee prices continue to decline. Brazil's arabica coffee price (the type most widely consumed in the United States) in June 2002 was $.43 per pound, down 17 percent from the June 2001 level, and down over 75 percent from the June 1997 level. According to some reports, inflation-adjusted prices for coffee beans are now at a 100-year low. Low coffee prices are severely affecting those countries that heavily depend on coffee export earnings. Unemployment is increasing as some farmers have abandoned their coffee trees. Many growers report that production costs are above the market price. As a result, lower fertilizer and chemical inputs, such as pesticides, are affecting yields. In those countries that produce higher quality arabica coffee beans, this has resulted in a drop in supplies. Producers in Central America and Africa have been particularly hard hit as coffee exports are crucial for export revenue. Some countries in Africa reportedly realize 6070 percent of their export earnings from coffee.
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Some countries have been trying to help farmers by helping them to diversify into other crops, but farmers are reluctant to give up their coffee trees. It has taken them many years to get their trees to produce and in some countries there are few alternatives.
World coffee consumption has been stable in recent years, averaging about 111 million bags per year. U.S. coffee consumption has likewise been stable, averaging about 18 million to 19 million bags per year.
However, due to large carry-in stocks, U.S. coffee imports declined nearly 11 percent during calendar year 2001. The United States continues to buy primarily from Brazil, Colombia, and Vietnam.
I appreciate the opportunity to present this information to the committee. I would be happy to try and answer any questions you might have.
Mr. BALLENGER. Thank you. In the discussion we have had and the statements we have had, the price is going down for everybody.
Mr. LEE. Yes.
Page 45 PREV PAGE TOP OF DOC Mr. BALLENGER. The people cannot make a living off of the coffee that they have in the small countries, and yet in Brazil it appears that the continued increase in production of coffee must be making money for those people. Is it because of the volume, the area that is in growth?
Is there an answer to the question as to why they can produce more and still continue to make money while the rest of them cannot?
Mr. LEE. I am not sure if there is a correct answer to that, Mr. Chairman, but it is not only in coffee that Brazil continues to produce excess quantities and compete in other commodities directly with us. Soybeans, for example.
Mr. BALLENGER. Yes, I know.
Mr. LEE. In the case of coffee, my only assumption or my only assertion here is that perhaps they are trying to expand production in those regions simply to provide work for laborers and provide a way for farmers to make some money.
As we have pointed out here in both statements, world low prices caused them to take a serious look at what is happening there. Their production is increasing again this year, up by I think it is 43 million bags, which is a tremendous amount of coffee that is coming out of Brazil. I am not sure if there is a right answer to that.
Mr. BALLENGER. I drink four or five cups of coffee a day, and I have never seen the price go down. The bottom of the market has collapsed. Maybe I should get off the powdered coffee and start grinding my own or whatever it is you do.
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Mr. LEE. Well, you know, Starbucks is Starbucks.
Mr. BALLENGER. I do not use Starbucks. It is too expensive.
Mr. LEE. They are doing very well, though, sir.
Mr. BALLENGER. Right. Is there a reason why? I mean, it must be highly profitable for somebody. I am a businessman. If my raw material prices go down and I do not cut my price, I make more and more money. Is that likely to be occurring?
Mr. LEE. That is good, pure economics, sir, and that is absolutely correct. We have noticed in many countries that economics do not always enter into the picture.
I have spent a lot of my time in Central America and South America. Many of these governments want the rural population to stay in the rural areas, so they do have some funds, and they do depend on other international donors.
USAID is one of the organizations that supports their efforts to increase the livelihoods of the people of the rural areas. They simply do not want their population to migrate into the cities. This is one way to keep the rural areas occupied. You are right. I have no answer to your question, sir.
Mr. BALLENGER. Yes, sir?
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Mr. FRANCO. If I could comment on this, this is more Mr. Lee's area, but the reason, Mr. Chairman, you do not see a lower price for coffee, although the prices are very low, is that the actual commodity is a very small portion of the actual cost of the product that we purchase here, the coffee that is either purchased by the cup or by the can or coffee beans here. That is one of the issues that we are trying to tackle at USAID.
I was at a coffee producers and growers conference in California a couple of months ago, and in Latin America the number of middle men and the procedures for export were just staggering. In Ecuador, Colombia and so forth, the number of processes, the taxes, the requirements to export the product were very, very high. That is where most of the costs were being incurred.
Part of our competitiveness initiative and our efforts to streamline economic policies in Latin America in preparation for the Free Trade Agreement for the Americas is to address those concerns. That would hopefully lower the price for the consumer in the United States, but that is not our ultimate goal. It is to leave more in the pockets of the people who produce the coffee.
Mr. BALLENGER. A penny more on a cup of coffee is not going to hurt anybody in this country.
Mr. FRANCO. Correct. That is right.
Mr. BALLENGER. Let me ask one more question. Since the Agriculture Department does grade just about everything else we eat, how difficult would it be? My understanding is that especially the Vietnamese coffee comes almost completely ungraded with all kinds of strange and wonderful things mixed in with the coffee.
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If grading were used, possibly the price of really well produced coffee might go up. What difficulty is there in grading coffee, and would that solve the problem in your opinion?
Mr. LEE. At the Department of Agriculture, we have an agency called the Agricultural Marketing Service that is responsible for setting grades and standards for the products that are produced in this country.
I will not pretend to speak for them here, but I think that it would be a very good question to ask them to take a look at that because that is probably a possibility. I cannot commit their resources, but certainly that is something they can look into and review. I am not sure that it is going to reduce cost in this country or perhaps
Mr. BALLENGER. I do not think we are really worried about cost in this country.
Mr. LEE. Not cost. I mean prices in this country or raise prices in the exporting countries because for this country we are, as you pointed out in your opening remarks, sir, the world's single largest importer of coffee. The duty on coffee coming into this country is very low.
The way coffee is purchased in the private sector, we have you might say a de facto set of standards because coffee produced or arabica produced, for example, in Brazil may garner a premium price versus that produced in another region of the world.
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A.M.S. is the organization that would have to be asked to look into that situation.
Mr. BALLENGER. Mr. Delahunt?
Mr. DELAHUNT. Thank you, Mr. Chairman.
Reflect on the price to the consumer staying the same and the price paid to the producer, to the grower, is going down. Somebody is making money somewhere.
I have before me a Wall Street Journal article. Let me just quote one paragraph.
''In the U.S. and the rest of the developed world, the price of coffee on supermarket shelves has fallen, but considerably less than the price paid to growers. That translates into record sales and profits for some of the corporations that process and market coffee.''
It goes on to say that there are four giants, Proctor & Gamble, Philip Morris, Kraft, Sara Lee and Nestle, and they control about 40 percent of the world's coffee. Do you think it might be a problem of concentration?
Mr. FRANCO. I will just take a stab at part of the question.
Mr. DELAHUNT. I mean, there is a big chunk of money there.
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Mr. FRANCO. Yes. I understand. Yes.
Mr. DELAHUNT. Profits are going up. We all believe in free enterprises and free trade, but it does not sound to melet me make a supposition.
Is it possible that there is over concentration by these giants in terms of the marketplace itself, thereby resulting in substantial corporate profits while the producers and the growers and the campesinos in these various countries are really having a problem?
Mr. FRANCO. Mr. Delahunt, I will try to answer that question within the purview of my agency's mandate and work and expertise. Some of this has to do with things outside what we do, but it is a good question.
A couple things. I am reminded of the same questions that were asked in our own country with respect to products such as cereal that people purchase while commodity prices for wheat and corn decline precipitously. Consumers in this country continued to pay $3 and $4 and $5 for a box of cereal. I know your colleague, Mr. Schumer, held some hearings on this some time ago and was very concerned. How could this be happening?
From the standpoint of USAID and what we do, which is development work in Latin America, and I tried to respond previously to another question that the Chairman had, we see rising costs in terms of the transportation and the number of regulations.
Mr. DELAHUNT. I understand that, Mr. Franco, but what the Wall Street Journal is saying is thatand I will grant you that maybe there are rising coststhe profits are increasing even more significantly.
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Mr. FRANCO. Right. I really
Mr. DELAHUNT. I can appreciate that maybe the costs are a component, but
Mr. FRANCO. Right.
Mr. DELAHUNT [continuing]. This is the Wall Street Journal, you know, the paper of record of capitalism. We know we can trust it.
Mr. FRANCO. I know.
Mr. DELAHUNT. Everything in here has to be the truth.
Mr. BALLENGER. Let me just preface this. I own stock in several companies he has mentioned. I do not want the market to collapse.
Mr. FRANCO. Let me just say I do not know the answer to that. I really do not know what the profits have been for the companies, but I will say this. I have spoken to producers in not only Latin America, but producers here. Many of them, by the way, are Americans that own stock. They are losing money, a lot of money.
What they have told me repeatedly is that the biggest impediment has been the middle men. That is what I have been told, and I have been told that in Ecuador, in Central America, in Colombia. You do not know how many people are taking a piece of this pie.
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I asked the same question. Why is it still $3 or $4 for the cheap coffee? The answer to that is there are too many people taking
Mr. DELAHUNT. If that is part of the solution, I will accept it. I am unaware. What I am saying is our purpose here in terms of trying to address this problem is not to increase the profits of, you know, Nestle and Sara Lee, but to insure that those who produce, those who grow in Central America and South America are surviving because it is our national interest that there be stability.
Mr. FRANCO. Sure.
Mr. DELAHUNT. What we see happening in South America today, and we can start with Argentina and go all the way up to Central America. You know, let us be really honest. We are on the verge of seeing an implosion in terms of that economy. We are really in trouble big time.
Mr. FRANCO. I cannot agree enough. I will turn to Mr. Lee in just a moment, but I will say this. Based on our discussions with the coffee buyers in this country, and they are the large ones as well as the specialty coffee, and I know you have other witnesses today that will testify on this. I can tell you that industry is concerned about what the profits are.
I think the industry is very, very concerned with what has happened to coffee prices. They are very concerned about it. They have a vested interest in the long term to make sure that there is stability in the market and there are reliable and good producers.
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Mr. DELAHUNT. Let me just finish up with a comment because I do not want to take any more time. I think it is really incumbent on the Administration, if you will, to call for a coffee summit to bring all of the stakeholders to the table to sit around whether it takes 2 or 3 days and really take a hard look at this problem.
Maybe we even have to go beyond that because simply to extract coffee from these economies is a false road to go. We ought to be looking overall in terms of, as you suggest, diversification, et cetera.
Thank you, Mr. Chairman.
Mr. BALLENGER. Thank you, sir.
Mr. GILMAN. Thank you, Mr. Chairman.
Mr. Franco, a constituent of mine sent a report that people in the Guatemala Highlands are in dire need of food because of the coffee crisis. Have you explored that? What is the incidence of hunger in Central America as a result of all of this?
Mr. FRANCO. Yes, Mr. Chairman, we have explored that, and we have responded to it. I can tell you that the food storage situation in Guatemala and Honduras is quite serious. We have provided approximately $20 million of emergency assistance to the region. Guatemala is, you are correct, sir, the most acutely hit. We have a coffee crisis compounded, as I said in my testimony, with a very serious drought, so we have the worst possible situation.
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Our response has been working with Central American governments, particularly in Guatemala and Honduras, to provide a significant amount of emergency food and medical supplies and other relief.
Mr. GILMAN. Have those supplies been distributed already?
Mr. FRANCO. Yes, they have. We have provided $20 million in emergency supply. I will add that this is the right thing to do, but I know Members of the Committee are right. This is a band-aid. We are not viewing this as the long-term solution.
Mr. GILMAN. Mr. Franco, how is USAID addressing the situation by which the farmers are abandoning coffee production and shifting over to illicit crops and narcotics?
Mr. FRANCO. I know this is a very keen concern of yours, sir, and you have asserted a lot of leadership particularly in Colombia and elsewhere.
I can report to you that we have not yet seen that as a problem in Central America. However, it looms as a very serious concern. We continue to monitor it. That is why we want to make the investments we can right now to address the coffee crisis there.
Unfortunately, in Colombia this is a very serious problem. We are trying to address this principally through some diversification. The downside about Colombia is it is a current problem and is a concern. I have to report that to you. The positive side of Colombia is unlike Central America, the Colombian economy is larger, more sophisticated. There are other opportunities for diversification in the rural sector.
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Indeed, my visits to Colombia as well are even to set up small production activities that are not agriculturally related in the rural areas of the country, so we will try to do this. We are very concerned about it particularly in Colombia.
Mr. GILMAN. Is there any alternative crop program for these countries?
Mr. FRANCO. When we refer to alternative development, we have learned a lesson at USAID, and that is not to simply identify alternative crops that might have short-term economic benefit, but are unsustainable over the long-term.
We look at that in consultation very closely with our partners, our non-governmental organization partners in Colombia, as well as with their PNDA.
Mr. GILMAN. Thank you, Mr. Chairman.
Mr. BALLENGER. Congressman Farr? I know we have cut your time short, but fire away.
Mr. FARR. Thank you very much.
Mr. Lee, let me ask Mr. Franco first. In USAID, how many people work in USAID?
Page 56 PREV PAGE TOP OF DOC Mr. FRANCO. In the entire agency?
Mr. FARR. Yes.
Mr. FRANCO. We have approximately 1,200 direct hires, and then in addition to that we have Foreign Service nationals and contractors.
Mr. FARR. In your facility here in Washington, do you serve fair trade coffee?
Mr. FRANCO. Do we serve fair trade coffee? We do not serve coffee.
Mr. FARR. Where do the 1,000 people drink coffee?
Mr. FRANCO. I believe theywhat is that called? County Buck or Buck County is downstairs in a food court. We do not have coffee. We do not purchase coffee at USAID for employee or visitor consumption.
Mr. FARR. Well, you lead by example. If you are going to do a stakeholders meeting, maybe you ought to get the 1,000 stakeholders to drink coffee to use their market leverage and insist that the vendor sell that coffee that you want the rest of the world to buy.
Mr. FRANCO. I will look into that, sir. I do not know what they are serving downstairs, but I will look into that.
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Mr. FARR. Congress is serving it just for that same purpose.
Mr. FRANCO. Okay.
Mr. FARR. I mean, I think you do have to lead by example.
Mr. FRANCO. It is a private vendor downstairs, but I will do that.
Mr. FARR. So is the one here.
Mr. FRANCO. Okay.
Mr. FARR. They do not get to do business here if they do not do it by our rules.
Mr. FRANCO. Okay.
Mr. FARR. Mr. Lee, first of all, how many ag products do we import that have purity standards?
Mr. LEE. Purity standards?
Mr. FARR. Grade standards.
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Mr. LEE. The products that we call purity standards are under the purview of the Food and Drug Administration, so the food and cosmetics.
Mr. FARR. But we have grades, though.
Mr. LEE. We have grade incentives for products that are produced in this country and if there are products that are imported, sir, into this country that compete or complement what we produce here in this country.
Mr. FARR. But we could adopt the International Coffee Organization in the European countries where they have 95 percent of coffee imports have to be coffee beans? We could just do the same thing here?
Mr. LEE. That I would have to defer to our investigators over at the Agricultural Marketing Service.
Mr. FARR. Would you check with them?
Mr. LEE. Yes. Absolutely, sir.
Mr. FARR. Also, would you check for me to see whether Sara Lee, Kraft, Proctor & Gamble or Nestle USA get any benefits from the Department of Agriculture in market promotion or loan programs or inspection or certification or anything like that?
Page 59 PREV PAGE TOP OF DOC Is there anything that the USDA does to assist these companies to do their job well in the United States? To me, that sounds like fun.
Mr. LEE. It sounds like fun. Sir, within the Foreign Agricultural Service I oversee most of the market promotion budgets.
Mr. FARR. As a Member of the Appropriations Agricultural Subcommittee, I oversee your budget.
Mr. LEE. Yes, sir. I appreciate what you have done this year in increasing our budget.
Mr. DELAHUNT. That is so far, though. There is another round to go.
Mr. LEE. Another round to go.
Mr. FARR. If you could find that out, I would appreciate it, too.
Mr. LEE. Okay. We can do that.
Mr. FARR. Thank you very much. Thank you, Mr. Chairman.
Mr. BALLENGER. Let me just tell everybody that we have three votes that will probably take a half an hour. This panel, we greatly appreciate your being here with us. If the second panel would bear with us, we will be back in roughly a half an hour.
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Mr. BALLENGER. Mr. Silva, we will let you go first knowing that you have time limits. Let me introduce you, if I may.
Mr. Silva, a native of Colombia, is the general manager of the National Federation of Colombian Coffee Growers. The Federation invests in the research and development of coffee plants, provides technical and other assistance to help foster the production of high quality coffee by the Federation's 500,000 coffee farmers.
Mr. Silva earned a degree in Political Science from the University of the Andes in Bogota, Colombia, and holds a doctorate degree from Johns Hopkins University of Advanced International Studies.
Knowing that you have a time schedule that you have to meet, Mr. Silva, we will go ahead and start with you and follow with the others after you finish.
