May 6, 2020

Why Is Green Coffee Illegally Smuggled Across Borders?

Every hour, thousands of kilograms of coffee are bought, sold, and transported around the globe. While most of this coffee will depart from producers and arrive at roasters through traditional channels, a significant volume will cross producing countries borders illegally via smuggling. 

Lee este artículo en español ¿Cuáles Son Las Razones Del Contrabando de Café Verde?

Here’s why coffee is smuggled across countries, who benefits from it, and what can be done to address it.

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Conditions That Encourage Coffee Smuggling

Food products are smuggled across countries and continents for many reasons, such as when a product’s price at origin is lower than its price in other countries, or when a product can be passed off as coming from an area renowned for its production, in order to attract higher prices. Olive oil is smuggled this way and is sometimes falsely sold as coming from Italy to attract a better price premium. Honey is also smuggled this way, often to get it into a country where steep import duties are issued on certain country’s imports.

The values placed on coffees coming from different origins drives its smuggling across country borders. Martin Mayorga, Founder of Mayorga Organics, says that green coffee is often smuggled across neighbouring countries where major price disparities exist. Jorge M. Lagos is a coffee producer and exporter based in Northern Nicaragua. He adds that when coffee is resold in another region, it’s sometimes falsely labelled as organic, Fairtrade, or having a similar certification to further increase its value.

Coffee smuggling is common in dollarised countries like Ecuador and El Salvador, where the use of the US dollar as a primary currency contributes to production being more expensive here than in other countries. Felipe Cisneros is the Owner of Café Traviesa in Quito, Ecuador, and explains that “the cost of production [in Ecuador] is three-times higher than in Colombia and Peru”. José Eguiguren, General Manager of specialty coffee farm Hacienda San Gertrudis in Ecuador, adds that having to pay minimum wage and contribute towards social security also means that the cost of labour in Ecuador will be higher. 

As a result of this coffee is frequently smuggled into Ecuador from neighbouring countries like Colombia – something which benefits both countries. Colombian producers located close to the border can sell their coffee to Ecuadorian smugglers, and will be paid a better price for it in US dollars (one Colombian Peso is currently worth less than a third of a US dollar) in comparison to selling it in Colombia for payment in Pesos.

Ecuadorian smugglers benefit from this arrangement by being able to access good quality coffee and paying less for it. Because Ecuadorian producers have to factor in the cost of production and labour in US dollars to their coffee prices, they will likely charge much more for a similar quality coffee that Colombians are offering for much cheaper.

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Other Countries Affected by Coffee Smuggling

Smuggling takes place in all coffee-producing countries around the world. Chris Treter, CEO of Higher Grounds Trading Co. in Michigan, USA, describes it happening in specific African countries, where “Sources both on the ground in the Democratic Republic of Congo (DRC) as well as expert analysis states that up to 70% of the DRC’s coffee production is illegally smuggled into Rwanda and Uganda, where much of it is sold to international buyers as Rwandan and Ugandan coffee.” 

For these smallholder producers, low sales prices are commonly cited as a reason why they sell their coffee to smugglers. Many farmers sell their beans to international buyers and cooperatives but aren’t fully paid – if they’re paid at all. They also have to deal with high production costs due to challenging environmental conditions, and most can’t access loans to improve their production processes by hiring more workers or better equipment. 

When producers sell their coffees to cooperatives, the cooperatives resell it on the export market for a higher price per kilo than what they paid for it. Little of this profit is passed back to the farmers. As a result, some farmers smuggle their coffee into neighbouring Rwanda or Uganda, where it’s labelled as Rwandan and Ugandan coffee and sold onto the market. Coffee smuggled into these countries attract superior prices, and producers also benefit from instant payments without the usual waiting period. 

Who Smuggles The Coffee?

While smuggling involves a coordinated effort and many people, it’s usually spearheaded by certain coffee supply chain members. These members are usually middlemen, who José says have the logistics and connections to buy coffee, smuggle it across borders, and resell it to roasters and merchants. 

This often occurs because producers are far from the facilities, technology, and equipment required to sell coffee. Often middlemen have better access to this, as well as connections to markets willing to buy the coffee. 

