Using intellectual property rights to create value in the coffee industry.

• Author: Johnson, Daphne Zografos
• Position: International Intellectual Property Scholars Series

1. INTRODUCTION 284 II. A SHORT HISTORY OF THE COFFEE BEAN 285 III. GEOGRAPHICAL EXPANSION OF COFFEE PRODUCTION 286 IV. THE COFFEE CRISIS 288 V. CHANGES IN CONSUMER CONSUMPTION PATTERNS--THE DECOMODIFICATION OF COFFEE 291 VI. DIFFERENTIATED COFFEES 292 A. Specialty and Gourmet Coffees 292 B. Single-Origin Coffees 294 1. Geographical Indications 294 2. Trademarks 301 3. Certification and Collective Marks 304 C. Sustainable Coffees 308 1. Ethical Consumerism 309 2. Organic Coffee 310 3. Shade, Bird, and Eco-Friendly Coffees 313 4. Fair Trade 315 a. Definition and Historical Development of Fair Trade 315 b. The Fair Trade Philosophy, Economics, and Principles 316 c. Fair Trade Principles 318 i. Direct Trade with Producers 318 ii. Long-term Trading Relationships 319 iii. The Minimum Price and the Social Premium 319 d. Fair Trade Labelling 320 e. Certification 322 f. Fair Trade Coffee Facts 322 5. Industry-Driven Certification Initiatives 325 VII. CONCLUDING COMMENTS 325 I. INTRODUCTION

   Coffee is the single most important tropical commodity traded worldwide. It is produced in over 50 developing countries, and it is estimated that some 20 million rural families, (2) or 125 million people, (3) depend on growing coffee throughout the world for their livelihoods. Over the past decade, coffee producers have been facing considerable difficulties because of low and unstable coffee prices. In 2002, coffee prices collapsed to 100-year lows in real terms, leading to a world coffee crisis. Meanwhile, the coffee economy in high income countries has been moving in the opposite direction, and the crisis is hardly visible from Starbucks-type western coffee chains. This paper examines how coffee producers in developing countries can use intellectual property, or intellectual property-related rights, as differentiation tools to move from pure commodity exports to higher-price exports in niche markets and create value. It takes into account the influence of new consumption patterns in the coffee industry and analyzes the various differentiation techniques that have been proposed, such as single-origin, specialty and gourmet, and sustainable coffees. Finally, it examines the situation of the coffee industry in Vietnam and Indonesia, who are also two of the most important coffee producers worldwide in terms of volume, and where the coffee sector has experienced an explosive growth since the 1980s.

2. A SHORT HISTORY OF THE COFFEE BEAN

   The history of the coffee bean starts in Northeast Africa, in the province of Kaffa in Ethiopia, where the coffee tree probably originated. Used traditionally by Ethiopian nomadic mountain warriors as an early type of energy bar, (4) "coffee was first eaten as a food sometime between 575 and 850[,] long before it was made into a hot beverage in 1000-1300[]." (5) Western accounts of the discovery of coffee include various fanciful tales told by local traders to the first European merchants who came to Yemen to buy coffee in the early seventeenth century. (6) According to one well-known legend, coffee was discovered by an Ethiopian goat herder, Kaldi, who noticed his goats would behave frenetically after eating red coffee berries. (7) Curious, Kaldi tried some and as his tiredness quickly faded, "he began dancing about excitedly with his goats." (8) Kaldi was noticed by a monk from a local monastery, who "tried the fruits himself, and, noticing the effect, came [up with] the idea of boiling the berries to make a drink [that would] help the monks stay awake during religious services." (9)

   From the Ethiopian monks' experimental drink, to today's busy coffee shops, coffee has become increasingly popular over the years and has grown into a central part of day-to-day life. By the mid-sixteenth century, the drink had come to be considered "as important as bread and water," so that drinkers in Constantinople, Cairo, and Mecca formed special areas where to drink it, which became the world's first coffee houses. (10)

   During the sixteenth century, most coffee beans were procured from southern Yemen where the Arabs had been cultivating coffee since about 1500. (11) The two main ports for coffee were Mocha, on the Red Sea in Yemen, and Jidda, the port of Mecca. (12) At the time, coffee was "a monopoly of the Arab world, and the secrets behind its cultivation were jealously guarded." (13) "Foreigners were strictly forbidden from visiting coffee farms, and the beans could" (14) only be exported after boiling or half-roasting to prevent them from germinating. In addition, fines were imposed on traders who would try to smuggle them out. (15) Nonetheless, "by the early seventeenth century, monopolistic control ... began to crumble" (16) "[a]s reports of the new beverage started to circulate through[out] Europe," (17) and merchants started to take notice of this new opportunity. The expansion of European trade and colonization led to a rapid spread of coffee cultivation from Ethiopia and Yemen to other parts of the world, and to the decline in importance of the port of Mocha. (18)

