Coffee BREWING A CHEAPER CUP

Coffee quality takes a dive as beans glut the world market

Louis Freedberg, Chronicle Senior Writer          Sunday, August 5, 2001

------------------------------------------------------------------------ Standing in the San Francisco fog selling steaming cups of coffee to shivering miners in 1850, 18-year-old Jim Folger staked his claim as one of San Francisco's first and most successful entrepreneurs. An 1858 miner's diary recorded his progress this way: Folger is "in business for himself down in Frisco and selling coffee to every damned diggings in San Francisco."

Folger was soon followed by Austin and Reuben "R.W." Hills, barely in their 20s, who began roasting coffee in front of their customers at San Francisco's Bay City Market in 1886. Their leaflets claimed their coffee to be "The Finest Coffee in the World."

A decade later, Joseph Brandenstein opened a coffee company a few blocks away named M.J. Brandenstein and Co. - or MJB - after his son Max. Folgers, Hills Bros. and MJB went on to become giant forces in the $18.5 billion U.S. coffee market. But they have long outstripped their rough-and- tumble roots in San Francisco. Folgers is now owned by Procter & Gamble, and Hills Bros. and MJB by Sara Lee. The other major brand, Maxwell House, is owned by Kraft Foods, a subsidiary of tobacco giant Philip Morris. Other than a Maxwell House plant in San Leandro, none has a major presence in the Bay Area.

Nor can any one of them convincingly claim to sell the finest coffee in the world. As these companies morphed into large multinational corporations, coffee quality deteriorated, contributing to a steady decline in coffee drinking in the United States, critics say.

These days, a glut of coffee on the world market - especially from Vietnam, a relative newcomer to the coffee trade - has triggered a new crisis. Prices paid to coffee growers have sunk to their lowest levels in decades. The pitifully low price - 50.4 cents a pound on Friday for better tasting arabica and 21.3 cents for lower quality robusta - has depressed the economies of dozens of coffee-growing countries, forcing growers to lay off hundreds of thousands of workers.

Increasing numbers of these workers - especially from Central America and Mexico - are now fleeing to the United States in search of work, sometimes with fatal results. In late May, 14 Mexican emigrants died in the Arizona desert on the U.S.-Mexico border. Almost all came from the coffee-growing region of Veracruz. Family members said declining prices had devastated the economy there and forced the migrants to seek work in the United States. If it continues, the crisis will also be felt by a new generation of coffee drinkers in the United States, which has come to rely on high-quality cappuccinos and espressos. That's because the low price of even the poorest quality coffee depresses the price of even the highest-grade coffee, forcing producers to cut corners in how they grow their once-valuable bean - or stop growing it altogether.

GREAT TIMES FOR BIG FIRMS

But disaster for growers has been good   news for the large coffee retailers, who are able to buy coffee at bargain basement prices. "The reality is that these have been the best of times for the coffee industry over the last 20 years," said Dan Cox, president of Coffee Enterprises in Burlington, Vt., a consulting and testing company. "The problem is, it is the worst of times for producers." The basic price of coffee is set by speculators on the New York Coffee, Sugar and Cocoa Exchange Inc. and the London International Financial Futures Exchange who have no direct relationship with the growers themselves. And the large coffee retailers are happy to buy the bean for the lowest possible price.

Some importers and roasters in the fast-growing gourmet or "specialty" coffee industry have agreed to pay higher prices to keep growers in business and make sure they keep cultivating high-quality beans. But the specialty market accounts for only 8 percent of the 113 million bags of coffee sold worldwide last year.

Instead, it is the large multinational companies that effectively control the international price of coffee. "None of the companies like ours have the buying ability to move the market one way or another," said Mark Inman, roast master of Taylor Maid Farms in Occidental, an organic coffee importer, and president of the Organic Coffee Association. "Even Starbucks only has the capacity to move the market one-tenth of one percent."

AMERICA DRINKING LESS COFFEE

The explosion of gourmet coffee outlets over the past decade gives the impression that the nation is on a coffee binge. And while the nation's drive for "double capps" and caffe lattes has begun to reverse the decline, in truth,

Americans are drinking far less coffee than in the early 1960s. Overall, the United States accounts for only 20 percent of worldwide coffee consumption, down from 80 percent during World War II.

