Many coffee growers and their employees are enduring a profound economic and humanitarian crisis. For most of the world’s 25 million coffee farmers, prices remain lower than production costs for the fourth successive season. Within the industry, views vary widely about the causes and solutions. Some believe that market forces should drive out uncompetitive players; others advocate intervention to correct the market’s volatility.

We asked people involved with the industry to recommend ways forward.¹ Our study found no single solution, but we did whittle down the promising strategies to a pair that would probably have the greatest impact: steering growers of higher-quality beans toward specialty coffees and helping troubled farmers diversify.² Both ideas are inspired by the fact that coffee is and will remain a commodity product whose price, despite cyclical recoveries, is going to fall steadily. Supply—driven by capricious weather, national policies, and production lags as growers attempt to deal with changing prices—has varied tremendously over time (Exhibit 1).

The current upheaval’s humanitarian cost may resemble that of past market crises, but its nature and origin are different. During the past ten years, the industry’s cost structure has shifted as a result of Brazil’s productivity-enhancing innovations (including the cultivation of less frost-prone areas, better mechanized harvesting, and increased irrigation) as well as competition from cost-efficient new entrants such as Vietnam. The increasing demand for coffee made from the cheaper robusta bean (a development driven by steam-cleaning technologies that can better mask its bitter taste) and rising consumption by price-sensitive consumers have also had an effect. Arabica beans, which roasters consider a better-quality product, are used in higher-end specialty coffees but have become a shrinking component of mass-market brands (Exhibit 2).

Growers of arabica are the focus of our first recommendation: that producers get technical, business, and financial assistance to help them shift to specialty coffees and to establish the necessary relationships with buyers. Consumption of specialty coffees has increased by 10 percent a year since the early 1990s, compared with 2 percent for the overall market. If this trend continues, demand for them could conservatively be expected to grow by 5 percent annually—an additional 2.5 million bags by 2007.³

Producers who do or could grow higher-quality coffee but don’t currently sell it to the specialty market should be the focus of these efforts. Such farmers are most often found in Guatemala, Nicaragua, and Tanzania, working at elevations of more than 3,000 feet. The initiative won’t be cheap, however. The estimated cost of converting half a million bags of coffee to specialty levels is $200 to $275 a bag, a total of $130 million.⁴

But shifting into the specialty segment is no panacea, since it will remain a small part of the overall market (Exhibit 3). As for our second proposal—efforts to diversify—the significant barriers include a lack of clear, profitable alternatives for farmers, unavailable or costly financing, and a strong cultural attachment to growing coffee.

Nevertheless, a partial or complete exit is essential for the many producers who will otherwise remain unprofitable in the long term.

The first step is to identify which farmers should diversify fully or partially, focusing on those who can’t compete on cost or quality. Attractive alternative markets, varying by region, must be explored. Several products seem promising: fresh (particularly organically grown) fruits and vegetables, timber and hardwood, cocoa, ornamental flowers, and niche and specialty foods. Two broad nonagricultural markets—tourism (especially agro- and ecotourism) and light manufacturing—could be included.

During the transition, farmers would receive crisis-relief funding from government and nongovernment sources. The cost of diversifying production, we estimate, would be $1,000 a hectare for each year of the transition. Implementing the program for 1 percent of the total area under coffee cultivation (about 100,000 hectares)⁵ would cost $100 million a year. The process would require two to ten years to complete, and the time needed to recoup the investment would range from two years (for fast-growing crops, such as fruits and vegetables) to seven to ten (for timber).

Success will depend on the level of cooperation among industry players. International development agencies can help by identifying growers for diversification, coordinating activities, and ensuring that farmer-entrepreneurs have the necessary information, skills, and partnerships. Governments in producing countries, for example, could determine the order in which farmers took part in the program and ensure that financing was available. Commercial interests might donate money and equipment to high-potential growers. Nonprofit organizations could align their programs with our two recommendations and avoid giving false hope to farmers who will never grow coffee at a profit.