3. GEOGRAPHICAL EXPANSION OF COFFEE PRODUCTION

   From the early eighteenth century, as most of the major colonial powers became players in the production of coffee, (19) coffee cultivation increased dramatically throughout the tropics. At the beginning of the nineteenth century, coffee was cultivated exclusively on islands. However, in the decades to follow, with the advent of the railway revolution, cultivation quickly spread to the Americas, including most of the newly independent Latin American countries. (20) Brazil became the first exporting country in that region. (21) In the 1920s, Colombia emerged as Brazil's main competitor in Latin America, and Africa progressively developed as a new coffee-exporting continent. (22) Eventually, in the 1980s and 90s, cultivation spread to Asia, with rapid development in Indonesia and, subsequently, an even faster development in Vietnam. (23) In the 1980s Vietnam was in the middle of the pack of coffee producers. By 1999, with production of over 11 million bags, it beat out Colombia as the second largest coffee producer in the world, a position it has held ever since. (24)

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   In 2007, the total value of coffee exports worldwide was estimated at US $12.7 billion, up 17% since 2006. (25) Of these, exports of Robusta coffee accounted for US $3.32 billion, as opposed to US $9.38 billion for Arabica coffee. (26) In terms of imports, in 2008, the European Union was the largest importer of coffee, accounting for 66% of worldwide imports, followed by the United States with 24%, and Japan with 7%. (27)

4. THE COFFEE CRISIS

   Following a series of short-term agreements between producing countries, a coffee study group was formed to negotiate an agreement to include both exporting and importing countries. In 1962 the International Coffee Agreement (ICA) was successfully negotiated in the United Nations New York headquarters. The ICA, which was administered by the International Coffee Organization (ICO), was to be renegotiated every five years. (28)

   Under the ICA, a target price was set, and export quotas were allocated to each producer "whereby supplies of coffee in excess of consumer requirements were withheld from the market." (29) In order to comply with the ICA, "[p]roducing countries met quota obligations by stockpiling coffee to keep it off the market, destroying it, or selling it at low prices" to countries that were not part of the agreement, such as the Soviet Block and other developing countries. (30) Although the system was not perfect, coffee prices remained relatively stable and high during that time and "came to be seen as a viable means of development for ... countries that had not produced it before or had done so only in limited quantities." Indonesia for example, along with some Central American and African nations, were some of the countries to undertake massive expansions of their coffee industries. (31)

   In the 1980s, the ICA system was showing strains due to changes in coffee production creating a global surplus concentrated in countries who had not previously been coffee powers, such as Vietnam and Indonesia. (32) As the quota system prevented new producers from accessing lucrative ICA markets, much of this production could only be sold at low prices to countries outside the ICA. (33) At the same time, in addition to problems of free riding and disputes over quotas, changes in consumer preferences for ground over soluble coffee "were not met by changes in supply due to the political rather than market [allocation] of quotas." (34) This rigidity worried roasters "who feared that competitors [w]ould get access to cheaper" and better quality coffee from new producing countries, that was available in non-member countries, and undermined their cooperation within the ICA system. (35) The combination of these elements led to a failure to renegotiate the ICA in 1989. (36)

   With the end of the ICA, producing country coffee agencies lost almost all influence on the international market. Coffee prices plummeted immediately, and in 2002 they collapsed to their lowest price in 100 years, causing hardship in countries where coffee is a key source of earnings and of farmers' incomes. While "[a]t the end of the 1980s coffee exporters received about $12 million for their exports[, i]n 2003 they exported more coffee, but received less than half as much income. Meanwhile, the coffee economy in high-income countries has been moving in the opposite direction. Since 1990 retail sales have increased from about $30 billion to $80 billion" in 2002. (37) As set out by Daviron and Ponte:

   The global value chain for coffee is currently characterised by a 'coffee paradox': a "coffee boom" in consuming countries and a 'coffee crisis' in producing countries. A paradox within this paradox is that the international coffee market is awash in coffee of 'low quality', while there is a dire shortage of 'high...