The Long Term Impact of Working with Smugglers

Despite both parties benefitting at the outset, smuggling can disadvantage producers in the long term. Middlemen often offer unfairly low prices to producers and can take advantage of producers’ need to sell their coffee urgently. This often takes place when a new harvest is approaching and producers still have stores of coffee from previous harvests they need to shift. 

Ena Escobar H. is the CEO of Galletti S.A, a coffee exporter based in Quito, Ecuador. She says that when middlemen buy coffee from producers it impacts more than just producers, as everybody in the coffee supply chain will get a minimum payment for their work or product. According to José, this can create a vicious circle that disincentives local coffee production. 

Other Pitfalls of Smuggling

Coffee smuggling negatively impacts the entire coffee supply chain. One a countrywide scale, it keeps the country where the coffee is being smuggled from, from benefiting from tax. Chris says that with smuggling, taxes on exports end up being allocated to the country of export instead of its origin country. This also keeps the economy from growing.

For Ena, a pitfall of smuggling is that it may lead to producers abandoning coffee production altogether due to the high cost of labour and fertilisation and the low prices they get for their coffees. José cautions that smuggled coffee is also more likely to lose its quality, as contamination and climate control isn’t always possible during the smuggling process.

Smuggling can even impact which country’s coffees are considered high quality. Michael Gomez Wood is Executive Director at non-profit organisation fi-lan’thro-pe. He says that in addition to suppressing smallholder upward mobility, smuggling can damage an exporting country’s image of quality and an importing country’s ability to really judge their own quality – leaving both country’s producers and buyers unable to accurately value their product.

How Smuggling Impacts Commercial Coffee Production 

Ena says that the impact of smuggling is higher when it comes to commercial coffee. When commercial buyers (unknowingly) purchase smuggled coffee, they’re doing so assuming that the producer is getting a good deal in the process – when in reality, this isn’t happening. José believes that this is less likely to happen with specialty coffee, as specialty coffee buyers are more likely to develop relationships with farmers they know and trust, and visit their farms regularly.

How To Discourage Coffee Smuggling

Currently, limited strategies have been created to address coffee smuggling, despite it being illegal in most countries. While threats of fines, product destruction, jail, and loss or restriction of license/movement exist, they aren’t a sufficient deterrent in countries where penalties rates are low and the conviction process is slow. 

Most interviewees agree that addressing the negative impact of smuggling won’t be possible without help from the government on a national level. Many producing countries who fetch high premiums for their coffees have had their governments and local coffee organisations invest significantly in marketing and branding their coffee and its unique origins. This is something that helps get international markets aware of their coffee and improve this market’s perception of its quality. Doing so could increase demand for origin coffee from roasters and green coffee buyers, improving the price it fetches per kilo and making smuggling a less attractive option for producers.

José feels that Ecuador’s coffee production could do with a dedicated national organisation to market and promote the region’s unique coffees. “My personal opinion is that coffee [isn’t viewed] as a priority by the Ecuadorian government [compared to] other agricultural products like cacao [and] bananas…. [as a result]… Ecuador has one of the lowest yields per hectare in the region.” He notes that change is starting to take place in Loja, where coffee producers, non-profit organisations and the provincial government have partnered to create a Provincial Coffee Board, which is aiming to secure an Appellation of Origin for Café de Loja to protect its local production. 

Coffee smuggling is a complex topic, and while it might seem to benefit producers, it can harm them in the long term – which could hamper their coffee production. 

It will take a government-led effort to curb this on a national level, which will involve incentivizing all members of the coffee supply chain. This could involve making it more financially attractive for producers to sell their coffee in their own countries to buyers – and making international buyers aware of the value that coffee from these countries has to offer. It will also mean communicating to roasters and green coffee buyers that smuggling will impact the quality of in-demand origin coffees. 

Ultimately, as Ena says, traceability, fostering strong direct relationships between buyers and producers, and prioritising ethics over profit will be key to a lasting change taking place.

Enjoyed this? Then Read What to Consider When Developing a Sourcing Program

Photo credits: Ana Valencia, Alejandra M. Hernández, Angie Molina

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