Some of the decline is a result of the emergence of Coca-Cola and other soft drinks. Another important reason is that the coffee most Americans drink bears little resemblance to the seductive drink that coffee gourmands savor. "The degradation of quality (in the mainstream coffee market) has led to a decline in general coffee consumption," said George Vukasin Jr., vice president of Peerless Coffee Co. in Oakland, a family-owned business near Jack London Square that supplies high-quality coffee to 23 Wolfgang Puck restaurants and other gourmet outlets. "I don't think you're going to find too many people who will disagree with that statement."

But an industry spokesman rejected the criticism that it is responsible for the decline in coffee consumption. In fact, he disputed the contention that coffee consumption has even declined. "If a lot of people are drinking it, it can't be that bad," said Gary Goldstein of the National Coffee Association, representing every major coffee retailer in the United States. "They are obviously meeting a demand. If specialty coffee is so special, why is only 9 percent of the country drinking it every day?"

WHAT IS IN THOSE CANS?

Goldstein demurred when asked about what actually goes into each can of coffee. "Usually it is a blend of several different varietals coming from several different countries, and the blend is secret," he said. "We have no idea what individual companies are using in a particular product." In fact, what actually goes into most cans of vacuum-packed coffee remains a closely held secret. Sara Lee did not return repeated phone calls. Kraft- Maxwell House said it could not comment on its operations because it was in a mandatory "quiet period" before it became a public company last month. And Procter & Gamble said it communicates with the press through the National Coffee Association.

At one time, all these companies were renowned for their high-quality coffee. "They did have good coffee years ago," recalls Erna Knutsen, a leading gourmet coffee importer in San Francisco, referring to Hills Bros. in its heyday. Then, lower-grade robusta coffee from Indonesia appeared on the market.

She remembers a well-known buyer for Hills Bros. telling her, " ÔErna, a little bit won't hurt anybody.' But a bit," she added, "became a lot." As companies expanded and competition intensified, large companies began tampering with coffee beans to increase profits. Some cut down on roasting times to limit weight loss during the roasting process. Some even added the water back after the roasting was completed. Others convinced restaurants they could use 2 ounces per pot of coffee, instead of the 3Ç ounces connoisseurs believe is necessary to produce the best cup of coffee. Some put the outer skin of the bean, known as chaff, back into the blend after roasting. Grinding the coffee and putting it in vacuum-packed cans also affected the flavor, as have hybrid and genetically engineered coffee plants developed to be more resistant to disease.

"Everything became convenient, quick and cheap, but quality itself was the last consideration," said Robert Fulmer, president of Royal Coffee, a leading Bay Area importer. "They lost sight of the fact that people were buying coffee because of the quality and not because of the cost."

THE RIGHT TO CHEAP COFFEE

And American consumers have traditionally believed that inexpensive coffee is their due. So retailers have felt intense political pressure to keep coffee prices low - regardless of its impact on growers. At least five times in the last century - most recently in 1976 - Congress has held hearings to investigate the high prices of coffee.

"Every time prices have gone up, the country practically has a meltdown," said Mark Pendergrast, author of "Uncommon Grounds: The History of Coffee and How It Transformed Our World" (Basic Books, 1999). "We think it is our birthright to get cheap products from Third World countries, and we act as if the world is coming to an end when producers can actually make a living from it."

In recent years, retail companies have begun to improve their products to capture a slice of the $7.5 billion specialty coffee market in the United States - as well as to develop new brands to attract younger coffee drinkers. Today, a walk down any supermarket aisle offers the consumer a dazzling, and often confusing, array of coffee products of varying quality, all packaged with seductive names and descriptions.

New products entice customers with names that sound like the latest ice cream flavors. Folger's Caffe Latte, for example, comes in flavors like Vanilla Vibe, Chocolate Mint and Caramel Grove. Each contains some 29 ingredients. Coffee - instant, at that - is fourth or fifth on the list. Of all the corporate giants, Nestle, with $6.4 billion in coffee sales, is making the biggest push to capture a share of the gourmet coffee market - as well as to lure youthful drinkers with coffee concoctions that contain more sugar than coffee.

