Does growing coffee help an economy?
Approximately 151mm 60kg bags of coffee were consumed last year. Said another way, 1.3 trillion cups of coffee were consumed or 183 cups of coffee per person in the world. It is one of the most consumed beverages in the world and shows no sign of abating in its growth. There are approximately 65 countries that produce coffee but the clear majority are only involved in the initial growth phase and sometimes the processing stage. The roasting stage adds a substantial amount of value, but it is primarily done in coffee-consuming countries such as Germany, the Netherlands, and Canada.
We tracked coffee production in all countries over the past 65 years and looked to see if an increase in coffee production coincided with economic growth. There are a variety of reasons for failing or thriving industries for coffee within domestic economies, but the primary driver is usually government policy. In the case of the Philippines, coffee production has been failing because a large portion of coffee production is in Mindanao which has been politically unstable and because of strong incentives to shift to corn production. Similarly, in Ghana, where coffee production is only 10% of what it was in 1990, the government has provided no support for coffee farmers while providing strong incentives to increase cocoa production.
In the case of those countries that experienced the strongest growth in production, the numbers are quite incredible, Vietnam is producing 19.5x what it was producing in 1990 and 17% of the world’s market for coffee. Vietnam coffee, however, is not regarded as particularly good. In that same time, Vietnam’s GDP per capita is 22.3x what it was in 1990 and aggregate GDP is 31.1x what it was. Vietnam is a clear success story. Similarly, Nicaragua has experienced 4.6x growth in coffee production, 8.8x growth in GDP per capita and 13.2x growth in its aggregate GDP.
On the flipside, Zimbabwe and Zambia have suffered the biggest declines in coffee growth over the last three decades. Zimbabwe’s coffee production is only 4% of what it was in 1990 and Zimbabwe is only 9% of what it once was. In that time, Zimbabwe’s GDP per capita has only increased by 20%. Zambia has had a 2.9x growth in GDP per capita which suggests that the economy was able to grow using other sectors of the economy.
A reasonable approximation of coffee’s value chain is provided here. Similar to cotton, where the primary value comes towards the later steps of processing, developed countries tend to be disproportionate beneficiaries as a result.
The Top 10 and Bottom 10 are shown below. There is a statistically significant difference of 6% annualized growth amongst the top 20 countries in coffee production growth compared to 3% annualized growth amongst the bottom 20 declining countries in terms of coffee production. This would suggest that focusing on the right crops and seeing growth in those crops are strong indications of an economy improving. The environment necessary for production increases is a strong government, increasing efficiencies (often through automation) and adequate infrastructure to get products to market. All these factors are exactly what we look for in a well-functioning Frontier Market.
There are of course exceptions as we have noted above, Philippines directed itself towards other crops and in the case of strong growth, Brazil has been able to grow coffee production in spite of the government, with the most efficient and automated coffee production in the world. Brazilians have been at the forefront of innovation in processing for coffee (hybrid wet-dry process) as well as in the actual harvesting of the coffee fruit. We have been through a particularly bad time in Brazil’s history with the shadow of the horrendous Rio 2016 Olympic Games and scandal after scandal. It is important though, to recognize that the country was and remains a superpower in a variety of industries including agricultural production.
One thing to note about our study is that we did not look at the value of coffee. Brazilian and Vietnamese coffee are generally inferior in quality to places like Ethiopia, Nicaragua, or Indonesia. However, we did not focus on value because there would be a clear link with the value of coffee and economic growth. However, a future post would be worth exploring with respect to countries such as Zambia where the quality of coffee has improved dramatically in the past decade.
Data for all coffee growers is courtesy of the international coffee organization and you can see it here. Noteworthy in our analysis is that the top 10 coffee producers who have increased production, also comprise 67% of total global production, indicating that the winners keep winning. Whereas, even at its peak, Zimbabwe only supplied about 1% of the world’s coffee compared to 0.01% today.
As always, any questions or comments please let us know.