STATEMENT OF GABRIEL SILVA, GENERAL MANAGER, NATIONAL FEDERATION OF COFFEE GROWERS OF COLOMBIA
Mr. SILVA. Thank you very much, Mr. Chairman. I am very pleased to be here, and I would like to submit my written statement for the record if I may.
I want to thank you for this hearing. It has been decades since this Congress took up the issue of coffee and discussed the issue of coffee. I think that in itself is a very strong signal that we are experiencing very difficult times, and we in Colombia thank you for that effort.
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I must say that this is not the first time that I have appeared before this Committee. In my previous incarnation as National Security Advisor of Colombia and Ambassador to the White House, I came here several times to request your support, to request your help and to request your participation in a fight that was also very difficult when we confronted terrorism from the cartels.
We were able jointly to devise a way to confront the threat and be successful. Now the cartel leaders are either dead or in jail, and most of it was achieved through the joint cooperation, the joint understanding of a common threat.
Now, I am coming back to ask you to also understand this problem, and I have seen in your statement, and Congressman Delahunt, Congressman Farr and Congressman Gilman's statements, a clear message that encourages us in believing that you are aware of the issue and that you are aware of the very difficult circumstances that we are currently experiencing in the coffee growing countries.
The crisis is characterized by low prices, as you have all said, but these low prices do not impact all the coffee growers in the same manner. The segment of the coffee industry that is hardest hit is the coffee growing countries that offer and provide the best quality coffees.
Why is that? Because those coffees require a lot of investments, a lot of effort, a lot of labor to make sure that it is picked right, it is dried right, it is processed right and make sure that it protects and keeps its quality. Those countries are in general higher cost producing countries, and they are certainly affected by these low prices. They cannot survive at the current prices.
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We have been in this situation for the last 5 years. I personally have witnessed the impact on the social and political situation in Central America and, of course, in my own country of Colombia. We just this week had a meeting of the countries of Mexico, Central America and Colombia, and all my colleagues from those countries were desperate to send you also a message and to ask me to bring you their voices and to join their voices to seek understanding and cooperation between the U.S. and our countries.
The income derived from coffee has fallen more than 50 percent in these countries, as you have said. I want to highlight the fact that 10 years ago the global coffee industry was worth around $35 billion, and the coffee growers received $11 billion, almost a third of it.
Nowadays, the global coffee industry is worth approximately $55 billion, and the coffee producing countries get around $7 billion. You can see that the share
Mr. BALLENGER. Seven?
Mr. SILVA. Seven. Yes, sir. The share of the income generated by the coffee business is going down significantly and is really much less both in percentage and absolute terms than in the past.
I want to highlight that this issue goes beyond just economics, particularly for my country. As was mentioned here, there is a serious threat that with the reduction in income from coffee that coffee growers who actually live in areas that are growing illicit crops, turning to those crops, and I have to report that unfortunately that is happening. I brought with me some pictures that I want to show you that a technician that we sent to certain areas took to illustrate what is going on.
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These are seedlings. Half of what you see there are coca trees. Half of them are coffee trees. These are coca trees surrounded by coffee trees, and they basically protect the coca trees with these crops. You see here a row of coffee trees followed by a row of coca trees.
This is just an example of some of the many areas in which we are perceiving that. Thank God it is still located in a marginal area, but we see the pressure from drug traffickers and paramilitary groups and guerilla groups to force the peasants out of their tradition of growing coffee into illegal crops. That is a reality. That is something we have to confront. The best way that we know to do that, to support coffee growers, is basically trying to improve their income and their revenue.
We think that the problem has many origins. One origin in fact was mentioned here, an excessive production from certain sources that are not the best quality sources. Also, there is an increasing concentration that was mentioned here on the side of the consuming side of the industry, and that has reduced the options with some of the producers.
Also the presence of bad quality coffees in the market that are not really coffee. They are really a mixture of byproducts and other materials that I think are not appropriate to be consumed by anyone and certainly not by the U.S. consumer. I do not want to extend myself too much, and I prefer to address your questions, Mr. Chairman.
We believe that we need to find solutions that are a positive sum, not zero sum. Many people see the prices of coffee as a zero sum problem. Whatever the producer wins, the industry loses.
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We are seeing that there are ways to build solutions in which we all can win and we can support and defend an industry that is critical for all of us. That is why we should talk more about a coffee community more than coffee industry because everyone who is involved in the coffee industry has a stake in making this viable and long-term.
We believe we can find solutions that are the result of dialogue, but at this point we also are convinced that we need very strong and quick action on very particular items. One of them is the establishment of quality standards. If we are able to establish minimum standards such as the ones adopted by the ICO for export coffee, certainly you it will serve two purposes. One, you will help the peasants who produce the best coffees to protect their participation, their share of the market.
Second, you will do something very important, too. You will allow the American consumer to know what is in their cup. When they serve a cup in the U.S., it is very difficult to know what you are getting. I think the American consumer has the right to know what he is drinking.
That is what we want. We do not want quotas. We do not want subsidies. We just want the ability to tell the coffee consumer that we are offering a quality coffee and that he knows what he is drinking. That simple measure will be in itself a tremendous boost for the industry and will support the coffee growers not only in Colombia, but in many other countries.
Mr. Chairman, I will stop here. I want to just say that a very, very deep and serious political and social crisis is brewing under the coffee trees.
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Thank you very much.
[The prepared statement of Mr. Silva follows:]
PREPARED STATEMENT OF GABRIEL SILVA, GENERAL MANAGER, NATIONAL FEDERATION OF COFFEE GROWERS OF COLOMBIA
Mr. Chairman, Members of the sub-committee.
Good Afternoon. My name is Gabriel Silva. On July 15th I became the General Manager of the Colombian Coffee Federation. I am very pleased that one of my first official acts as General Manager is to appear before this subcommittee to discuss the crisis in the coffee industry. I have to admit, agreeing to take the helm of this venerable federation of coffee growers in the midst of the worst crisis ever to hit the coffee industry was a decision that gave me some sleepless nights. However, the concern that members of this subcommittee have shown for the crisis, particularly Chairman Ballenger and Congressman Farr, is very gratifying and provides me with optimism that together we can turn this crisis around.
I want to focus on a few key points about the coffee crisis that has brought us all here today. First, this crisis is devastating rural areas in Colombia, Central America and Mexico. Second, the crisis will have serious economic and foreign policy repercussions for the United States. Third, down the road, the crisis will injure the U.S. coffee industry and U.S. consumers. Fourth, the crisis cannot be resolved solely by market forces because, to a great extent, the crisis is the result of market distortions and market interventions. Fifth, this Congress's can and should act to help resolve the crisis.
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EFFECTS OF THE COFFEE CRISIS ON COUNTRIES IN THE WESTERN HEMISPHERE
First let me speak briefly about what I know best, the impact of this crisis on coffee growers and others who depend for their livelihoods on coffee production. Coffee growers around the world are suffering through the worst crisis ever experienced by the coffee industry. Prices received for green coffee are at historical lows. Farmers in Latin America are now receiving less than 50 cents a pound, an amount far below their 80-cent a pound production and export costs and the average of 96 cents received in the past. That translates to a devastating loss of income for countries like Colombia. To put it in perspectivein the 1980's when consumers spent about $30 billion a year on coffee, coffee producers share was one-third or $11 billion. Today consumers spend about $56 billion on coffee annually but growers receive less than one-sixth of thatabout $7 billion a year. Colombia lost close to half of its coffee revenue in the last decade. Unfortunately, these lower prices have not been passed on to consumers, who are being forced to drink lower quality coffees at significantly higher prices.
Coffee is very important to the economies of Latin America. In Nicaragua, coffee accounts for 7 percent of GDP. In Colombia it accounts for 2 percent of total GDP and 22 percent of agricultural GDP and 35 percent of rural employment. For comparison purposes, consider that all of U.S. agriculture accounts for less than 2 percent of GDP and steel, an industry with economic woes that has recently captured much attention, accounts for less than 1 percent of U.S. GDP. But these are only numbers; there also a dreadful human toll.
The tales of the crisis from coffee growing regions around the world are alarming. Mexico has tens of thousands of small coffee farmers. This year a significant portion of the crop in Mexico may not be harvested because the farmers would lose money on the harvest. Chiapas, the southern state where the notorious sub-commandante Marcos and his Zapatista Rebels operate, is the hardest hit. Farms lay untended and many unemployed former coffee farm workers inevitably attempt the dangerous migration to the United States. In Nicaragua, thousands of small growers face losing their land and have had to lay off thousands of pickers and other workers. There is no safety net for these workers. In Nicaragua's coffee regions, coffee workers are struggling to survive by panhandling along the Panamerican Highway. In El Salvador and Honduras, the misery is similar. If something is not done, malnutrition and homelessness are sure to create long-term problems in Central America.
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These problems are not limited to Latin America. Some countries in Africa are even more dependent on coffee. Uganda and Burundi, for example, rely on coffee for more than two-thirds of their export earnings. Throughout Africa coffee farmers cannot afford medical care, are taking their children out of school and are unable to maintain their coffee trees. Loss of coffee earning is undermining the benefits of debt relief given to African countries.
In my country, the toll in human misery has not been as severe because the Colombian Coffee Federation provides a safety net for farmers by supporting the price of coffee with profits earned in better times. However, the Federation cannot fully compensate for today's low prices nor can it continue to provide price supports forever. In fact, our recent efforts have exhausted decades of savings. In coffee regions of Colombia, the unemployment rate is growing and incomes are falling. The Federation, which has traditionally supplied funding for health, education and infrastructure projects in coffee regions, is no longer able to provide such funding. Similarly, the funding for technical assistance and agricultural extension services to coffee farmers has also dried up. What may be the most immediate and serious impact of the crisis, however, is the political and social instability that is beginning to infiltrate the coffee regions of Colombia.
I don't need to tell this Sub-Committee that Colombia is a country affected by terrorist violence arising from drug trafficking activities and the related guerrilla and paramilitary groups, such as the FARC. What may be news to you, however, is that the coffee crisis is aggravating the problems in Colombia and contributing to destabilization of rural areas. Despite the violence and instability in other regions of the country, Colombia's coffee regions have traditionally been havens from the violence that plagues other rural areas. We know the drug traffickers are actively recruiting coffee farmers to grow opium poppies and coca trees. Kidnappings in the regions have increased. There are more than 500,000 coffee farmers in Colombia and more than 3 million people whose livelihoods are dependent on coffee. If coffee prices are not turned around, the coffee regions are at risk of becoming mired in narcotic cultivation and violence.
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EFFECTS OF THE CRISIS ON THE UNITED STATES
The crisis has serious domestic and foreign policy implications for the United States. From an economic standpoint, the traditional producing countries in Latin America represent an important export market for U.S. goods. From a foreign policy perspective, the United States depends on political stability in coffee producing regionsrural poverty drives not only guerillas and narco-terrorism but migrationboth to the United States and urban areas in Colombia and Latin America.
Although they may be unaware of the lower prices paid to coffee growers, U.S. consumers are already experiencing the effects of the declining producer prices and a deterioration in the quality of coffee. A smaller and smaller percentage of the coffee imported into the United States is flavorful washed arabicas from Colombia and Central America, resulting in a less appealing and flavorful coffee cup for the average consumer. If the crisis continues it will be the Colombian and Central American producers of washed arabicas who are forced from the market. The labor intensive, careful process of preparing the highest quality beans is costly and cannot be maintained indefinitely at current prices. It is a vicious cycle. If washed Arabicas, which are widely recognized as the highest quality and best tasting of coffees, are forced from the market it will be impossible to increase coffee consumption. Washed arabicas give coffee the flavor consumers desire and expect. The current market conditions conspire to expropriate the right of the consumer to enjoy a full flavored, rich cup of coffee.
CAUSES OF THE PROBLEM
Page 69 PREV PAGE TOP OF DOC The problem has been created by explosive growth of coffee production, in robusta and unwashed arabica producing countries. Speculative and government-driven expansion of areas dedicated to coffee-growing is harming all of us.
At the same time, we are seeing ever growing amounts of low quality coffee (that is coffee filled with defective, moldy, unripe beans and foreign matter). The oversupply, low price, poor quality combination has set off what you might call a ''perfect storm'' in the coffee industrythe three factors are working together and complementing each other to drive prices ever lower and at the same time pushing consumers away from the beverage. Lower prices mean less of the labor-intensive quality control required to remove defects. And paradoxically, less quality control means MORE coffee on the market. If defective beans and foreign matter are not removed from coffee the defects and foreign matter are sold as coffee. More coffee means lower prices. In this market, lower prices do not raise consumption because eventually, as quality declines the coffee industry loses consumers, plus, the lower prices paid to farmer are not being passed on to consumers but retained as large margins for the middlemen and retailers.
Some producing countries have tried to take action. They have retained part of their crops and agreed to a plan to destroy the lowest quality coffee produced in their countries. Last week I attended a ceremony of voluntary destruction of low-quality coffees in Costa Rica where the washed arabica producing countries of the Americas issued a strong joint statement asking the United States not to abandon them. I have attached a copy of the resolution to my prepared statement. I have also brought a sample of the destroyed coffee with me to illustrate the kind of coffees we want out of the market. But past experience has taught that unilateral action by coffee producing countries will not address the problem. Producers cannot beat this problem with out action by the consuming nations, particularly the United States.
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Furthermore, we recognize and appreciate the efforts made by some U.S. roaster/retailers like Starbucks and Procter & Gamble who have instituted targeted aid programs for some coffee growers. However, small, targeted programs are not going to resolve this crisis. The crisis is world wide and systemic and requires steps to create a level playing field for washed arabica producers. Social and political unrest is rapidly brewing under the coffee trees around the world. We need decisive action.
I am here today to request the commitment of the United States in adopting and implementing concrete and far reaching solutions. For there to be free and fair trade in coffee (fair to producers and consumers) coffee quality cannot be allowed to decline. Producers cannot be allowed to sell defective beans and foreign matter at fire sale prices while calling it coffee. Importers cannot be allowed to fill cans with defective beans and call it coffee. At present, U.S. standards are all but non-existent. Any mixture of moldy, black, under-ripe, broken and insect damaged beans can be marketed as coffee. A standard in the U.S. that prevented sale of defective beans and foreign matter would level the playing field for traditional coffee producers who have long worked to ensure that end consumers in the United States are receiving high quality and pure product. We believe that such measures will benefit the entire industry. The outcome will be social justice on the coffee farm and a happier and healthier consumer.
Thank you again Mr. Chairman.
Mr. BALLENGER. I do not know what your time schedule is, sir. They told me that you are short of time, and you might have to leave.
Page 71 PREV PAGE TOP OF DOC Mr. SILVA. No, Mr. Chairman. This is my priority. I will stay here until whenever you decide.
Mr. BALLENGER. I am just wondering. Maybe we ought to just go ahead and have the rest of the panel if you have time.
Mr. SILVA. Yes, sir.
Mr. BALLENGER. Ladies being first, let me introduce you. I have a written introduction here for you.
Colleen Crosby is co-founder and partner of the family owned Santa Cruz Coffee Roasting Company, a wholesale roasting and retail company. Ms. Crosby has traveled extensively throughout the coffee producing regions of Latin America, giving her a unique understanding of the coffee industry.
She has written a number of articles on the coffee industry and has produced a documentary on challenges facing coffee growers. Ms. Crosby received a Bachelor of Arts degree in Economics from the University of California-Santa Cruz.
Ms. Crosby, go ahead.
STATEMENT OF COLLEEN CROSBY, PARTNER, SANTA CRUZ COFFEE ROASTING COMPANY
Page 72 PREV PAGE TOP OF DOC Ms. CROSBY. Thank you, Mr. Chairman, and thank you, congressmen, for hearing this issue. From my travels, I really appreciate that I can feel honored as an American that this issue is being brought forward before our Congress.
I want to especially thank Sam Farr, who has been so encouraging and so supportive of these issues that are facing coffee growers.
Last Friday, in a congressional hearing here in the offices I heard a statement that I would like to quote again. Through the conduct of business, human happiness or misery is inextricably woven.
I am going to read some excerpts, and I would like to submit my total statement. During my first visit in January of last year to Nicaragua, I witnessed the hardships that the farmers suffered from the low prices; not enough food or clothing for their family, malnourished children whose smiles had missing teeth and were frequently sick because they lived in shacks with dirt floors that did not protect them from rain or cold.
During this tour of the coffee countries, I met Jaime Azcarate, a member of the Colombian Coffee Federation. As we traveled through Nicaragua I asked him. Are other coffee farmers suffering the same way in other countries? Are coffee farmers this poor everywhere? Can they not feed their families? Can they not clothe them? Are the schools closed in the coffee farmlands? What do the children do?
Jaime told me that the coffee crisis has affected all the countries in Central and South America he has visited. He said farmers are being abandoned, and farming families are fleeing to the cities. He also said that being poor in the city was even more difficult than being poor on a farm. In the cities, disease spreads rapidly, and gangs dominate the streets.