In eight West Coast markets, including San Francisco and Sacramento, Nestle has set up what it calls "the Nestle solution center" that offers one-stop coffee shopping. In place of instant coffee, you will see new Nescafe products ranging from actual whole beans to an assortment of ground coffees, some with flavors like "cool Java" blend and hazelnut French roast. "We want to bring the excitement back into grocery coffee," said Gilles Pelissier, marketing manager for Nestle USA's Beverage Division in Glendale. So far, Nestle has resisted pressure to lower its prices as the commodity price of coffee has plummeted. "We don't want to play this game of price increases and decreases," said Pelissier. "We want to put everything back into the quality of the product."

Not so with most of its competitors. What stands out about most supermarket coffee is its stunningly low price. At Safeway recently, a 2-pound, 2-ounce can of Maxwell House "good to the last drop" rich French roast was going for $8.99, or 26.1 cents an ounce.

If you had a Safeway card, you could snag a can of its "100 percent Colombian coffee" for $4.99, or 12.8 cents an ounce. Compare that to a packet of Nestle's 10-ounce whole-bean Kona blend, which was selling for $6.99, or 69. 9 an ounce, or Starbucks' 12-ounce house blend, which was selling for $9.29 for a 12-ounce pack, or 77.5 cents an ounce.

TOUGH TIMES FOR THE FARMER

In fact, the average price of a can of ground supermarket coffee is now $3. 20 a pound, down from $4.40 in January 1998, according to the National Coffee Association. At that price, it is no wonder that coffee growers in dozens of countries are struggling to survive. In recent years, a range of consumer organizations have put pressure on Starbucks, Peets and other specialty coffee chains to carry "Fair Trade" coffee in their stores. That means they agree to pay $1.26 per pound of high- quality coffee directly to the growers, nearly twice the prevailing commodity market price.

But many coffee insiders feel that the focus on pressuring specialty coffee chains to buy Fair Trade coffee has been misplaced. Instead, they say, the focus should be on Procter & Gamble and the other major coffee retailers. "The big companies are the ones who are buying most of the coffee," said author Pendergrast.

"Fair Trade by definition is oriented toward small producers who band together in cooperatives to sell their coffee - it doesn't affect the plight of workers on the big plantations at all. When you're buying Fair Trade coffee,  you're not affecting the lives of workers on major plantations." The Fair Trade strategy has triggered open disagreements between traditional allies. Inman, president of the Organic Coffee Association, recently wrote a sharply worded letter to the Organic Consumers Association, denouncing its calls for a boycott of Starbucks for not aggressively promoting the Fair Trade coffee it carries.

"Going after Starbucks will simply hurt the biggest buyer of specialty coffee, the one that pays well for quality coffee," wrote Inman on his organization's Web site. "What's the point?"

Recently, Whole Foods Market, the natural foods supermarket chain, voluntarily agreed to pay growers 60 cents per pound more than the commodity price. But, in general, the large coffee retailers have avoided paying more for coffee than the going rate.

QUALITY ON THE DOWNSWING

The low prices eventually could affect even the booming specialty market, which counts on being able to market 8 million to 10 million bags of high- quality arabica beans worldwide each year. Because the price of low- quality beans can affect the price of high quality beans, growers are tempted - and in many cases forced - to cut corners at every juncture of the complex coffee cultivation process.

"If prices stay at these levels, it is going to be a huge problem," said Peerless Coffee's Vukasin. "Most farmers are not going to be able to put the care into maintaining and building the quality of their coffee." That may explain why the production of arabica coffee is expected to drop again this year - by an expected 7 million bags since 1998. "Farmers are just walking away from their farms," said Don Hawley, administrative director of the Specialty Coffee Association of America. "And the folks that buy quality coffee are highly distressed and very nervous." Vukasin hopes the long relationships his family's business had developed with coffee growers in Costa Rica and other coffee-growing countries will shield his firm from the crisis now shaking the entire industry. "I'd like to be here in 20 or 30 years," he said. "But if farmers go bankrupt and there are no farmers growing coffee, I am going to have to look for another job."

E-mail Louis Freedberg at lfreedberg@sfchronicle.com..