November 8, 2021

Why is green coffee traded between producing countries?

Generally speaking, coffee producing countries aim to export to major consuming countries and increase international demand. This often supports coffee farmers to obtain better prices for their crop and builds the country’s reputation as a coffee origin on the global stage.

But green coffee is actually often traded between producing countries as well. Some origins import coffee to satisfy certain industry needs and the domestic market, even though they might export most of the beans they produce themselves. Meanwhile, others simply do not produce enough to cover domestic demand

This trade dynamic is a contentious issue which has been discussed by coffee producers for decades. Many recognise this as a way for producing countries to generate more income. But are there disadvantages?

To learn more, I spoke to four industry experts about this kind of green coffee trading. Read on to find out what they said.

You might also like our article on how we can increase coffee consumption in producing countries.

Analysing trade data between producing countries

José Dauster Sette is the Executive Director of the International Coffee Organisation (ICO). He tells me that between 2015 and 2018, the world exported an average of around 121 million 60kg bags each year. These quantities include green, roasted, and soluble arabica and robusta coffee. 

Of the above figure, approximately 8.5 million bags are traded between producing countries, which accounts for some 7% of total exports. 

Within this trade, green robusta was the most exported category, totalling just under 5 million bags. This represents 59% of the market. 

Green coffee for soluble was second, totalling 1.7 million bags, equivalent to 21%. Arabica accounted for 19%, and roasted coffee just 0.43%.

Jose explains: “This shows that the trade is mostly concentrated in soluble, for processing reasons, and robusta for price and quality reasons.

“When we subdivide the coffee trade between producing countries into these different segments, the proportions are quite different from the overall trade. In total, soluble coffee represents 21% of exports, compared to 8% in global exports.”

Interestingly, José adds that 74% of all coffee exported by Vietnam, Brazil, and Indonesia went to other producing countries during this period. Another major exporter is Honduras, which shipped 460,000 bags to producing countries, including Mexico, Peru, India, and Colombia.

Why coffee is traded between origin countries

Joao Mattos is the Latin American Coffee Production and Market Coordinator at CLAC Comercio Justo, a network that represents all certified Fair Trade organisations in Latin America. He explains that there are two reasons why producing countries import coffee.

Firstly, he says, it meets domestic demand and provides stock for the instant coffee sector, which is often popular. Secondly, the price of incoming coffee is often much cheaper because of its lower quality. 

José agrees, but he adds that it is difficult to determine the destination of imports. Once the beans enter a country, it is tough to trace them. Therefore, it is unknown how much of it is used for soluble versus how much is used for blends, for instance.

Let’s look at Mexico as an example. Mexico is the ninth-largest coffee producer in the world. According to ICO figures, its production figures have sat at around 4 million bags since 2017.

However, between 2015 and 2018, the annual average amount of green coffee imported reached 715,000 bags – the third-highest for producing countries. These beans came mainly from Brazil, Vietnam, and Honduras

“Robusta is ideal to [make] soluble coffee, [as] it has a much higher cup yield,” José says. “So a bag of robusta produces more soluble coffee than a bag of arabica. 

“However, Mexico isn’t just importing to satisfy its domestic market. Some of the imports are actually processed and re-exported as soluble coffee, mainly to Central America.”

Vera Espíndola Rafael is an agricultural economist and coffee consultant based in Mexico, and the Director of Strategic Developments at Azahar Coffee. She explains that her country has one of the largest instant coffee industries in the region. 

“In Mexico we have two plants. The second one is under construction,” she says. “[It is] a huge plant, one of the largest in Latin America for soluble coffee, simply because Nestlé has a very strong presence. So coffee is definitely being imported, simply because coffee is cheaper.”

In contrast to production, domestic consumption In Mexico is low – around just 1.6 kg of coffee per capita per year. Most imports are used to satisfy internal demand for soluble coffee, as Vera explains.

While not everyone is happy with the situation, she says, the huge requirements of major producers like Nestlé leave them with little choice.

“There is the criticism that it [the coffee used] must be Mexican coffee,” Vera says. “Nestlé understands that part. They are, supposedly, committed to buying more Mexican coffee. 

“However, at the end of the day, Mexico’s production is not enough to supply the demand for a factory like that.”

Coffee production in some countries has also been weakened by disease outbreaks, and Joao says that Mexico is one of the countries that has been affected.

Quality vs price

Price differentials for each country’s coffee are also a determining factor in the trade of green coffee. 