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In Managua, we saw children living in playhouse-sized cardboard huts in parks and sniffing glue to diminish hunger pains. I could then understand why families clung to the farm to avoid the living hell of these horrific slums and replaced coffee with cocaine in order to keep their farm.
For the next 6 months, Jaime and I e-mailed each other almost daily. I received an e-mail from Jaime on the first round of layoffs in the Colombia Coffee Federation. He wrote that the women and men in the offices were crying as they were given their termination notices, that unemployment was around 20 percent in Colombia at the time, that these layoffs would increase the unemployment rate and that with armed conflict increasing there was no future.
Soon another layoff happened at the Federation and then another, and as the coffee prices continued to fall, still another. In another e-mail he wrote that the Federation had begun terminating critical social programs provided to the farmers. He was worried about the impact this would have on the farmers' communities and their future.
Shortly after the SCAA 2001 convention, the Colombian Coffee Federation invited me to Colombia. I visited mills, schools and farming communities. I met with the COSURCA farmers from Popayan in Southern Colombia whose families had been growing coffee longer than our family has been roasting it.
They remembered how decades ago their entire family sat at dinner together. They remembered their sons leading the family prayers. They remembered the pride of their fathers watching them learn the family trade and eventually taking charge of the family farm.
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When coffee prices continued to crumble, farming coffee no longer provided food for their families. They were forced to continue with the only crop they knew could generate good cash income, one of the few crops that grows at these high altitudes and is also a cash crop, heroin poppies.
Their eyes conveyed the tragedy that soon followed. They told me that as the drug lords came into their community to buy this new crop, heroin, that the lords would force their sons to join the drug lord's army. As the farmers spoke to me, they expressed much sadness and anger as they recalled the loss of their sons to the lords. Soon the farmers had no choice but to grow heroin, and if they stopped the drug lords would kill them. The farmers lost their sons, their culture and their community.
Then the farmers told me that they took a stand against the lords, which meant that some farmers sacrificed their lives. They organized a Fair Trade Coffee Cooperative. They began to replace the heroin poppies with coffee trees, more than 1,047 acres. Europe had been purchasing their fair trade coffee for a few years, and by receiving that price the farmers continued to take back their community. Because of fair trade prices, they have now been able to prevent the planting of close to 4,500 acres of coca and poppy plants.
We visited another group of young farmers who recently formed a cooperative. We drove in jeeps to their farms in the mountains of Valle del Cauca, where in spite of the armed conflicts these young farmers proudly focused on producing a premium quality coffee. They once lived in Cali and other major cities without the possibility of ever providing a real home for a family. The ASOJAV Cooperative is devoted to training young people from these cities in order to provide them with a future.
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These future farmers are necessary for the continuing supply of coffee to our world. Living in a bamboo house he had built by his hand with newborn twins to feed, we visited one of these farmers, Jose Angel Garzon, who grew coffee on the slopes of Seville. He is a proud, strong and determined farmer, but in the last e-mail I received from Francisco, an agronomist in Colombia, he stated that Jose was struggling to feed his family and that his twins were sick. Francisco also wrote that a month ago during the armed conflict in the hills bombs destroyed the water lines to the coop's farms.
Jose Angel Garzon asked me in front of 65 young farmers at the ASOJAV Coop meeting in the Federation offices why do Americans not care? I faced the farmers and answered his question. Americans care. Americans have a big heart. They just do not know. The news is not informing them. When they are informed, they do care. When they know how to make a difference, they act. In Santa Cruz, where I am from, they know about fair trade, and they buy it. They value the quality of life and the quality of coffee derived from fair trade.
Jose is still determined. He is preparing to harvest the crop next month in September and plans to ship it to America in October. With all his hard efforts to farm during the armed conflict, he hopes he will get a fair price that covers his costs to produce coffee and provides him with some extra to feed and clothe his twins.
Two months later, my family and I went to Nicaragua to film the documentary In Our Hands: Sustainable Relationships in Specialty Coffee. Coffee prices had continued to fall, and conditions had worsened. Miles of coffee farmlands were abandoned and overgrown with weeds. In southern Nicaragua, we visited Jinotepe. The mayor told us that unemployment had escalated to 80 percent in his city. He said farmers who do not sell coffee do not buy bread from the bakery or meat from the butcher.
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In northern Nicaragua, we saw thousands of families who were living under plastic sheets on the streets of Matagalpa and San Ramon. We purchased a truckload of food and drove it to the mayor of San Ramon. He thanked us and said the truckload of food would feed the families for 1 day. A few days later in Matagalpa, the Nicaraguan newspaper reported that three children died of the coffee families from starvation that week and that 12,000 coffee refugees were fleeing the farmlands to set up camps in the city.
Peter Fritsch has written in the Wall Street Journal,
''The collapse of world coffee prices is affecting an estimated 125 million people, resulting in a combustible brew of unemployment, hunger and migration.''
I want to close with my opening statement that through the conduct of business, human happiness or misery is inextricably woven. I urge the U.S. Government and all consumers to purchase certified fair trade coffee and to support the H. Resolution 491 and also to work hard on this quality control issue.
[The prepared statement of Ms. Crosby follows:]
PREPARED STATEMENT OF COLLEEN CROSBY, PARTNER, SANTA CRUZ COFFEE ROASTING COMPANY
As a roaster who has conducted a family business in the US for twenty-four years, I am embarrassed to report that until the SCAA Convention of 2000, I was unaware of how low prices had destabilized whole communities in Central and South America. At that same convention, I learned about the powerful alternative of Fair Trade.
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During my first visit in January of last year to Nicaragua I witnessed the hardships that farmers suffered from the low coffee prices: not enough food or clothing for their family, mal-nourished children whose smiles had missing teeth and were frequently sick because they lived in shacks with dirt floors and slat walls that didn't protect from rain or cold.
During this tour of the coffee countries, I met Jaime Azcárate, a member of the Colombian Coffee Federation. As we traveled through Nicaragua, I asked him: ''Are other coffee farmers suffering the same way in the other countries? Are coffee farmers this poor everywhere, can they not feed their families, can they not cloth them? Are the schools closed in the coffee farmlands? What do the children do?'' Jaime told me that the Coffee Crisis has affected all the countries in Central and South America he has visited. He said farms are being abandoned and farming families are fleeing to the cities. He also said that being poor in the cities was even more difficult than being poor on a farm. In the city disease has spread rapidly and gangs have dominated the streets. In Managua we saw children living in playhouse size cardboard huts in parks and sniffing glue to diminish hunger pains. I could then understand why families clung to their farm to avoid the living hell of these horrific slums and replaced coffee with cocaine in order to keep their farm.
We visited fair trade farmers in Esteli, Nicaragua who had been able to hold onto their land because they received a fair price for their coffee. The fair trade cooperative provided the farmers with an education and the ability to plan for their future. These farmers had hope and were able to support their families. I saw the Fair Trade Cooperatives schools that were built. I visited Community Centers that provided health care and vaccination programs for children. I witnessed that through Fair Trade Coops farmers attained a sustainable income and did not have to rely on Illegal Trade or U.S aid.
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For the next six months Jaime and I emailed each other almost daily. I told him how the news was beginning to inform American consumers about the coffee crisis, and how Fair Trade Certified was beginning to be recognized and demand was growing in the US.
But it seemed hopeless at times that it wasn't growing fast enough. I received an email from Jaime on the first round of layoffs in the Colombian Coffee Federation. He wrote that the women and men in the office were crying as they were given their termination notices, that unemployment was around 20% in Colombia at the time, that these layoffs would increase the unemployment rate and that with the armed conflict increasing there was no future. Soon another layoff happened at the Federation and then another, as the coffee prices continued to fall. In another email he wrote that the Federation had begun terminating critical social programs provided to farmers. He was worried about the impact that would have the farmers' communities and their future.
In April that year, Jaime and I met again at the SCAA. I was a speaker on a panel presentation on the success of marketing Fair Trade coffee at the SCAA National Convention in Miami. I encouraged roasters and retailers to promote Fair Trade coffee because I witnessed how it saved the lives of children and how it help to build self-reliant communities no longer dependent on charity or US aid. I spoke about how fair trade was absolutely necessary to guarantee the future supply of specialty coffee and how it was vital for our own survival.
Shortly after the convention, the Colombian Coffee Federation invited me to Colombia. I visited mills, schools and farming communities. I met with the COSURCA farmers from Popayan in Southern Colombia whose families had been growing coffee longer than our family had been roasting it. They remembered how decades ago their entire family sat at dinner together. They remembered their sons leading the family prayers. They remembered the pride of their fathers watching them learn the family trade and eventually taking charge of the family farm. When coffee prices continued to crumble, farming coffee no longer provided food for their families. They were forced to continue with the only crop they knew could generate good cash income, one of the few crops that grows at these high altitudes and is also a cash crop, heroin poppies. Their eyes conveyed the tragedy that soon followed.
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They told me that as the drug lords came into their community to buy this new crop, heroin, that the drug lords would force their sons to join the drug lord's army. As these farmers spoke to me they expressed much sadness and anger as they recalled the loss of their sons to the lords. Soon the farmers had no choice but to grow heroin, if they stopped growing it the drug lords would be kill them. The farmers lost their sons, their culture, and their community.
Then the farmers told me that they took a stand against the drug lords, which meant that some farmers sacrificed their lives. They organized a Fair Trade Coffee Cooperative. They began to replace the heroin poppies with coffee trees, more than 1047 acres. Europe had been purchasing their fair trade coffee for a few years, and by receiving that price the farmers continued to take back their community. They introduced me to two of the young men from their community; they said they were learning the trade of farming coffee instead of heroin farming. We shook hands and I promised that as soon as their coffee came to the US, I would purchase and inform our community about their lives and their struggle. A few months later, their first shipment of a container of fair trade coffee was shipped to the US and I emailed them that our customers loved the great quality and appreciated their efforts to take back their community. The container of coffee was soon completely sold and we had to wait for the next shipment to purchase more. Because of Fair Trade prices they have been able to prevent the planting of close to 4500 acres of coca and poppy plants.
Especially appreciative of the farmer's lives in Colombia was Mr. Alejandrez from Barrios Unidos of the United States. He had joined me on this tour of Colombia. We had visited another group of young farmers who recently formed a cooperative. We drove in jeeps to their farms in the mountains of Valle del Cauca where, in spite of the armed conflicts, these young farmers proudly focused on producing a premium quality coffee. They once lived in Cali and other major cities without the possibility of ever providing a real home for a family. The ASOJAV Cooperative is devoted to training young people from the cities in order to provide them with a future. These future farmers are necessary for the continuing supply of coffee to the world. Living in a bamboo house he had built by hand and with newborn twins to feed, we visited one of these young farmers, Jose Angel Garzon, who grew coffee on the slopes of Seville. He is a proud, strong and determined farmer. But the last email I received from Francisco in Colombia stated that Jose was struggling to feed his family and that his twins were sick. Francisco wrote that a month ago during the armed conflict in the hills, bombs destroyed the water lines to the coop's farms.
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Jose asked me in front of the 65 young farmers at their ASOJAV Coop meeting in Federation Offices of Tulua: ''Why don't Americans care?'' I faced the farmers and answered his question: ''Americans care, Americans have a big heart. They just don't know, the news isn't informing them. When they are informed they do care. When they know how to make a difference, they act. In Santa Cruz where I am from, they know about Fair Trade and they buy it. They value the quality of life and the quality of coffee derived from Fair Trade.''
Jose is still determined; he is preparing to harvest the crop next month in September and plans to ship it to America in October. With all his hard efforts to farm during the armed conflict, he hopes he will get a fair price that covers his costs to produce coffee and provides him with some extra to feed and clothe his twins.
This farmer's pride brought tears to the eyes of Mr. Alejandrez, director of Barrios Unidos, a national organization in the US that works to bring Latin youth out of drug gangs and into recovery and cultural programs. Mr. Alejandrez told us in the jeep as we left Seville and the young farmers, that he was crying because on the Barrios Unidos financials there is a funeral expense account for unknown American youths that will die this year due to drugs and gang violence. He hoped the Latino youths at risk in the United States might learn from these young farmers in Colombia and develop that same pride and spirit of determination.
Two months later, my family and I went to Nicaragua to film the documentary ''In Our Hands: Sustainable Relationships in Specialty Coffee.'' Coffee prices had continued to fall and conditions had worsened. Miles of coffee farmlands were abandoned and overgrown with weeds. In southern Nicaragua we visited Jinotepe; the mayor told us that unemployment had escalated to 80% in his city. He said farmers who don't sell coffee, don't buy bread from the bakery or meat from the butcher. In northern Nicaragua, we saw thousands of families that were living under plastic sheets on the streets of Matagalpa and San Ramon. We purchased a truckload of food and drove it to the mayor of San Ramon. He thanked us and said the truckload of food would feed the families for one day. A few days later in Matagalpa, the Nicaraguan newspaper reported that three children of coffee families had died from starvation that week and that 12,000 coffee refugees were fleeing the farmlands to setup camps in the city.
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Peter Fritsch reported in the Wall Street Journal: ''. . . the collapse of world coffee prices is affecting an estimated 125 million people, [resulting in] a combustible brew of unemployment, hunger and migration.''
I urge the US government and all consumers to purchase Certified Fair Trade Coffee. While Fair Trade is certainly not the only solution to this crisis facing millions of people in the coffee growing world; it has provided more than $10 million in additional income for small farmers. Out of 170 million lbs. of coffee sold by these farmers, only 31 million are fair-traded.
Santa Cruz Sentinel Newspaper: Coffee's Untold Story
February 17, 2001
By COLLEEN CROSBY
Special to the Sentinel
FIELDS TRIP STRENGTHENS FAIR TRADE RESOLVE
The following is an excerpt from a travel journal kept by Colleen Crosby, co-founder and co-owner of the Santa Cruz Coffee Roasting Co. Colleen just returned from a trip, for people who are in the coffee business, to the coffee farms of Costa Rica and Nicaragua. No one could ever have guessed (including Colleen) how deeply this trip would affect her and how much it would serve to strengthen her commitment to Fair Trade practices.
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What you will read here is all true. No exaggerations. No embellishments. My narrative is not meant to scare you. But this heartfelt account is meant to stir up your passions as you read about mine and, most importantly, to show that you can easily take action to helpright now.
With the price of coffee as low as it is, coffee farmers barely eat. Most of the farmers can't read or write or perform any math. Without an education, they can't plan for the farm, so saving a little for the hard times doesn't happen. But then, all the times are hard times.
Unfortunately, prostitution is the alternate source of income for a woman who has no other way to get medicine for her baby. When her baby gets a bacterial infection and ends up with diarrhea, it dies without antibiotics. And when all the income from their farm barely puts food on their plates, prostitution is what a woman does to buy that medicine to keep that baby alive.
On the coffee farms of Costa Rica and Nicaragua, I saw how illness from a poverty diet dominates lives. Teeth fall out at an early age and smiles have big gaps. Extreme poverty means you don't read, you don't have an education, and you don't file birth certificates or get marriage licenses, so you don't get married, and you never know exactly how old you are. Ask a farmer how old he is, and he'll say: ''Well, I was born probably in April, maybe in June, I think it was toward the end of the month. I think I'm 23, but I may be 18.'' That means they never celebrate a birthday. They don't celebrate much of anything. If they don't work almost every day, all day, picking or planting or weeding or something else, they don't put food on the table.
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How skinny they were! How skinny the women were. Their children! Health is something I take for granted. I eat healthy and can see a doctor when I get sick, and I certainly can get basic medicine. Somehow, these people shouldn't have to live such unhealthy lives, and it gets worse as the coffee prices drop and droptheir lives go from tragic to more tragic. The low prices paid for the non-Fair Trade coffees, instant coffees, canned coffees and even major gourmet coffees, have a major impact on these farmers' lives. Non-Fair Trade coffee literally means starvation for the farmer's children, and simply no education at all.
We listened to the improvements made in a community where a Fair Trade Coffee Co-op operates: a community room for a rudimentary education, a place where a doctor can come during the week and check to see who's sick, how the pregnancy is going and control outbreaks of contagious diseases. I felt so glad to know that Fair Trade coffee was a working idea, glad to know that it could put a drop of hope into an ocean of pain and poverty.
We stayed at a hotel one night in the city of Matagalpa. There, too, the poverty was horrible and heartless. It was now very difficult to hold back the tears. We traveled across barren, arid land with millions of one-room mud houses filling my view, all with dirt floors and aluminum outhouses. And it was like this for hours and hours, on the bus, outside my window. I had no idea how massive the poverty was in Nicaragua. This extreme poverty never ended. It wasn't just a pocket. Poverty seemed to go on forever. I don't care who fixes the problem. I just want the problem fixed.
Again, the Fair Trade Co-op offered some real solutions for its community, a small step and maybe insufficient, but a step in the right direction. It offered minimal health care, a beginning to eliminating the proliferation of diseases. The best part is that fair trade is a sustainable practice. The farmers actually learn how to do business. They learn math, so they can keep some simple records. They learn to read, so they can set up some rules for the co-op and learn which ones work. They learn how to plan, so they can make it through when the coffee prices plummet and put all the other farmers into a living hell. Fair trade isn't perfect, but it does make a small difference and above all it's sustainable. It's not charity that's here today and gone tomorrow, stealing the farmer's pride.
