Coffee Roasters Rev Up PR Machines On Low Coffee Prices By CATHERINE HUNTER Of DOW JONES NEWSWIRES
November 12, 2001

LONDON -- Negative publicity about the struggles of cash-strapped coffee farmers facing thirty-year price lows set against high roaster profits has set public relations efforts whirring at leading roasters.

Within the last month alone, Swiss roaster Nestle SA (Z.NES) has said it's "very concerned" about the current low coffee prices, while U.S. specialty roaster Starbucks Corp. (SBUX) has agreed to promote "fair trade" coffee and contribute $1 million to a fund for farmers.

The decline of raw green coffee prices to their lowest levels in 30-years on massive oversupply has compounded poverty amongst coffee growers and, observers say, sown the seeds for broader economic and political problems in producing countries across Central America, Africa and Asia.

But why are roasters suddenly feeling the need to state their views on low green coffee prices, and with profits and shareholders in mind, will they do anything more than pay lipservice to the problem?

Campaigners for coffee farmers and some industry observers say roasters are profiteering from the situation and as a result, may face the sort of consumer backlash that has plagued other products like genetically modified foodstuffs or cocoa beans.

"It will take a while, because (consumers) aren't conditioned to think about raw materials, but the public is more and more making a connection between a product and what went into it," said Simon Harris, coordinator for the U.S. Organic Consumers Association which has been lobbying for fairer trade.

Roaster efforts to date are "token gestures" when compared with the continuing high prices and returns from the retail market, he said.

While it's estimated world annual coffee trade generates $60 billion in revenues, double the amount in the 1980s, producing countries retain just over 10% of this, compared with 30% in the 1980's, estimates Karen St-Jean Kufuor, senior economist at the Association of Coffee Producing Countries.

At the same time, fewer roasters control a bigger slice of the retail market, with Nestle, Kraft Foods Inc. (KFT) and Sara Lee Corp. (SLE) accounting for a hefty 45%, while farm suppliers are increasingly fragmented after World Bank-led liberalization efforts.

"It's an issue, but not a major issue yet, although it's getting to be one," said one Swiss-based retail analyst.

Roasters Delink Profits From Coffee Farmers' Woes

While roasters have been spurred into stating their concern for coffee producers, their recent statements also reveal a wish to convince consumers that earnings aren't linked to the low coffee prices.

"Together with its suppliers and consumers, (Kraft Foods) shares a deep concern for the livelihood of the producers of coffee around the world," the company said in a statement. But Kraft isn't making "windfall profits" from the lows, and it prefers stable prices to low prices.

Kraft reported total pro forma net profit of $522 million in the third quarter of 2001, up 24% on the year.

Nestle made a similar statement in its for the nine months ended Sept. 30, which showed a 5% rise in total sales to CHF62.4 billion but it didn't report earnings. In 2000, Nestle's net profit was at CHF5.8 billion.

When the figures were release, Nestle Chief Executive Peter Bradeck said people who say his company is benefiting from the coffee lows are wrong. He cited roasting, processing and advertising costs for the failure of retail prices to match the lower green coffee prices.

Sara Lee says its retail price follows structural changes in the purchase price of green coffee, and is, for example, down 18% since 1998 in the Netherlands.

But these statements don't sit well with Denis Sedieu, economist for the International Coffee Organization, which represents consumers and producers. He said that "for most (roasters) this is a good opportunity and (low prices) aren't against their interests."

Likewise, Swiss coffee consultant Walter Zwald believes that a roaster processing 1 million 60-kilogram bags of coffee is $80 million better off this year than last because of the lower raw coffee price. The big three roasters each process more than 10 million bags of coffee a year.

"All Or Nothing" Response Seen From Roasters

Critics aren't yet agreed on what, if anything, roasters should do to help alleviate the worsening financial situation for coffee farmers.

"I don't think that roasters should act as a charity but... there should be changes to the long-term imbalances in the market such as the growing monopoly of the majors and the fragmentation of producers," said the ACPC's Kufuor.

She added that rising ethical concern among consumers, gives producers "a lot of room" to get roasters to change course on their pricing policies.

Coffee consultant Zwald is also appealing to manufacturer concern about negative publicity to seek a $1 a bag donation for a worldwide coffee fund which would fund relief projects in producing and consuming countries.

"The consumer pays more and more attention to social and ethical concerns" so the industry needs to be proactive to avoid a public relations disaster stemming from the desperate circumstances of growers, he said.

However, equity analysts and the ICO's Sedieu believe it will probably be an "all or nothing" response from roasters depending on the public response. If there's not a big push from consumers, then sympathy statements from roasters may be all the help farmers get.

Competition is such in the sector that individual roasters can't spend any substantial amount on changing the market situation if the others aren't, said Sedieu.

"Only if all market participants do the same, will Nestle" or other roasters decide to balance out the coffee profits, a second Swiss-based analyst agreed.

But with economists predicting at least three more years of low prices ahead, there's still plenty of time for this issue to run.