One example is Colombia, which is the third-largest coffee producing country in the world. In 2019, its production totalled almost 14.8 million 60kg bags. Of these, 13.7 million (93%) were exported.

Consequently, only 1.1 million bags (7%) were left over to meet local demand. Internal consumption in Colombia is estimated to be around 1.8 million bags, leaving a gap of 700,000 bags or so. Colombia therefore has to import coffee from other producing countries. 

This is also because the premium that Colombian coffee receives for quality when exporting internationally is much higher than in neighbouring countries with similar export quality. It is equivalent, on average, to an extra US $0.26 per pound on the international market.

Joao explains: “[In January], the sixth most important destination for Brazil was Colombia. I think that a lot [went] to the domestic market, but it is also used for the instant coffee industry.”

In general, it’s accepted that international exports lead to better prices for coffee farmers, and that international trade is beneficial for the national economy. This also applies to trade between origins, specifically when the country buying the coffee is able to pay a higher price than the local market would.

“If you look at the price differentials of different countries today, it is quite diverse,” Joao adds. “We have countries with negative differentials like Brazil and other huge differentials like Costa Rica.”

Because of the price differences for coffees from different origins, some people have even started to smuggle coffee between neighbouring countries in order to obtain better prices. 

René León Gómez is the Executive Secretary of Promecafé. He explains that this illegal practice is surprisingly common in producing countries. 

He says that it is especially prevalent in Central America, as the price of the bean offered by a country of origin can be lower than what is paid in other regions. 

“In Honduras, many people in the coffee exporting or trading industry were complaining and constantly bringing this to light,” René says. “They were claiming that a lot of coffee from Honduras was escaping to Guatemala through illegal or informal channels.

“But not everything is disregarded. People who trade that coffee or the coffee producers themselves have their reasons, and we understand them. 

“For example, again with coffee from Honduras, the price that is being paid in the national market may be lower than the price paid by a buyer – someone who is thinking of taking the coffee to Guatemala or Mexico.”

The benefits and disadvantages

For all its perceived benefits, there are some opponents of this unique trading dynamic. 

Joao and José both support it. They say that it gives trading countries the ability to strengthen commercial ties, increase cash flow, and add value to lower-quality coffee.

“There are always some concerns in the producing sector, in terms of importing. [For example], some people think that this lowers prices in the domestic market,” José says. “But I think that most of the time, what enters [the country] frees higher quality coffee to obtain higher prices abroad. 

“So, there is a certain complementarity. I don’t see it as much in terms of a threat.”

There are also concerns about the lower quality of coffee traded between producing countries, which centre around this not improving the quality of coffee consumed internally.  However, in response, José explains that most producing countries have little purchasing power in comparison, and aren’t able to sustain a large market for high-quality coffee.

“This is a reality,” he says. “Must we do something in this regard? Yes. I look at my country, Brazil. It was a country with low purchasing power and low quality. Over time, better quality and good marketing programmes increased the volume of consumption. Now it is going through this stage of differentiation, with the emergence of specialty coffee.

“I am in favour of first growing the market, and then subsequently segmenting it and going for this kind of value addition.

Vera agrees, saying that she participated in a relevant study. The study indicates that, in the coming years, coffee prices are unlikely to increase.

In this event, it will be necessary to encourage domestic consumption of higher quality coffee. This would reduce the pressure on producing countries created by the international market. 

The study reads: “Creating a program for the promotion of coffee consumption led to success both in Brazil and Colombia. 

“Professionals were trained and consumers were informed, and thus more coffee was consumed, which led to more demand in understanding local specialty coffee.”

The trade of green coffee between producing countries is a unique phenomenon in the coffee sector that is rarely discussed. It is, albeit convoluted, a way for farmers in producing countries to obtain better prices for the coffee they grow. These are prices which would not necessarily be achieved in the domestic market. At the same time, it also helps to satisfy the demand for soluble coffee and domestic consumption.

On paper, this is not necessarily a negative relationship. The main objective of these countries is to secure a market for their farmers’ production and to maintain a healthy economy. 

However, it does open up discussion of a further challenge: how producing countries can promote the domestic consumption of higher-quality coffee. This, in turn, will massively improve the livelihood of local coffee farmers and the long-term sustainability of coffee production.

Enjoyed this? Then read our article on what’s keeping producing countries from growing coffee consumption.

Photo credits: Tatiana GuerreroOIC.

Perfect Daily Grind

Originally posted on PDG Español. Translated by Tati Calderón Cea.

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