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We arrived at the house of a farmer named Santiago. The house was just like all the others: a dirt floor, mud brick walls, a bench in the kitchen that held a bowel for cleaning a dish, an adobe fire pit for cooking, board beds, a ceiling with light passing through the boards that weren't tightly fitted, an open space in the adobe wall that we would call a window, pictures of Christ, a cross on the wall near where they ate, and the Virgin Mary everywhere. Their life was just too hard to believe, poverty I couldn't imagine, coming from America.
Santiago took us to his coffee trees and mill. We hiked with him up a steep path that went for miles. We reached the top exhausted. On the sides of these steep mountains, Santiago and his family pick coffee. They hold on to one tree while picking cherries from the next. Then they carry the heavy sacks on their backs for hours till they get down the mountain. Picking coffee is even harder when it rains. They slip on the muddy inclines. And they strain their backs to pick the rain-fallen cherries from the muddy ground.
The work at the coffee processing mills is equally strenuous: lifting the heavy sacks all day and sorting millions of coffee beans on a continuous conveyor built. Coffee harvesting and milling is a hard, intense laborious process. Despite this hard work and the sweat that goes into our coffee, these people are barely surviving.
Santiago and his family held a feast for us. They had so little food, but they were dying to be generous. We had to eat, even if the bacteria were going to make us sick. You don't refuse the generosity of a poor farmer. Later I gave him a T-shirt from Barrios Unidos, with the Fair Trade logo on the front. On the back was printed ''Changing Our World, one cup at a time.'' He loved it!
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In the lush, tropical rainforest of Nicaragua, we visited another house. A mother was rocking her child in a small hammock, smiling as I approached. I could see 10 flies sitting on the baby's face. I smiled at her and said, ''Es bonita (the baby is beautiful).'' I got the camera out, and she swept the flies from the baby's face. I learned that she'd had 10 children, but seven of them had died. Only three survived. She didn't want to bury any more and started using birth control, so her man left her. She was left alone now with three kids to care for and nothing for a living except the bare minimum from the land.
There's a program that subsidizes education if enough children attend. Some of the children hike three hours to school. Unfortunately, teachers are hard to come by. Very few want to live in this desolate condition, in this poverty. They come for a month, find it too difficult, leave and the school looses funding. The children have no place to go, so no one reads, no one writes, and no one plans a future.
I hope this story helps to show what far-reaching affects purchasing Fair Trade coffees can have. It probably won't change your life to spend those few extra dollars a month to buy Fair Trade coffees at their slightly higher prices. But it most definitely will change theirs.
The Fair Trade label comes from a non-government organization that makes certain the farmers and their families actually receive that money. The purchase of coffee (and other crops) with the Fair Trade logo on it ensures a positive affect on the people who bring the coffee to your cup.
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The Wall Street Journal: Coffee-bean oversupply deepens Latin America's woes
Monday, July 8, 2002, Peter Fritsch, Associated Press
LA DALIA, NicaraguaAntonio Luna thought he had seen the worst life had to offer during the 1980s, when his village in Nicaragua's coffee-rich northern highlands sat in the crossfire of a guerrilla war between U.S.-backed ''contra'' rebels and the Marxist Sandinista government.
That was before this May, when his family's home became a plastic tarp pitched along the roadside here. Huddled with about 3,000 other unemployed coffee pickers, Mr. Luna is a hungry refugee from a potentially more devastating conflict than any he has known before: a global brawl over the $55 billion coffee market. The fight has left the world awash in java and has driven inflation-adjusted prices for beans to their lowest levels in more than a century.
''We've had no work since February and are here begging for our lives,'' says Mr. Luna, a listless 33-year-old, surrounded by a group of visibly malnourished, unshod children. They are living on wild bananas and the charity of passersby. ''At least during the war there was food,'' he says.
In lush coffee-growing regions from Central America to Africa, the collapse of world coffee prices is contributing to societal meltdowns affecting an estimated 125 million people. In former Cold War proxy battlefields such as Nicaragua, the result is a combustible brew of unemployment, hunger and migration. In countries such as Uganda and Burundi, which get 70 percent of their export earnings from coffee, the severe price drop has blunted benefits from international debt relief.
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The oversupply of beans driving the crisis won't ease quickly because so many small growers see few alternative crops that are profitable and legal.
In the U.S. and the rest of the developed world, the price of coffee on supermarket shelves has fallenbut considerably less than the price paid to growers. That translates into record sales and profits for some of the corporations that process and market coffee, according to industry officials. Four giantsProcter & Gamble Co., Philip Morris Cos.'s Kraft Foods Inc., Sara Lee Corp. and Nestle SA of Switzerlandcontrol about 40 percent of the world's coffee. They buy it in bulk and then roast, grind and blend it into brands such as Kraft's Maxwell House and P&G's Folgers.
The low bean prices fueling corporate profits are ''causing entire rural communities to disappear and forcing desperate peasants into everything from crime and illicit crops to illegal migration,'' says Nestor Osorio, a Colombian who heads the International Coffee Organization in London, which represents producing nations. He predicts more tragedies like that which befell 14 out-of-work coffee pickers from Mexico's Veracruz state. They died of dehydration in Arizona in May 2001 while trying to cross the Sonoran desert to a new life in the U.S.
Until the 1990s, the desire for international security made propping up coffee prices a crucial instrument of U.S. foreign policy toward places such as Nicaragua, where coffee supports more than 40 percent of the rural labor force. The world's most-traded commodity after oil, coffee was seen during World War II as key to thwarting the spread of fascism among German immigrants in countries such as Guatemala. During the Cold War, coffee wasn't only a morning pick-me-up but a bulwark against Communism.
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At the time of the 1962 Cuban missile crisis, Sen. Hubert H. Humphrey told Congress that ensuring healthy coffee prices for Latin American campesinos ''is a matter of life and death. . . . Castroism will spread like a plague through Latin America unless something is done about the prices of raw materials produced there.''
That year, 66 coffee-importing and -exporting countries created the International Coffee Agreement. The deal imposed strict limits on each exporting nation. Actively promoted by the U.S., the world's largest coffee consumer, the agreement artificially propped up prices for nearly three decades. But when the Berlin Wall collapsed in 1989, so did the coffee deal.
In its place arose a new ideology of free trade, championed by the U.S. Many producing nations ended coffee-buying and stockpiling programs that controlled supply. That enabled Procter & Gamble, Nestle and other large foreign buyers to purchase directly from relatively small growers, giving the buyers more muscle to negotiate favorable prices. The result: free-for-all coffee exports and a production boom that continues to generate more beans than the world needs.
Brazil and Vietnam, which emerged as a coffee-growing giant in the last five years, have flooded the market in a battle for dominance. That has left the global market with an annual coffee excess of almost two billion pounds.
At the end of the 1980s, coffee-exporting nations received about $10 billion of a $30 billion annual retail market. Today, the total market has nearly doubled, but with big buyers able to play growers against each other, exporting countries receive less than $6 billion, according to the International Coffee Organization.
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Coffee prices on New York's Coffee, Sugar and Cocoa Exchangewhich provides the industry with its benchmark for beanscurrently hover around 50 cents a pound, down more than 80 percent from their brief peak of $3.15 in May 1997. But production costs in Central America are about 80 cents a pound. That adds up to insolvency for many farmers.
''On my farm, I usually have about 100 permanent workers, but now I have just 20,'' says Jose Angel Buitrago, who has grown coffee in Matagalpa, Nicaragua, for 30 years. ''I'm out of money, and in the next few weeks I'll have to let them go, too. They'll end up on the highway begging for food.'' When they have work, coffee pickers earn less than $2 a day in most of Central America. Mr. Buitrago is lucky to have held out this long. Neighboring farmers have already abandoned the business, leaving their land overgrown with weeds.
The social impact on countries still emerging from the debt crises and wars of the 1980s and 1990s is profound. In Central America and Mexicowhere some of the world's highest-quality coffee is grownthe World Bank estimates that 600,000 permanent and temporary coffee workers have lost their jobs in the past two years alone. Relief agencies estimate more than 1.5 million peasants in the region lack food.
In Guatemala, where a 36-year civil war with rural guerrillas ended in 1996, relief workers say about 6,000 children of out-of-work field hands face starvationa situation exacerbated by a fierce drought. U.S. government officials say struggling coffee growers in Colombia who had resisted the drug trade are now turning to heroin poppies for a living.
The collapse of coffee prices has been a boon for the big companies that process the beans and sell the final product. While prices paid to growers have tumbled more than 80 percent since 1997, average retail prices for ground roast coffee in U.S. cities have fallen only 27 percent, according to the U.S. Bureau of Labor Statistics. Accordingly, the price differential between international wholesale and U.S. supermarket prices ballooned to $2.54 in May, compared with $1.50 five years ago.
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Increasingly, big corporate buyers are substituting less expensive ''robusta'' coffee from Vietnam and Brazil for the higher-quality ''arabica'' variety commonly grown on the cloud-wreathed mountain slopes of Central America. ''Up to 75 percent of a typical can of coffee is now made up of the cheap stuff, which they then cut with Central American or Colombian (arabica) beans so your coffee doesn't taste like a shoe,'' says Eric Poncon, director in Nicaragua of ECOM Group. ECOM, a major coffee trader and unit of Brazil's Esteve SA, does business with Kraft and the other big coffee sellers.
Some of the industry's leaders have taken note of the widening gap between the haves and have-nots. In March, Howard Schultz, chairman of Starbucks Corp., urged fellow coffee executives in a speech at the National Coffee Association's annual meeting to ''share the blanket'' of prosperity with growers. The Swiss Coffee Federation has called for an ''ethical coffee tax'' of more than one cent per pound to be invested in community programs in the developing worlda proposal the industry hasn't rushed to embrace.
Human-rights advocates and others in the so-called fair-trade movement have pressured big companies to pay coffee prices that will sustain poorer growers. Some upscale coffeehouse chains, including Starbucks, now pay a premium for quality coffee. But bigger buyers typically don't.
Rather than pay above-market prices for coffee, says P&G spokeswoman Tonia Hyatt, the maker of Folgers prefers to provide community aid. She says the company's offices in Mexico, Brazil and Venezuela contributed a combined $10 million last year for things such as community health centers and schools. ''We care very much and want everyone in coffee to have a sustainable business along the whole line,'' she says.
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Kraft, Sara Lee and Nestle say they, too, go out of their way to help small growers. Sara Lee says it tries to buy at least 10 percent of its coffee from small planters and cooperatives. Nestle buys 13 percent directly from farmers, ''ensuring that they receive the full value of their crop,'' says spokesman Francois-Xavier Perroud. But he adds that increasing demand for coffee ''is the best way to ensure a long-term future for the farmers.'' Kraft has helped educate Peruvian growers, among other programs, but it, too, believes that its ''most important contribution'' is to promote demand, says spokeswoman Patricia J. Riso.
Coffee consumption in the U.S. is growing by about 1 percent a year, but that offers no panacea. Per capita consumption in the U.S. is about 20 gallons a year, down from about 37 gallons in 1970.
Sara Lee's coffee-and-tea division had sales of $2.9 billion last year and income ''after accounting for non-recurring items'' of $495 millionits best financial results in at least five years, says spokesman Joost J. den Haan. P&G'S coffee business, with about $1 billion in annual sales, had ''a record year'' in 2001, according to the company's annual report. P&G declines to comment on coffee profitability, as do Nestle and Kraft. But Nestle did say that coffee sales by volume hit a record in 2001.
To farmer Buenaventura Gutierrez, sitting in the dusty headquarters of the Nicaraguan Coffee Growers Union in downtown Jinotega, corporate talk of sustaining small planters sounds hollow. ''In two or three years, most of our industry will be gone,'' he predicts. ''This is dangerous because we are still coming out of a revolutionary, guerrilla environment in this part of Nicaragua.''
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No one believes Nicaraguans are inclined to take up arms again. But the coffee crisis is complicating a fragile political situation and eroding confidence in the free market.
Coffee-related protests and the restructuring of coffee debt have become daily thorns in the side of the new administration of Nicaraguan President Enrique Bolanos. In the impoverished countryside, frustration is keeping alive the political hopes of former President Arnoldo Aleman and former Sandinista leader Daniel Ortega.
The rehabilitation of coffee fields after the devastation of war and Sandinista mismanagement was a pillar of the government of Violeta Chamorro, who defeated Mr. Ortega at the polls in 1990. ''We all just wanted to forget politics and get back to work,'' recalls coffee grower Miguel Gomez, a former Sandinista official.
In the 1990s, some plantation owners who hadn't been in the coffee business took advantage of loan programs offered by the government and a regional development bank. ''Though coffee has been in Nicaragua for well over a century, a lot of the businesses are relatively new, with very small capital bases and lots of debt,'' says Julio Solorzano, a coffee grower and special adviser to the Ministry of Agriculture.
The borrowing continued through the mid-1990s as frosts affecting Brazil's huge crop helped boost international prices temporarily. By 2000, Nicaragua's 32,000 farms had boosted coffee crops back to 1979 levels. But by then, falling prices had rendered grower debt, estimated at $100 million, more difficult to pay off. While the cash-strapped government is trying to help growers postpone repayment of some of what they owe, there is little money to help starving field hands, officials say.
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Mr. Solorzano, one of the struggling growers, struck a deal with his remaining workers: They get paid two weeks salary for every three weeks they actually work. His employees, rather than lose their jobs, agreed to let him try and make up the difference at some point in the future.
Other farmers talk of switching crops. They are discouraged, however, by the experience of farmers who have grown peanuts and sesame. Those growers now find themselves on the verge of bankruptcy after trying to compete against U.S. farmers receiving generous subsidies from Washington.
With a lack of competitive alternative crops, ''the only viable diversification alternative for workers is mass migration,'' says Mr. Poncon, the coffee trader. An estimated 400,000 Nicaraguans now live in Costa Rica, many of them recent arrivals. They scrounge for work in competition with Costa Ricans unhappy to be their hosts.
The coffee crisis has prompted some fanciful proposed solutions. In Mexico, state oil company Petroleos Mexicanos has been looking at the possibility of using excess coffee to absorb oil spills. Other ideas include using coffee as animal feed and as fuel. International charity Oxfam has suggested a mass destruction program funded by a windfall tax on the big international companiesan approach the companies reject.
The answer for a handful of Nicaragua's best-run farms is selling to the so-called specialty coffee market, which pays a premium for top-quality branded coffee. But this niche market is smallabout $100 million a yearand the high-end brands have a hard time winning supermarket shelf space when pitted against powerful marketers such as Procter & Gamble.
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The U.S. National Coffee Association is hoping to stimulate more consumption by focusing ''on more scientific research on the health benefits of coffee,'' says Robert F. Nelson, the trade group's president. ''There's a lot of bad science out there,'' he says.
Mr. BALLENGER. Let us go ahead and finish the panel so that we can then ask questions.
Next I have, according to my thing right here, Robert Nelson. Robert is the President and Chief Executive Officer of the National Coffee Association of the United States. Since naming Mr. Nelson President, the National Coffee Association has experienced its largest growth in a decade.
As CEO, Mr. Nelson leads the Association's public relations, government affairs, scientific research, membership, education and marketing programs. It sounds like you do not have any staff.
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Mr. NELSON. I lead them.
Mr. BALLENGER. Thank you for coming, and please proceed.
STATEMENT OF ROBERT NELSON, PRESIDENT AND CEO, NATIONAL COFFEE ASSOCIATION OF U.S.A., INC.
Mr. NELSON. Mr. Chairman and Members of the Subcommittee, thank you very much for the opportunity to testify on this vital issue, one that the National Coffee Association has been interested in for a number of years.
The global coffee market today is experiencing a period of extraordinary price deflation. The cause is oversupply of coffee from producing nations. The result is significantly increased production exceeding slow growth in international demand.
This is not a short-term cyclical downturn, but a long-term structural imbalance between supply and demand brought on by significant new production increases. There continues to be a downward pressure on prices due to an increase in supply from countries that have a low cost of production; for example, Brazil, which continues to increase its output, and Vietnam, which has increased its exports from four million bags in 1995 to 15 million bags in 2001.
The fact is we are concerned about the effects that the current situation is having on the 25 million farmers who grow coffee and on the long-term sustainability of the industry. As the U.S. industry, the most important contribution that we can make to the long-term health of the coffee sector, including the sustained well-being of producers, is to increase consumption, and in fact U.S. coffee consumption continues to grow, although not as fast as production.
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As we work to address this imbalance, let me assure you that the NCA is committed to working with producers, governmental bodies and development agencies in seeking solutions that will make a difference. Recently we convened an international summit of global coffee leaders from producing and consuming nations, as well as international development organizations and USAID.
Although time limits do not allow me to present the summit conclusions now, summit participants identified eight options that might be considered to address the current situation. I would direct your attention to my written testimony for these options.
With regard to the role of quality standards, the concept was recently debated at the International Coffee Organization, and producing and consuming nations alike elected to adopt an export based quality standard. Let me be clear that the National Coffee Association supports efforts by producers to improve the quality of their products.
At the same time, we support current FDA import standards which focus on the protection of the health and safety of the American consumer. Moreover, the National Coffee Association strongly opposes changing an excellent, decades old FDA standard that is based on health and safety to meet a totally different objective of supply management.
Since the United States imports only 25 percent of the world coffee exports, if the U.S. alone were to adopt import standards for the purpose of supply management, any coffee restricted from U.S. entry would simply find an alternative destination. The most likely effects would be competitive disadvantages for American companies and higher prices for American consumers with no change in income for coffee growers.
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I would also add a caution about executing government policies specifically designed to artificially increase commodity prices. The ordinary effects of increased prices are an increase in production and a decrease in consumption. The history of coffee consumption in the States over the past 50 years is a clear case in point. Simply put, government policies designed to increase prices are not viable options for alleviating a structural imbalance in the world coffee market. For these reasons, the NCA supports free markets for coffee.
There are effective roles the U.S. Government can play in insuring the sustainability of the coffee industry. The U.S. is uniquely placed to provide incentives and guidance to producing nations to help them address the structural imbalance and to provide assistance in developing diversification programs for coffee farmers. Of course, inherent in developing attractive alternatives to supplement coffee production is a need to review U.S. policy, which currently limits market access to many alternative agricultural products.
We encourage the Subcommittee to urge Congress to look at all forms of governmental barriers to trade such as U.S. farm subsidies and restrictive tariffs that often close our own markets to foreign agricultural exports. In this regard, we urge Congress to pass HR 3009, the Andean Trade Preferences Act.
In fact, U.S. agricultural policy results in low worldwide price levels for the very crops that are best suited for Latin America to diversify out of coffee. The region could easily produce more sugar, but U.S. law restricts the importation of sugar through quotas. The same holds true for cotton and other commodities.
Page 98 PREV PAGE TOP OF DOC This type of policy, which effectively limits access to the U.S. market, makes it difficult to impossible for Latin Americans to participate in the marketplace for a range of commodities. It prevents them from diversifying into other agricultural products and generates unemployment and emigration.
Before closing, I would like to express the National Coffee Association's support for U.S. membership in the International Coffee Organization, and in closing I would like to say that I am optimistic that we can identify a variety of effective approaches where there is support for the global coffee community, governmental bodies and development agencies.
We are faced with a challenge that will require far reaching and common support as we develop and implement approaches designed not so much to manage the industry for tomorrow, but to build it for future generations. National Coffee is committed to working with Congress, the appropriate Executive Branch agencies, producer organizations and consumers as we all act to address this vital issue.
I would ask, please, Mr. Chairman, that a full copy of my written testimony be entered into the record, and certainly when we are finished
Mr. BALLENGER. Will do without objection.
[The prepared statement of Mr. Nelson follows:]
PREPARED STATEMENT OF ROBERT NELSON, PRESIDENT AND CEO, NATIONAL COFFEE ASSOCIATION OF U.S.A., INC.
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Mr. Chairman and members of the Subcommittee, thank you for the opportunity to testify on this vital issue, one which the National Coffee Association of the USA (NCA) has been interested in for a number of years.
The National Coffee Association membership is comprised of importers, specialty and commercial roasters, wholesalers, and coffee retailers. NCA members conduct approximately 90 percent of all coffee commerce in America.
The global coffee market today is experiencing a period of extraordinary price deflation; the key cause is an oversupply of coffee from producing countries, which has resulted from significantly increased production exceeding slow growth in international demand. This is not a short-term cyclical downturn as we have seen in the past, but rather appears to be a longer term structural imbalance between supply and demand brought on by significant new production increases.
In 2001 global coffee production was approximately 117 million bags, while global consumption was only about 108 million bags. In fact, global production has exceeded demand, which has remained relatively flat, for each of the past several years and, according to published data, continues to do so today, resulting in the continued buildup of stocks.
There has been continued downward pressure on prices due to an increase in supply from countries that have a low cost of production. For example, through economies of scale and the erosion of the Real against the Dollar, Brazil, which continues to increase its output, has become a low cost producer. Vietnam, another low cost producer, has increased export output from 4 million bags in 1995 to 15 million bags in 2001.
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We are concerned about the effects that the current situation is having on the 25 million farmers who grow coffee in 50 countries that export the commodity, especially given that 70 percent of the world's coffee farms are less than 4 hectares in size.
The most important contribution the US coffee industry can make to the long-term health of the coffee sector, including the sustained well being of producers, is to increase consumption. In fact, consumption in the United States continues to increase at a steady pace, though not as fast as production growth. In 2002, the NCA determined that 109 million American adults drink coffee every day and an additional 52 million Americans drink coffee occasionally. This represents 1.2 million more daily drinkers and 9.5 million more weekly drinkers than in the previous year.
Further, the National Coffee Association is committed to working with producers, governmental bodies, and development agencies in seeking solutions that will make a difference. In fact, we are in regular contact with producers, and agencies such as US AID and the World Bank.
The National Coffee Association recently convened an international summit of global coffee leaders representing growers, exporters, and foreign coffee trade associations, as well as importers, roasters, retailers, and international aid organizations, such as the Inter-American Development Bank, World Bank, and US AID.
Summit participants identified eight options that might be considered to address the current situation.
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1. Farmer education regarding crop diversification.
2. Roaster consideration of long-term, independently arrived at, contracts.
3. Emphasis on health benefits of coffee consumption, scientifically confirmed, in marketing and promotion.
4. Advocating sound government agricultural policies which minimize market distortion.
5. Increasing accessibility, convenience, and quality choices for coffee consumers.
6. Encouraging governments to establish a revolving fund to balance social needs in select producing countries.
7. Development of meaningful, transparent statistical data from producing countries.
8. Development of farmer risk management and marketing skills.
Although the NCA is focusing our efforts on the following Summit options, we are actively encouraging other entities to consider all of the options as may be appropriate:
Emphasis on health benefits of coffee consumption, scientifically confirmed, in marketing and promotion.
Page 102 PREV PAGE TOP OF DOC Advocating sound government agricultural policies which minimize market distortion.
Increasing accessibility, convenience, and quality choices for coffee consumers.
The Subcommittee has expressed interest in the role of quality standards. The concept of quality standards was recently debated at the International Coffee Organization (ICO), and the producing and consuming nation members elected to adopt an export-based quality standard. The National Coffee Association supports efforts by producers to improve the quality of their products.
At the same time, the National Coffee Association supports the current FDA import standard, which focuses on the protection of the health and safety of the American consumer. Moreover, the NCA strongly opposes changing an excellent, decades-old FDA standard that is based on health and safety, to meet the totally different objective of supply management.
Since the United States imports only 25% of the world coffee exports, if the US alone were to adopt an import standard for the purposes of supply management, any coffee restricted from US entry would simply find an alternative destination. The most likely effects would be competitive disadvantages for American companies and higher prices for American consumers, with no change in income for coffee growers around the world.
Further, the assumption that a higher quality standard for coffee will lead to increased consumption is without merit. The fact is, American consumers today enjoy a wide variety of quality coffee products. Consumer demand dictates the range of qualities provided by the coffee industry.
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I would also add a caution about executing government policies specifically designed to artificially increase commodity prices. The ordinary effects of increased prices in any commodity market are an increase in production and a decrease in consumption. The history of coffee consumption in the United States over the past 50 years is a clear case in point. The NCA's annual consumption survey has shown that, in periods of sustained high prices, consumption has declined. Even after price equilibrium returns, one can never totally recapture lost consumption. Simply put, government policies designed to increase prices are not viable options for alleviating a structural imbalance in the worldwide coffee market. In fact, it is during periods of high prices that production has increased and created an imbalance between supply and demand. This, in part, is why the National Coffee Association supports free markets for coffee.
We do however believe that there are effective and significant roles the US government can play in ensuring the sustainability of the coffee industry, although legislating quality would not be an effective option. The United States is uniquely placed to provide incentives for and guidance to producing nations to help them address the structural imbalance in global supply and demand.
Further, the United States government can provide assistance in developing diversification programs for coffee farmers. Inherent in developing attractive alternatives to supplement coffee production is a need to review US policy, which currently limits market access to many alternative agricultural products. The National Coffee Association recommends that the Subcommittee urge Congress to look at any and all forms of governmental barriers to trade, such as US farm subsidies and restrictive tariffs that often close our own markets to foreign agricultural exports. In this regard, we urge congress to pass HR 3009, the Andean Trade Preferences Act, soon to be reported out of conference committee.
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In fact, United States agricultural policy results in low worldwide price levels for the very crops that are best suited for the lands and people of Latin America to diversify out of coffee, if they choose to do so. The region could easily produce more sugar, for instance, but US law restricts the importation of sugar into the US through quotas and also provides US farmers with price supports. The result is that futures prices for US sugar are today more than 20 cents a pound, while world futures prices for sugar are at 6 cents a pound. Nearly every country in Latin America could produce sugar at 10 cents a pound, but under existing quotas, only a very small amount would ever be allowed into the United States.
The same is true for cotton and other commodities. Twenty years ago, Central America produced 2 million bales of cotton; today, the region produces fewer than 200,000 bales, and a key reason is US subsidies to American farmers. While the world price for cotton today is at 40 cents a pound, the US government guarantees that American farmers receive 70 cents a pound.
This type of policy, which effectively limits access to the US market, makes it difficult to impossible for Latin Americans to effectively participate in the marketplace for a range of commodities, prevents them from diversifying into other agricultural products, and also generates unemployment and emigration.
The United States government could also encourage producing nations to adopt agricultural policies that are consistent with effective crop management and provide assistance with quality management at the farm and milling levels.
Page 105 PREV PAGE TOP OF DOC With an eye toward increasing consumption, Congress could also play a role by encouraging the National Institute of Health (NIH) to support the Institute of Coffee Studies, a research institute focused on identifying positive health effects of coffee, and housed at Vanderbilt University's Medical School.
Finally, the National Coffee Association supports the United States rejoining the International Coffee Organization.
In closing, I am optimistic that we can identify a variety of effective approaches where there is support among the global coffee community, governmental bodies, and developmental agencies. We are faced with a challenge that will require far-reaching and common support as we develop and implement approaches designed not so much to manage the industry for tomorrow, but to build it for future generations. The National Coffee Association is committed to working with Congress, the appropriate executive branch agencies, producer organizations, and consumers as we all act to address this vital issue.
Mr. BALLENGER. Mr. Ted Lingle has served as the executive director of Specialty Coffee Association of America since 1991. As its first full-time employee, Mr. Lingle has successfully guided the activities of the Association, including its efforts to establish a number of technical standards for quality.
Through his efforts, the Specialty Coffee Association has grown from 350 members in 1991 to over 2,400 members today. For his efforts to improve coffee quality, Mr. Lingle was awarded the 1998 National Medal of Merit for the Federation of Coffee Growers of Colombia.
Page 106 PREV PAGE TOP OF DOC Mr. Lingle has earned a Bachelor of Science degree from the United States Military Academy at West Point and a Master's of Business Administration from Woodbury University.
I look forward to your testimony. Please proceed.
STATEMENT OF TED R. LINGLE, EXECUTIVE DIRECTOR, SPECIALTY COFFEE ASSOCIATION OF AMERICA
Mr. LINGLE. Thank you, Mr. Chairman. I am delighted to be here and very much appreciate the invitation. We realize that there are many important issues before the Congress and really would like to express my appreciation for taking your time to deal with this one, which is an issue very near and dear to the heart of the specialty coffee industry.
I have spent my entire career in coffee. Before assuming this position, I was in the roasting business, a small, family business started by my grandfather in Los Angeles. I have lived through the boom and bust cycles of coffee that characterized the 1970s, 1980s and 1990s. I have seen it firsthand.
The first point I would like to make from my perspective is this is not the issue of the boom or bust over production. This is a structural problem that is going to require a structural solution. We cannot wait and ride it out until some weather disaster happens in Brazil.
Second, if you look at the overview of things that have happened, I think we have to accept responsibility for part of this within the policies of the U.S. Government, particularly as it relates to our farm sector. I share Mr. Nelson's view on this. It is simply because we close out the opportunity for many of these rural Latin American countries to produce agricultural products that would compete with the U.S. farmer, so there is an element of policy here.
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I would also like to reinforce the conclusions that you were coming to earlier with the first panel that there is a growing disparity between retail prices and agricultural prices. I think you need to understand that and what is causing it to get a sense of what is happening in the coffee industry.
I think you covered well the issues about this continued decline in the real price of coffee and the devastation it will bring to Latin America, particularly in terms of problems of illegal immigration and illicit drugs. The two are tied together. We see this very clearly in Colombia where it is critically important that our coffee policy, if we can develop one, be consistent with our foreign policy because in Colombia they collide.
It was really the Kennedy Administration back in the 1960s and the Alliance for Progress that Congressman Farr addressed that drew this parallel between changes in the price of coffee offsetting any foreign aid that we can deliver. The two are inextricably tied together.
We see this today in our border states; Texas and California particularly, but Florida as well, about problems created as workers needing jobs move north illegally across the border. It is happening throughout all of Latin America. The problem is if it continues for any length of time then it is a permanent dislocation of workers. Once they leave the rural communities, they do not go back. It is overburdening the major cities in Latin America.
We talked a little bit about the source of the crisis, and the two countries that have come under scrutiny are Brazil and Vietnam. It is important to understand the differences that relates to these two countries. Let me deal with Brazil just quickly to get this one understood.
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Essentially, the growth in Brazilian expansion has come from private investment. With the collapse of the quotas and the restrictions, the Brazilians feel that it is in their best interests to increase or recapture their market share. They have worked very hard at becoming efficient producers, so their cost of production is much below the cost of production in the rest of Latin America. As you would expect, a country with the resources of Brazil have become very efficient farmers.
Vietnam is a much different case, and the reasons that make Vietnam a different case first has to do with the investment that has been made in the coffee sector did not come from earnings. It was not growth through earnings, which would have brought a more slow evolution of the sector. It came from outside investment.
The Vietnamese Government, the French Agricultural Development Agency and the Asian Development Bank all invested outside funds in the Vietnamese coffee structure. Unfortunately, they did it in a way that did not lend itself to producing a quality product and so we had this unprecedented growth of a country going from roughly one million bags of production in 1990 to almost 15 million bags by the year 2000 and virtually without any grading standards.
In addition to the problem of foreign investment to disrupt a market, we have this loss of standards. Standards have to do with export grades. It is a matter of industry's way of dealing with-in effect-defective items in coffee.
I brought some examples that I would like to show you, but I would first like to tell you that defects are part of every harvest in every producing country. They are not unique to Vietnam. What makes Vietnam somewhat unique is they are virtually shipping all of their defects because they have no internal consumption. You do not have to be a coffee expert or a grader to recognize that.
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If I may?
Mr. BALLENGER. Please do.
Mr. LINGLE. The sample tray on top is what you would expect in getting a good delivery from a country like Colombia. The sample tray that follows would be a good delivery of a robusta coffee from not only Asian origins like Vietnam or Indonesia, but also African origins. The sample tray below represents the material that was removed from the harvest that represents standard defects found in coffee commerce.
The problem today is that under sort of international trade rules, all three of those products can be labeled as coffee when clearly you can see the latter samples stretch that definition to the limits.
To give you an example of the differences, if coffee is delivered against the market in New York, the New York Board of Trade, you are allowed roughly 15 to 20 defects per 350 grams, whereas if you tender robusta coffee in London against the London market, you are allowed as many 450, so a wide diversity.
If we compare that to the current FDA standard, which is really in our view an arcane 1920s regulation, it allows for up to 850 defects per I think it 375 grams. How this gets to be significant is that when we are looking to bring coffee supplies in balance in demand, the strategies are either retention or diversion.
Page 110 PREV PAGE TOP OF DOC Retention simply does not work because the marketplace waits for the coffee to be released. They know that producers cannot afford to hold it forever. Even Brazil with its resources has trouble holding it forever.
Diversion is a much better strategy. In diversion it causes what we feel are classified as coffee byproducts to be used for other purposes. A good example of the third tray, the triage, is diverting that product into an alternative energy source. It is very cheap, and it is very renewable.
If we were to do that, the economics greatly favor the producer. In an ICO study that was done a couple of years ago, their economist calculated that for every million bags of coffee that are removed from the market, the price will increase two cents a pound. If you look at world production today in the world in producing 118 million bags, it is also producing 11 million bags of triage. That is two times 11 or 22 cents a pound. It does not sound like much, but that translates into roughly $30 a bag of coffee.
If we took Colombia's exports at nine million bags, that is $270 million every year that goes back into the economy of Colombia. If we apply that across the major producers in Latin America, that is increasing the revenues they receive by some $800 million every year.
More important than the diversion aspects of this, and the economics say that diversion is a very sustainable strategy, we will also eliminate the breaks to consumption, and that will allow us to do the NCA strategy of market building because the coffee will taste better, and we will consume more of it.
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I realize I am exceeding my time a little bit and would simply close by saying a crisis of this magnitude is going to take a global strategy, and we would definitely encourage the United States to become a player again in the international coffee arena in part by rejoining the international coffee agreement so that our voice is heard in those circles.
Thank you very much for your attention.
[The prepared statement of Mr. Lingle follows:]
PREPARED STATEMENT OF TED R. LINGLE, EXECUTIVE DIRECTOR, SPECIALTY COFFEE ASSOCIATION OF AMERICA
Mr. Chairman, Members of the Committee.
Good afternoon. I am Ted Lingle, Executive Director of the Specialty Coffee Association of America, or ''SCAA.'' It is an honor for me to be asked to speak about this important issue before you today. I hope that my testimony will be of some help to you in your efforts to address the coffee crisis.
Nearly my entire career has been spent in the coffee industry. My grandfather and father were coffee roasters, and I spent the first twenty years of my coffee career working at Lingle Bros. Coffee, Inc., a small wholesale business started by my grandfather and his two brothers in Los Angeles in 1920. Since 1991 I have held my current position at SCAA. SCAA is a nonprofit trade association representing the specialty coffee industry at every stage of production, from farmers to importers and from roasters to coffee retailers. My work brings me in contact with the entire coffee supply chain, from small growers in Hawaii and Latin America to local specialty roasters in downtown Santa Cruz like Ms. Cosby, from large roasters like Starbucks and Folgers to Mom & Pop coffee cafes on Main Street. As demonstrated by the worldwide growth in specialty coffee during the past ten years, this segment of the industry is becoming the catalyst for change for the entire coffee industry.
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I am here today to tell you about the conditions in the world coffee market that may soon precipitate a worldwide economic and political crisis with implications far beyond the impoverished farmers in Latin America.
Lets look at a few facts:
On the producing side, coffee is grown in more than 50 countries and on more than 11 million hectares of land, a remarkable 1 % of the world's land area. It generates nearly $7 billion in export earnings for developing countries and is second only to oil as the largest globally traded commodity.
The coffee industry provides employment to over 25 million people in some of the poorest countries in the world, and smallholders on farms less than 5 hectares produce about 70 % of the world's coffee.
On the consuming side, as the world's largest coffee consuming nation, importing about 20 million bags annually or approximately 25 % of world exports, the US is a major factor in international coffee commerce. When combined with the import volume of the European Union, which represents roughly 50 % of world exports, and Japan, which accounts for an additional 8%, the major industrialized countries consume over 80% of world coffee exports.
Also on the consuming side, the industrialized countries that consume more than 80% of world coffee production are providing over $360 billion dollars in farm subsidies annually, almost $1 billion dollars per day, to protect their own domestic farm industries. These subsidies often prevent developing countries from venturing into agricultural products other than coffee.
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In addition, there is a growing imbalance between the behavior of export and retail prices. In the 1980's, the final consumer spent around $30 billion annually on retail coffee sales; of this total, exporting countries took in $910 billion, representing 3033%. Today, the latest estimates indicate that final consumption now accounts for around $55 billion in annual retail sales, with exporting countries receiving approximately $7 billion, representing only 15%.
IMPACTS ON COUNTRIES IN THE WESTERN HEMISPHERE
The magnitude of the economic and social crisis facing coffee-producing countries in Latin America is staggering. Years of little to no natural asset investment (soil, land, water, flora, fauna) have left many coffee producing areas to become the poorest, most economically degraded, and socially unstable regions in their countries. As the price of coffee continues to drop in real dollar terms, many coffee producing areas are ripe for conflict, natural disaster, environmental collapse, and diversion into illicit activities. Inattention to this ''disadvantaged and left-out rural sector'' has affected the competitiveness of other industry sectors in these regions, such as tourism and commerce, and it has exacerbated ethnic, regional, and class conflicts that affect the political stability and economic growth in many coffee producing countries. Colombia is a classic case in point of the need to coordinate US coffee policy with US foreign policy. While the US has committed hundreds of millions of dollars for economic assistance, US efforts have been significantly marginalized by Colombia's loss in coffee export earnings, which currently exceeds $600 million annually.
An international crisis of this magnitude has political implications for the US, has potential for elimination of traditional coffee sources in Latin America for the US coffee trade, and has the probability of extreme price volatility for US coffee consumers. As the crisis continues to affect countries in Latin America, particularly Mexico, Guatemala, Honduras and Nicaragua, it has the potential to cost jobs for those Americans working in export oriented markets. The kind of poverty provoked by the coffee crisis promotes economic instability in Central American countries that leads to illegal immigration and costs US taxpayers in the Southern Border States from Texas to California billions of dollars annually in order to deal with the crime, health care, and educational demands of these displaced workers. In addition, as coffee and coca and opium poppies compete for the same land, crop substitution for increased exports of illegal drugs into the US becomes an increasing social problem and criminal justice cost to the US Government.
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SOURCE OF THE CRISIS
Today the coffee market is in grave dangerthreatened by a vast a growing oversupply of ever-lower quality coffee that have driven green coffee prices to historic lows. This is not the temporary boom and bust cycle coffee cycle of the past. It is structural. It is not, and will not be corrected by market forces in the short run.
The crisis has been caused by a large increase in coffee production over the past several years by two countriesVietnam and Brazil. In the case of Vietnam, within ten years this country grew from a relatively insignificant producer to the world second largestahead of Colombia but behind Brazil, now producing well over 10 million bags annually and accounting for approximately 12% of world exports. The unprecedented growth of the Vietnamese coffee industry is the result of loans from the Asian Development Bank, the French Agriculture Development Agency, and the Government of Vietnam. The Vietnamese coffee trees were planted at a time when prices were relatively stable and coffee was a good cash crop. However, the funders lost sight of market economics and failed to consider the impact on prices of increasing supply by 10 to 15 % in so short a period. The problems with Vietnam's coffee production go way beyond the issue of volume. It is also one of export grades. Unlike Brazil, which has traditionally established minimum export grades, Vietnam has virtually none. The intractable nature of this crisis arises because much of the coffee that has been added to the world market is of an extremely low quality.
Coffee grades are a measure of the defects remaining in the mixture of coffee beans after the harvest. It is what we in the trade describe as ''triage.'' It can be described as the ''sick, dying, and dead coffee beans,'' along with sticks, stones, leaves and other foreign matter that come out of the coffee fields as the trees are harvested. And, here I must turn to my props to make my point. . . . More and more of what we are seeing on the market today is ''triage.'' Normally, these sick, dying and dead coffee beans, along with the foreign are cleaned out of the coffee prior to export. Sticks, stones, leaves, dirt and other foreign matter are also removed. While triage is a natural part of every harvest of every coffee producing country in the world, exports of triage coffees are not. To give you an idea of the magnitude of the difference, grading standards at the New York Board of Trade for wash mild Arabica coffees (the coffee produced in Latin America) allow for 15 defects per 350 grams sample, whereas standards for Robusta type coffees (the coffee produced in Vietnam) allow for 450 defects per 500 grams sample. These standards were actually lowered to accommodate coffees from Vietnam. And while there is a difference in price, because both items can be labeled as ''pure coffee'' in international commerce, the price levels tend to move in tandem, as one product can be a substitute for the other.
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Although some exporting countries (and Hawaii) have strict standards of quality that do not allow significant number of defects in green coffee, the United States has no laws or regulations governing purity of coffee. The only thing that passes for quality control in the United States is an FDA ''guideline'' for import inspectors from the 1920s that urges inspectors only to reject in any coffee with more than 810 defects per 375-gram sample. To put that in percentage terms, the FDA guideline allows a mixture that contains up to thirty (that's three, zero) percent defects to enter the United States and be sold as pure coffee. For comparison purposes, the lowest Hawaiian standard allows export from Hawaii of coffee that contains no more than 5 percent primary defects such as sticks, stones and defective beans.
In recent years, explosive growth in production and sale of low quality coffee has set off a chain reaction of overproduction and falling prices. Low prices mean farmers invest in less of the quality control required to remove defects from coffee. Less quality control means MORE coffee on the market. If defective beans and foreign matter are not removed from coffee the defects and foreign matter are sold as coffee. More defects mean more coffee. More coffee means lower prices. Bad coffee is driving good coffee from the market.
POLICIES THE UNITED STATES COULD PURSUE TO ADDRESS THE SITUATION
The crisis is a structural one that is not going to resolve itself via market forces. In April 2001, the Presidents of 12 Latin American countries called attention to this situation in their Quebec Declaration in which they outlined the strategies for correcting the situation:
Page 116 PREV PAGE TOP OF DOC Strengthen the mechanisms of cooperation and consultation between producing countries that allow the establishment of concrete solutions.
Invite the United States of America and Canada to rejoin as members of the International Coffee Organization, so that within this forum, and in dialogue with producing countries, there is an analysis of the possible solutions to the coffee crisis.
Instruct ministers to search for formulas for consensus, designed to confront the problem, including the organization of supply and demand for coffee, or measures such as the establishment of quality standards for coffee intended for export.
Reach an agreement with multilateral, global and regional credit organizations that they will not grant loans or donations intended for further expansion of world coffee production.
Promote the creation of suitable financial tools for the regional development banks, that will allow an orderly management of the world coffee supply, by way of, amongst others, instruments of price coverage and the financing of inventories in producing countries.
The implementation of the initiatives and policies mentioned above would allow producing countries to promote the establishment of a Second Generation International Coffee Agreement.
SCAA has endorsed the Quebec Declaration. We feel it is a good plan with a high likelihood of success, IF the US Government will support it as well. As the world's largest single coffee consuming nation, we have to take the lead in finding a long term, market based solution to this crisis. It is truly in our nation's best interests, both economically and strategically.
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SCAA has also become a leading advocate for establishing minimum coffee purity standards. Markets are most efficient when ''tiers'' and ''transparency'' are the regulating factors. We see this in any number of agricultural products from meats to eggs, from milk to juices, from produce to jams and jellies. Minimum purity standards in the United States would go a long way toward resolving the problem. Standards would ensure that U.S. consumers were not mislead about the content of the can of coffee, because they would know it met a purity standard to be labeled as ''pure'' coffee. Commercial roasters would not have a short-term incentive to buy triage for 10 cents on the dollar to create a ''price blend'' that ruins the coffee market for the long term. Specialty coffee roasters would continue to have access to a wide diversity of high quality coffee beans for their roasting operations. And, the coffee industry would not have to fight an uphill battle for consumer's palates.
A recent resolution by the International Coffee Organization commits member countries to purity standard that is approximately 95 percent. If the US does not follow suit with similar standards, it is hard to envision the ICO's action will have any impact in the world market place. More likely, the US will become the buyer of last recourse for the world's low-grade coffees, and as a result US commercial consumption will continue to decline further exacerbating the crisis.
SCAA is also working with USAID to form a Global Development Alliance for market access and development assistance in coffee producing countries. I feel very strongly that for all of Latin America, except for Brazil, coffee needs to become a value added agricultural product, similar to grape production for the wine industry. Beyond threatening the farmers in Latin American and Africa, the crisis is also threatening the livelihood of U.S. coffee roasters and retailers. In particular, the businesses that make up the membership of the Specialty Coffee Association of America count on a reliable supply to high quality Arabica coffee beans that are not contaminated with defects and impurities. Even the producers of high-quality coffee, who sell the beans that are roasted for specialty coffee, receive an unsustainable price for their product. On a larger scale, when important suppliers of the specialty coffee industry are forced to close their doors, the entire industry is threatened with permanent change, since high quality beans become unavailable. Central American producers in particular, who historically produce very high quality coffee, will be hard-hit. Currently, many farmers are not even harvesting their crops since the amount they would receive would not even cover the cost of production; much less give them a profit as income. It is economically more feasible for them to let the coffee rot in the fields. If pure high-quality coffee is driven from the market the U.S. specialty coffee industry will cease to exist. A market-based solution requires coffee to become a family of differentiated products, whose prices reflect their individual costs of production and not general commodity market prices.
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As the world's largest coffee consuming nation, the US has more than a role to play in resolving the coffee crisis. It has a responsibility. The cost of maintaining our current ''laissez-faire'' posture on international coffee policy is increasing exponentially. We are precipitating a worldwide economic and political crisis with ramifications far beyond the impoverished farmers in Latin America. As a representative of the specialty coffee industry, we want to express to you our sincere appreciation for your timely interest and investigation of these issues. We are fast approaching a critical juncture in coffee's future and sustainability in Latin America.
Mr. BALLENGER. Thank you.
I would like to ask Mr. Nelson one question. In all the propaganda that I was given to read before we had this hearing, we read about the production and standards for Hawaiian coffee. They evidently have a very strict manner of grading what they produce in Hawaii.
Is that difficult for other producers? I mean, I do not even know what the grading is, but it evidently produces a much cleaner brand or better brand of coffee.
Mr. NELSON. I think Hawaii is a unique place in the country, and it is very difficult to compare the Hawaiian model, which is probably the ideal model, to the rest of the industry.
Page 119 PREV PAGE TOP OF DOC It is not an issue of grading standards necessarily that results in the high quality Hawaiian, but it is a result of the husbandry and the geographical location of the trees.
Mr. BALLENGER. Do you mean the altitude and so forth? I have always heard that coffee produced at higher altitudes or something was better under the canopy of the jungle.
Mr. NELSON. Generally I think people would argue that in Hawaii it is a very unique situation in that it is an island. It happens to be produced almost at ocean level in some cases, as well as up in the mountains, so it is really a different situation. It is very difficult to compare Hawaii to the rest of the producing world, I think.
Mr. BALLENGER. Mr. Lingle, were you talking about burning this stuff to generate energy?
Mr. LINGLE. They did a study in Guatemala where they converted it. The pelletized it and used it as a fuel to drive an industrial furnace that made bricks.
I just got back from Brazil, and in Brazil I visited a farm where they pelletized that material and used it as part of the drying process for the coffee.
Mr. BALLENGER. And it was efficient?
Mr. LINGLE. Yes.
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Mr. BALLENGER. It produced enough heat that you could actually
Mr. LINGLE. Coffee contains sugars, fats and oils, so it is a very efficient fuel.
Mr. BALLENGER. Ms. Crosby, I am just curious about that visit you had. When was that?
Ms. CROSBY. Last year I went to Nicaragua twice, and I went to Colombia in June.
I just want to also state that it is 125 million people we are discussing, the lives of 125 million people as we talk about this commodity. I think sometimes it is easy to think you are just exchanging money when you are talking about a commodity. You are also exchanging human lives. Sorry.
Mr. BALLENGER. No. Actually, I have been to Matagalpa and have helped them build homes there.
Ms. CROSBY. Excellent.
Mr. BALLENGER. I recognize the crowds of people that have come from the coffee farms into town that makes it really a frightening situation.
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Ms. CROSBY. Twelve thousand people.
Mr. BALLENGER. Mr. Silva, do you remember the earthquake in Armenia? Your President invited me to come down, and we went to Armenia. It looked to me like the most fabulous coffee growing area I had ever seen. Everywhere you went they had these little coffee trees under every bush in preparation for I guess transplanting into something greater and so forth.
Is that area suffering as well in this whole problem that Colombia has now?
Mr. SILVA. Yes, sir. The situation is affecting the whole country, all growing areas. The price of coffee right now barely covers 70 percent or 65 percent of the average cost of production. It is across the board.
In some cases when you are talking about peasant farms, because they devote their own labor, you do not see the impact as much because they do not have to pay for external workers. Certainly it is affecting the whole area.
The ones who are most affected are the smaller lots that are in the less productive areas. They are the ones who are actually more vulnerable to these pressures.
Mr. BALLENGER. Right. Mr. Delahunt?
Page 122 PREV PAGE TOP OF DOC Mr. DELAHUNT. Thank you. I want to applaud Ms. Crosby for her social conscience. It is very refreshing.
Ms. CROSBY. Thank you.
Mr. DELAHUNT. Let me ask you a question, Mr. Nelson. This article that I read from by Peter Fritsch; is it true that the corporate profits rise as retail prices fall far less than wholesale?
Mr. NELSON. I have no knowledge actually of the corporate profits other than what my own stock portfolio does, which is not good.
Mr. DELAHUNT. We are all experiencing that, though. Who makes up the trade association that you represent?
Mr. NELSON. Our members are importers and roasters of coffee. They range from small companies, specialty roasters, to large companies that are specialty and/or commercial roasters.
Mr. DELAHUNT. But they do not involve Proctor & Gamble and Philip Morris and Kraft Foods, Sara Lee?
Mr. NELSON. They include those and a couple hundred more. However, I do not track the members' profit levels. They are members, along with others. Yes, sir.
Page 123 PREV PAGE TOP OF DOC Mr. DELAHUNT. So they are members?
Mr. NELSON. Yes, sir.
Mr. DELAHUNT. And you do not know how they have been doing?
Mr. NELSON. Not on their profit levels, sir.
Mr. DELAHUNT. You do not?
Mr. NELSON. No. The only thing that we track with regard to money, if you will, is the price of coffee.
Mr. DELAHUNT. Yes. I understand that. I mean, I just thought maybe curiosity might motivate you.
Mr. NELSON. No, sir, it does not.
Mr. DELAHUNT. Okay. At the same time, presuming that this statement is accurate, I do not know Peter Fritsch. He might be an excellent journalist, yet again maybe he is misrepresenting the market conditions. I do not know.
I am really confused. Corporate profits are up. Retail prices, maybe they are falling. I have not noticed it when I buy my fair trade coffee at the Starbucks franchise here, but yet we have 125 million people who are experiencing real pain and anguish. It just makes me wonder. There is something wrong there somewhere.
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Then I read it is 40 percent. Let me ask others. Ms. Crosby, do you sense that the options that are available for the producers are limited, and does that have an impact on price?
Ms. CROSBY. When I was interviewing the mayor of Jinotepe, he said he wished he could talk to the U.S. Congress directly and that he could talk to the President.
Mr. DELAHUNT. Well, you do it for him.
Ms. CROSBY. He said if he could talk to the President he would say, and I wish I had brought the notes with me from the interview. He said that his whole city is suffering from extreme, low prices, and he knows that they are selling on the grocery shelves here in America for so much more.
Mr. DELAHUNT. I understand.
Ms. CROSBY. He has asked, ''Where does the money go to?''
Mr. DELAHUNT. Right, but here is my question. Does he have any choice?
Ms. CROSBY. What he said to me after that is he was talking about what Nicaragua was working on in terms of alternatives to coffee, and he said one of the problems is that when you go to make a transition to an alternative crop, you are talking about years in order to make it really, truly productive. The crisis is now.
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Mr. DELAHUNT. Okay.
Ms. CROSBY. The economist magazines said 5 years; at least 4 or 5.
Mr. DELAHUNT. I understand that and alternative uses, but what I am talking about is now. In other words, at the production level are there choices? Is there competition for the purchase of that coffee that is produced in these countries, or is the marketplace so restricted, so concentrated
Ms. CROSBY. The marketplace is extremely concentrated.
Mr. DELAHUNT. See, I am starting to get a sense of that when I read the Wall Street Journal.
Ms. CROSBY. The American consumer frequently in the mainstream buys by brand and not by quality. The branding has caused a high concentration in the marketplace in the U.S.
Mr. DELAHUNT. You know, it is a 40 percent concentration level here, so is it a free market? Is a healthy, great dynamic of capitalism going on, or is it just a lot of big players that are controlling the market, and there is limited opportunity to sell if you are a campesino up in the hills of Nicaragua or in Colombia? Mr. Lingle?
Page 126 PREV PAGE TOP OF DOC Mr. BALLENGER. Mr. Silva, I think you mentioned the growth of a cooperative. I do not know whether this would apply as well in Nicaragua, but I think you were the one that made the presentation that the cooperative started with 300 acres and then went to membership and so forth and so on.
Mr. SILVA. Yes, sir. The structure of coffee marketing in Colombia is interesting because 30 percent of it is done by the Federation, and it is based on cooperatives. Basically what we do is market for those coops, and also we have the private sector exporters involved.
In the areas in which we cannot be present, the prices, the local prices that the grower gets, are between 20 and 40 percent less than the areas in which we have a presence, so community organizations, cooperatives and direct producer controlled channels to the market increase the price for the final producer, but, at the same time, when we take this coffee to the world market we are limited by the realities of the price.
Mr. DELAHUNT. I understand, but is the world market dominated by so few purchasers, so few wholesalers, let us say, that they, in effect, dictate the price? It is monopolistic, if you will.
I mean, do we have a problem in terms of such a concentration that there are the few players that can really dominate, and I do not want to use the term price fixing, but dominate the market to the point where you are out there?
I understand that excessive production seems to be a problem, but is it compounded by the fact that there are not enough wholesalers, and the marketplace is concentrated with those who can purchase the coffee and, therefore, few options?
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Mr. SILVA. On that particular point, Congressman, in one of my inauguration speeches for the Federation I stated that we are starting to see the early stages of an oligopsonic market structure, meaning basically a reduced number of buyers.
Mr. DELAHUNT. Right.
Mr. SILVA. I will agree. I would not dare to say that we are, as you mentioned, close to a price fixing situation, but the options and the channels available are being reduced and increasingly concentrated.
The ability of the exporters to differentiate their coffees is critical to finding options, and what we are really asking for is allowing us to show the consumer. Let us bypass the strict and the private ways to present our coffee to the consumer. Allow us to tell them what those coffees are, and allow us to take our coffees to them.
Mr. DELAHUNT. You have no problem with that recommendation, Mr. Nelson, the request by Mr. Silva? You would agree?
Mr. NELSON. I have no problem with a good information flow back and forth.
Mr. DELAHUNT. No. You would not have a problem with his recommendation?
Page 128 PREV PAGE TOP OF DOC Mr. BALLENGER. Did Juan Valdez have any effect on your operation? I mean, I know it did on yours, but I was just wondering. You built a quality image with Juan Valdez, and I think that is what Bill was talking about. What effect did that have on the purchasing of coffee by your group?
Mr. DELAHUNT. Mr. Chairman, could I?
Mr. BALLENGER. Yes.
Mr. DELAHUNT. That is okay. There is some banter here, but I guess I need from Mr. Nelson to know that, you know, the grade of coffee, if it is part of the label, for example, I think that is what you were getting to, Mr. Silva.
You do not have a problem with that? In other words, so I, as an avid coffee drinker, know what I am drinking. You do not have a problem in terms of whether I am drinking this or whether I am drinking this. Where is the free flow of information?
Mr. NELSON. And in the United States coffee is regulated under the law with regard to what is in it. If a coffee container is marked coffee in the United States, under U.S. law it must be coffee.
Mr. DELAHUNT. No, no. I am talking about I want to know what I am drinking. I want to know the quality of what I am drinking. I can read. I know if it is coffee. I can figure that one out on my own, but what I want to know is what the hell these beans are. Are they good beans, or are they bad beans?
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I cannot imagine that you would have any objection to having that information as part of what is available to the consumer on the can. Maybe I am incorrect, but if you could tell me specifically yes or no or maybe?
Mr. NELSON. We have not taken a position as the Association on labeling. I did not discuss it with the members prior to this hearing.
Mr. DELAHUNT. Great. Thank you.
Ms. CROSBY. Could I quickly just talk about the mainstream? I just found a paragraph on an issue paper for the Center of Development Research in Copenhagen on foreign aid policy and practice. Could I read two paragraphs real quick? They are short.
''International prices for green coffee is more than half from January, 1999, to November, 2001. Coffee is grown in over 50 developing countries, and low coffee prices are affecting the livelihoods of an estimated over 100 million people involved in its production.
''One of the factors behind the crisis has been oversupply in the global coffee market. Supply has outstripped demand in the last three seasons. Yes, it is often forgotten, but one cause of oversupply was a push to promote export earnings under market reforms. Vietnam, for example, produced less than four million bags of coffee in 1995. In 2001, it produced over 11 million.
''Furthermore, the crisis is not simply a matter of oversupply, but also deregulation of international and domestic markets and of shifting power balances with the global coffee chain. A combination of political and administrative factors, plus the withdrawal of consuming countries' support for the quota system, led to the collapse of the ICA in 1989.
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''At the same time, producing countries started liberalizing domestic coffee markets. In consuming countries, the international trade and roasting segments of the marketing chain became more concentrated. International coffee prices fell, and price volatility increased. However, retail coffee prices declined only marginally. As a result, a sizeable slice of the total income generated in the coffee chain . . .''
Mr. DELAHUNT. Ms. Crosby, can I suggest that you submit that to the Committee?
Mr. BALLENGER. Right. We will be glad to have that in the record.
Ms. CROSBY. Okay.
Mr. DELAHUNT. I have to depart. I apologize, but I have another meeting.
Ms. CROSBY. All right.
Mr. DELAHUNT. Mr. Farr I know
Mr. BALLENGER. Sam may want to pick up on that, or he can do as he wishes.
Page 131 PREV PAGE TOP OF DOC Ms. CROSBY. All right.
Mr. FARR. Thank you, Mr. Chairman. I think submitting it for the record will be fine.
I, first of all, want to really thank you as Chairman of this Committee for having this hearing, and I hope you will allow some questioning here because I really think this is a very important issue.
I want to ask Mr. Lingle. Do you support the ICO? You know what the ICO stands for, the International Coffee Council's Resolution 407, which was adopted and approved at their meeting in February of this year.
Mr. LINGLE. This is the standards and purity resolution?
Mr. FARR. Yes.
Mr. LINGLE. Very definitely. Our association has passed a resolution stating that we should not only support that, but we should come here to Congress to ask you to support it as well.
Mr. FARR. Thank you.
Mr. Nelson, do you support this resolution, the Association?
Page 132 PREV PAGE TOP OF DOC Mr. NELSON. We support that and all efforts that the producers make to improve their quality.
Mr. FARR. Pardon me?
Mr. NELSON. We support that and all the efforts the producers make to increase quality.
Mr. FARR. Do you support Resolution 407 on the quality standards?
Mr. NELSON. The export standard, yes.
Mr. FARR. And the certificates of origin and so on? Okay.
Is there any other product that we importperhaps, Mr. Nelson, you would know thisthat has the socio-economic structure of coffee growing? As I understand it, and Mr. Silva's presentation pointed out that 35 percent of the rural economy of Colombia is in the coffee production. Thirty-five percent of the rural economy. Not a large part of the entire country structure, but still significant, particularly when you look at that segment of society, and that the average coffee plantation, so to speak, is about four hectares.
Is there any other commodity that is grown in such small size, units, that we import as an ingredient? I mean, is chocolate or coca? It seems to me that what I am getting to, and maybe I am not asking the question right. Is the sociology of coffee, the manufacturing of the beans on the plant and how that is agriculturally done, different than any other crop that we have?
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Bananas are grown on big plantations. We import those. Wheat and corn, obviously we know all that. We produce those by machines, but coffee and the micro climate that it grows in sort of requires that it is a very labor intensive crop.
Is there anything else that can be grown in such small percentages, or are there huge coffee plantations that are just machine driven?
Mr. NELSON. The only part of the question that I can answer to is with regard to the coffee specific question. To answer that, yes, there are huge coffee plantations where coffee is harvested by machines.
With regard to other imports or how other agricultural products are produced in producing nations, I would have to say that I am simply not familiar with the overall rural economy or agricultural sectors.
Mr. FARR. I drew the similarity to grape harvesting because I represent a lot of grape growers, and I have done a lot of work with them on quality and labeling and that kind of stuff.
I think there is a similarity between wine and the niche out there and the marketing and the boutique of it as you are seeing in coffee as people are now labeling coffee from different regions of the world and different kinds and classes of coffee. It is getting very boutique in many ways. Then you have certainly the coffee houses of America that were not around when I was in college that are all over college campuses.
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Probably we ought to look at some of the similarities between those specialty crops because there is always supply and demand, but it seems what is moving in that industry is upgrading the quality and then the buyers, the wineries, are essentially paying better prices for better quality grapes. We ought to be probably trying to support that in whatever similar type ag policy we can develop.
Ms. Crosby, you are a business woman. You come here testifying with a social conscience that corporate America ought to have. What is it in your business sense, wearing a business hat, when you are in competition with Starbucks. You are in competition with the big chains. How do you make it?
What do you have to pay for the coffee beans that you buy? If those coffee bean prices go up, could you still stay in business?
Ms. CROSBY. We are carrying fair trade coffee so, in effect, our coffee bean prices are higher, but we can stay in business. What it takes to stay in business is really informing the consumer.
I really support the idea of a good marketing campaign of what are the qualities of coffee, and included in the qualities of coffee would be the unique taste characteristics that make up coffee, also the environmental and social concerns are also the qualities of coffee, so an educational campaign.
Mr. FARR. With all due respect, when I go into your coffee store I just order a cup of coffee. I do not know whether the beans are fair trade. I do not come in and say I want fair trade coffee.
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Ms. CROSBY. When you walk into our premises, you will not help but notice. There are fair trade signs everywhere.
Mr. FARR. I know, but I do not think you need to put the burden on the consumer.
Ms. CROSBY. Quality really drives the market as well, but informed consumers are entering our premises. The difference with the mainstream is that they are not informed. I think it really takes a good educational campaign.
The quality of coffee has gone down over the last 30 years, the general, mainstream coffee. It has decreased over 30 years consistently. The decrease in prices right now has led to even further decline in the quality of coffee.
Mainstream consumers are becoming less aware what is in coffee. They are purchasing a product that is labeled coffee and is not coffee, so their lack of awareness is adding to this crisis.
Mr. FARR. Do you have competition from Starbucks?
Ms. CROSBY. Yes.
Mr. FARR. How close are they physically related to your store?
Page 136 PREV PAGE TOP OF DOC Ms. CROSBY. Across the street.
Mr. FARR. And who sells more coffee?
Ms. CROSBY. I would hate to tell you what I know. I do not know if I can reveal this or not. I know that we are extremely popular, and I understand that Starbucks may not be
Mr. FARR. As successful?
Ms. CROSBY. As the other locations of Starbucks. I do not want to quote that. That is just from staff that happen to work at Starbucks.
Mr. FARR. The point is you have a competitor across the street, and you do better, and you have this higher standard of coffee.
Ms. CROSBY. A higher standard of coffee. We are really concerned about quality. That is what is on this video is the quality labs that we saw that were created by USAID, the company labs.
Mr. FARR. And what do you have to pay for your pound of quality coffee, your fair trade coffee?
Ms. CROSBY. I think it is about $1.38 for us. I do not remember for sure. I am sorry. I am not the person who pays the invoices when they come in.
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Mr. FARR. Mr. Nelson, what is the average price they pay for Latin American coffee from coffee growers?
Mr. NELSON. The average green price of coffee?
Mr. FARR. Yes, per pound. I think it was in somebody's testimony here. Maybe it was Mr. Silva's testimony. I saw Latin American coffee at about 50 cents per pound.
Mr. BALLENGER. Mr. Silva is trying to give you an answer.
Mr. SILVA. The quoted price currently is around 50 cents. The average real price, because the lower qualities are sold at discounts, is around 32 cents per pound.
Mr. FARR. And you pay $1 and something?
Ms. CROSBY. Well, we carry organic, fair trade, bird friendly coffees, as well as conventional. We also carry some conventional coffees.
The price is important, and businesses operate fine with dealing with the price. Concentration in the market is probably more of a problem. In an econometric study that I did in the 1980s that led to the fall of a lot of coffee houses, the concentration that was happening.
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The one other paragraph I think I would love to just get into the record real quick is that
Mr. FARR. You can submit anything you want.
Ms. CROSBY. ''Even if the initiatives work in fragmenting and upgrading coffees . . .''
Mr. BALLENGER. Sam, what is the difference in price of those three?
Mr. Lingle, could you tell me if we were buying coffee? You have three different grades here. I can tell by looking at them. What is the difference in price? Is there a difference that anybody would know? I guess professionals would.
Mr. LINGLE. Well, yes. There is a great deal of transparency on the green side, so those prices are actually quoted every day in some periodicals.
If you looked at the Colombian coffees on your far right, those coffees are traded at anywhere from 10 to 15 cents a pound above what is known as the New York market. The New York market closed today at 48 cents a pound, so if I were buying that coffee I would add 10 or 15 cents a pound to it, and that would be my price. That is assuming that I am large enough to buy a container full, 250 bags.
Page 139 PREV PAGE TOP OF DOC The coffees in the center would be graded out as Type I robusta. I am not sure where the robusta market closed today. I would assume it was around 28 cents a pound.
The triage coffees are traded as a percent of the regular price, so generally those coffees are selling at about just 20 percent of the market price. If that is 30 cents a pound for robusta, then robusta triage trades at six cents a pound. That is why the economics of triage removal are so compelling.
Mr. FARR. What I am also compelled about is I am worried about the statement of Mr. Nelson sort of attacking the market, the price supports for sugar in the United States. The reason we have price supports is because there was a race to the bottom. As you know, the world price for sugar is considerably lower than the U.S. price.
We buy sugar from the very same countries we buy coffee. Those countries love being able to sell it to us as part of our foreign aid program. Why should we not do the same for coffee?
Mr. NELSON. I am unclear on your question, Congressman Farr.
Mr. FARR. El Salvador, Nicaragua, the Caribbean nations, essentially the Central American countries are all sugar cane producing countries.
Mr. NELSON. Right.
Mr. FARR. They produce raw sugar. They have access to the American market. We have a quota for their sugar, and we pay them American sugar prices and also for the Caribbean countries as well. That price, as I said, is considerably higher than the world market price, and we are able to sustain sugar production for those producers.
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Why should we not, if it is good social policy and part of our international aid program, keep that agrarian economy going in agrarian countries? Why should we not have the same policy regarding the purchase of coffee beans?
Mr. NELSON. Well, we do not, I believe, have domestic prices on coffee other than in Hawaii.
Mr. FARR. No, we do not. That is what I am suggesting perhaps.
I mean, I think that there is a real responsibility here from the people that you represent, which are all Fortune 500 companies. We as policy makers have a responsibility regarding American taxpayer money, including the taxes that your companies pay and the assistance we give those companies in greater corporate America being able to do business in this country and being protected by all the laws of this country. That is why I asked the U.S. Department of Agriculture what it does to help those companies because I am sure that one way or another, there are programs where we use our government services to make sure that those companies which are dealing with food quality have standards that are protected, that protect them in the industry.
What I am trying to get at is I do believe that there is a corporate responsibility somewhat of what Ms. Crosby is talking about. She is a business woman. She talks about having this business sense of standards that really affect people's lives.
We have pointed out that in coffee production it is a unique kind of culture, particularly in Central and Latin America. So why, with this great elasticity between what you have to pay and what you sell the beans for, is there not more assistance to try to help these countries by buying these quality beans in greater quantities?
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Mr. NELSON. Well, I think, first of all, that corporate responsibility is important, but I think that corporate responsibility and price subsidies are two different issues. Certainly our members promote selling coffee in the free market. Subsidizing the prices of coffee will stimulate production, and one of the main issues that we are dealing with here is over production.
Our members for the better quality coffees are paying higher prices. In fact, you talk about price elasticity, and I believe that retail prices have dropped since the high back in 1997.
Mr. FARR. Are you buying these cheap beans?
Mr. NELSON. I do not buy any coffee. I would like to point out
Mr. FARR. Your members. Do your members buy the cheap beans?
Mr. NELSON. Our members buy a wide range of beans. What I would like to point out is that the coffee, as it is grown with other commodities, is a natural, imperfect product.
The product that the coffee industry buys as it is imported is not necessarily the product that ends up in the package. As with any raw commodity, those imperfections in the commodity are removed prior to the product being served to consumers. In fact, it is under U.S. law and FDA regulation that requires you to provide wholesome coffee; not something else, but a coffee product.
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The beans that come in from an import standpoint go through many processes to clean them and to take out impurities. It is the same as wheat. We do not expect the wheat farmers to have 100 percent pure Type 1 wheat.
Mr. FARR. Can you see what I am trying to get at? If you do not want us to regulate the market, we are spending in Colombia alone $1.4 billion just to stop the coca trafficking. You saw the pictures there. Because of desperation, the best coffee growers in the world are turning to growing coca. If they are the best coffee growers in the world, they are certainly going to be the best coca growing farmers.
That is not in the American interest, and yet we have American corporations that are racing to the bottom to buy the cheapest coffee you can buy. Where are we going to be able to solve this problem if we cannot get a better price? It rests with the industry.
If the industry does not pick up the slack, then those of us in Congress are going to have to do something, and that is going to be something that your association is not going to want to do. Where is that corporate responsibility that Ms. Crosby talked about?
Mr. NELSON. To answer your first question, if I may, I think that it is very important that we as U.S. consumers, roasters rather, industry, focus on increasing consumption. I believe that the industry is doing the best it can through the development of new products.
Page 143 PREV PAGE TOP OF DOC Mr. FARR. Do you have marketing orders? Do you put private money into that as the Colombian flower growers are putting in Colombian money into the U.S. market to promote more flowers being purchased in this country in partnership with American flower growers? Do you do the same thing?
Mr. NELSON. U.S. companies spend millions, hundreds of millions of dollars, promoting consumption, and as the Association
Mr. FARR. Of higher quality coffee?
Mr. NELSON. We promote the consumption of coffee. There are many different types of coffee. The National Coffee Association has just released to PBS and is coming out with a video that will be shown around the country on PBS regarding the varieties and growing methods for coffee.
Mr. FARR. Would your association put money into marketing fair trade coffee?
Mr. NELSON. Our association believes that fair trade coffee is an option, but that it is up to roasters, as with the other socially responsible things that roasters do.
Mr. FARR. But the quality of coffee, according to Ms. Crosby, is going down. The world production of poor quality coffee is way up, and we are out there buying it at the cheapest possible price. I do not know if I can instill upon you how important it is.
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The Chairman of this Subcommittee is a private businessman. When he takes his private dollars to go down and build hospitals in Guatemala and assisthe is in the furniture manufacturing businessin getting desks into schools, he does with this corporate or private responsibility the same thing Ms. Crosby does.
What I am saying is there has to be more of a conscience in the coffee purchasing process here or we are going to run headlong into wanting to regulate your business. Because if Latin America and Colombia are failing because market prices are falling and we as a country are trying to save that country so it will not grow coca and if one of the ingredients of that is the price of coffee, you can be damn sure that we are going to pay attention to the conscience of the coffee association that you represent and its purchasing and its marketing.
If you want to market more coffee, then market fair trade coffee or market higher quality coffee. Do not market the cheap stuff, because increased consumption of cheap coffee does not solve this problem.
Mr. BALLENGER. I think I have to say that I am a free trade kind of guy, but for a quotation of coffee bearing these three plus what you pay for yours, and it goes from six cents to 30 cents a pound to 58 cents a pound to $1.58 a pound, so there is a great deal of variation in the price that is available, and obviously what you are buying is probably the highest grade that you can find.
Ms. CROSBY. A good quality.
Page 145 PREV PAGE TOP OF DOC Mr. BALLENGER. Very good quality. It appears to me that if I were trying to change the market, and I think I am with you on the idea of Vietnamese coffee, you could draw a picture of a dog or something like this. Is this the kind of stuff you really want?
To take the higher price coffee, and you all did it with Juan Valdez. I mean, I read the history of it. I do not know how effective Juan Valdez is now.
Mr. FARR. He is not now because the price has dropped so much that they cannot afford to market it.
Mr. BALLENGER. That is right. You cannot afford to carry the cost of Juan Valdez anymore.
Mr. SILVA. Mr. Chairman, we had to stop the campaign because we did not have the resources. We had to spend the resources in basically providing social services to coffee growers, and we could not advertise.
Now that you are highlighting the point, first I want to say that we do not believe in price subsidies or supports in the sense that Mr. Nelson was suggesting. We believe that the prices will come up if people are allowed to understand what they are drinking.
The fact that people are willing to pay a premium for Ms. Crosby's coffee, that is significant. A smaller premium for Colombian coffee and also a premium, for example, for certain Guatemalan coffees, shows that when people know what they are buying they are willing to pay.
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Mr. FARR. Right.
Mr. SILVA. What is going on is that people in certain types of coffees, particularly the mass market coffees, are not getting through the message. They are not receiving the message.
In that sense, we advocate the fact that if someone wants to buy Colombian coffee they know it is Colombian coffee that is in the coffee and how much Colombian coffee is there because, for example, what happened with Juan Valdez is we invested $500 million during 10 years to make Juan Valdez and 100 percent Colombian coffee a symbol of quality.
Now you see some product on the shelves that says Colombian blend. They are piggy-backing on the $500 million that we spent. If you do the analysis
Mr. BALLENGER. I am going to shut it down, Sam.
Mr. SILVA. If you do the analysis, Mr. Chairman, of how much Colombian coffee is there, you can actually trace.
Mr. BALLENGER. Right.
Mr. SILVA. You find that branded Colombian blend is less than two or 3 percent Colombian coffee, but it is sold on the perception
Page 147 PREV PAGE TOP OF DOC Mr. BALLENGER. Right.
Mr. SILVA [continuing]. That it is a high quality coffee. It is not. We did a marketing effort, but without the support of transparency and information to the consumer that effort is being lost.
Mr. BALLENGER. Let me just say, and I do not want to keep you all here. I think we can shut it down, but I am a businessman, and I happen to represent the largest textile producing area in the United States. In defense of the situation, I say we have developed a WalMart-psyche in this country. That means no matter where you go, you want to buy the cheapest thing you can find.
As long as you do that, you are not going to find it made in the United States, and you are not going to find your coffee made in Colombia or grown in Colombia. You are going to end up with it tastes kind of strange, but I cannot tell if it is Vietnamese.
The basic idea is you need the promotion that you have and the quality that you have to tell these guys that we all ought to work together and upgrade Americans. I mean, I drink so damn much coffee toward the middle of the day I do not know what I am drinking because sometimes it is terrible. I do not know really whether it came out of a different pot or it is just that time of day that I have corrupted myself by drinking coffee.
I would say that we all, at least this group here, know that we have a real problem in our friends in Central and South America, and someone aiding them to be able to exist in a situation where the world marketreally, if we could figure out a way to prove that this stuff that is grown in Vietnam is cheaper than fuel oil and we can start generating electricity with it, it would be great for the Vietnamese. They could have all the electricity they want, and we would not have to get rid of all the cheap coffee, but that is not a true answer. It is tongue in cheek as a method that might do something constructive.
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I realize handling the big boys that I am a free enterprise guy, too, and I hate to say it, but government controls I do not really see. I do see when I can just in the discussion here come up with four different prices for coffee and sit here and look at it and can see the difference, but once you cook it and grind it all up, I cannot tell the difference between one and the other.
It used to be we could say Juan Valdez on the outside meant that that was top grade, but now, as you say, advertising has gotten Colombian blend in there, and we have now turned coffee into WalMart, the cheapest stuff you can buy.
I wonder. When you go to the store to buy coffee, and I do not do it so I do not know. Do people actually shop for the top grade coffee in the store? I have never been to the grocery store to buy coffee, so I do not know.
Mr. FARR. If you go to Safeway or to even Costco where you can buy coffee in bulk, the Costco bags do have Colombian coffee. In the Safeway stores where you put the bag in and you just fill it up it says Colombian.
I wonder. My question is really a lot to that. Is there anybody who really goes around and inspects that knows whether that coffee is 100 percent Colombian?
Mr. BALLENGER. That is a good question.
Mr. NELSON. I probably should let Mr. Silva answer this, but the 100 percent Colombian and the Juan Valdez logo, which many of our members use, are actually licensed trademarks of the Coffee Federation.
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Mr. FARR. Yes.
Mr. NELSON. Yes. They go through like American companies to protect their trademark and to enforce their trademark, so yes.
Mr. BALLENGER. So you defend his trademark?
Mr. NELSON. Excuse me. He defends his trademark.
Mr. BALLENGER. He does, but if you use it you defend it, too?
Mr. NELSON. Absolutely. U.S. roasters have a big investment in that Juan Valdez program, and that is why they have invested in that as co-branding with the Federation, along with their own brands. Our members respect that logo.
Mr. FARR. My question is let us take Safeway. It is raw coffee. It is roasted coffee, and it is in those where you put the bag under and lift it up. You think that is Colombian. It does not say 100 percent. It just says Colombian.
Do we have any inspection mechanisms in America to know whether that is truth in labeling, that it is really Colombian coffee and not a blend?
Mr. LINGLE. Unfortunately, the answer to that is no. That is part of the reason the specialty industry grew up is the truth in labeling was a very big issue for our members.
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Mr. FARR. Wow. Well, that opens up all kinds of interesting
Mr. BALLENGER. Ms. Crosby has already proven that if you really want to make it work, that is the way to go.
Mr. FARR. If I may, this is a big crop for Colombia.
Mr. BALLENGER. Sure.
Ms. CROSBY. Yes.
Mr. FARR. They have been growing it for a long time, so they invested in the Juan Valdez logo, which was essentially a promotion not for a particular brand. There are lots of coffee growers in Colombia.
Mr. LINGLE. Right.
Mr. FARR. This was just no matter where it is grown, no matter what part of the country, it is Colombian coffee. It is sort of like Made In The USA.
Mr. LINGLE. Right.
Mr. FARR. That was so successful that you could command a higher price for it on the New York market to where it was 10 cents above the other.
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Mr. BALLENGER. But the bottom fell out of that.
Mr. FARR. Now they do not have the promotion, but still people use it. It has become a marketing tool because you go in, and it is labeled on these things.
It seems to me that, frankly, part of the increased popularity of drinking coffee in the United States came from the effort of Colombians
Ms. CROSBY. Yes.
Mr. FARR [continuing]. By advertising Juan Valdez. He is gone because they cannot afford him.
What happens now? Does this Colombian coffee come sort of from anywhere in the world? Do you just call anything you want Colombian coffee?
Mr. LINGLE. No. From our point of view, it is very important for us to protect the geographic indication of origin of our producers. Colombia is where we have the biggest problem.
Mr. Franco was talking about programs in conjunction with USAID. We just started one with USAID in Colombia, and part of that will be verification of origin. This is not a new agricultural problem.
Page 152 PREV PAGE TOP OF DOC A classic example is the potato growers in Idaho and substituting Washington potatoes for Idaho potatoes. While Washington potatoes may be perfectly good and safe for consumption, they are not Idaho potatoes. They did research with the University of Oregon and used trace mineral analysis to either confirm or dismiss claims that potatoes that were grown in Washington were in fact not Idaho potatoes.
If you use a combination of science, of industry involvement through association and create an atmosphere of respect for geographic indication of origin, you can stop what is sort of borderline consumer fraud.
Mr. BALLENGER. I think Sam
Ms. CROSBY. There was Kona that was sold on
Mr. BALLENGER. Excuse me. Go right ahead. I do not want to cut you off.
Ms. CROSBY. There was Kona sold that was not really Kona sold in the marketplace. That happened, too.
I also just want to share really quickly that when I was on my way to the airplane I started a conversation about coffee with about seven people in line about how 25 percent of the coffee inside of their can was not real coffee. Everybody was shocked and asking me what was I talking about. I explained it was called triage, and it is made up of bark and garbage and other things.
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Mr. BALLENGER. Yes.
Ms. CROSBY. They all said the they were not going to buy any more of the canned coffee just from a quality standard, but they had no idea that this was why it was tasting so bad.
Mr. FARR. I mean, the bag may contain it, but before they roast it they filter that, do they not?
Ms. CROSBY. Sometimes it does not always get filtered, unfortunately.
Mr. FARR. I would think they would. There is an analogy there that for the standards, these ISO standards, if we can get those standards established in the United States and enforced labeling because you are going to have origin of labeling, it may help bring the price, but I also think the advertising.
Frankly, Mr. Nelson, I would be glad to go speak to the Association, that you have to help promote quality coffee in your marketing, not just coffee.
Mr. NELSON. Yes.
Mr. BALLENGER. Let me just say, first of all, thank you all for being here. I am sorry we kept you so late.
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As you can tell, not only are we terribly interested in coffee, but I think along with that goes a desire on our part to see what we can do to assist the people of Salvador and Guatemala and Nicaragua and Colombia where that is a major crop.
Now, I do not know what you are going to do about Brazil because we have run into this very same situation, and I do not know if you all remember it or not, but the British and the French wanted to buy bananas from their islands that belonged once upon a time, so they had lots of little bananas that were grown there, and each little guy had a half acre of bananas. They would collect them all and sell them.
Everything was going great guns until we sued using Chiquita Banana and Dole. We sued in the World Trade Organization to say that the British and the French had to buy their bananas wherever the market was cheapest. We won the suit. From that time forward, they had to buy their bananas from Honduras and Ecuador, and it destroyed the little islands as far as the economies that they had in the Caribbean.
I have been to Dominica, which used to have its only income was growing bananas. Now you cannot give the bananas away because they cannot compete possibly with Honduras where, you know, there are 50,000 acres and so forth of bananas.
I do not want to get in that situation with coffee because there are too many people involved for us to damage the economies of all those countries, and that is the reason.
Page 155 PREV PAGE TOP OF DOC I think Sam is trying to put the screws on business, and I would not quite go as far as Sam would, but I do think that the social conscience of the big companies if they look at the idea that we can help the economies of these countries by at least properly identifying what is in the package. I do not know how you go about it, but
Ms. CROSBY. Yes. That is critical.
Mr. BALLENGER. Right. I know we put a whole bunch of Federal money into advertising because we get a fight every time we have it up here about whether we should continue to put that money for the national firms for the international advertising they do.
Maybe we ought to force them to use that advertising and put some money in. I am kidding. Excuse me.
Mr. FARR. Mr. Chairman, I really appreciate this hearing, and I really see your sense because your interest in the well-being of the Southern Hemisphere and my interest from being on the Agriculture Appropriations Committee, which, you know, puts out about $80 billion a year for agriculture in this country. We really need to tie these two together. I think we have done it in many other policies and will find analogies to it.
We need to work with the industry to make sure that we can really kind of upgrade this sense. I think the American consumer wants to do the right social thing, but I do not think we should put the entire burden on just the consumer having to have all the knowledge and to have to have sort of the right speak and just say, you know, I am only going to ask for one type of coffee in order to help campesinos in Colombia.
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I do think we can use private/public partnership ways of improving the quality of life and the quality of the economy for these countries that we are not only dependent to, but historically and physically linked to. That is why it is called Latin America.
Mr. BALLENGER. Yes. Again, let me thank you all for coming. We greatly appreciate the education you have given us.
[Whereupon, at 5:35 p.m. the Subcommittee was concluded.]