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Coffee as a commercial product

Coffee, is one of the most important world trade products, which is subject to the market. The supply and demand determine the price.

Marketing channels and systems in the producing countries are explained.
Transport, import and export conditions complete the picture.

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1.1 Coffee - an important agricultural commodity
1.2 Marketing in the country of production
1.3. marketing systems and routes
1.4. effect of international and national policies on coffee prices
1.5. producing countries and their domestic consumption
1.6. export of coffee
1.7. quantities and composition of exports
1.8 Coffee as a transport commodity
1.9. importing countries and their demands
1.10. Taxes and import duties


1.1 Coffee - an important agricultural commodity

Coffee is now grown in more than 70 nations. Among the plantation crops, it plays the exceptional role. This term is used to describe perennial tropical tree and shrub crops such as cocoa, coffee, tea, rubber, bananas, jute, palm oil, coconut oil, sugar and copra. The crops are grown on a large scale and also on a small scale.

Even though perennial plantation crops, with around 130 million hectares under cultivation, only claim a relatively low share of just under 8% of the world's cultivated area of 1,532 million hectares (source: Statista, 2018 ), they supply exceedingly important export goods for producing countries and thus provide jobs. Developing countries have a particularly high share of exports of these products. Except for sugar, they account for over 90% of world exports of the other commodities listed.

Coffee is currently cultivated (source: Statista, 2018 https://de.statista.com/statistik/daten/studie/304973/umfrage/anbauflaeche-von-rohkaffee-weltweit/) on an area of over 10.5 million hectares. Cultivation is quite labor-intensive. It is estimated that coffee provides employment for 20 to 25 million people in the growing countries. Coffee plays a central role in the standard of living, social fabric and development of many families. Coffee is the engine of economic development. It is through the trade in coffee that it is possible to earn money at all. For the so-called subsistence economies, which are common for many coffee-producing regions, it is characteristic that the remaining self-produced agricultural products only serve to cover their own needs. In addition, coffee cultivation ties people to the land-centered habitat and thus prevents them from fleeing the country. Worldwide, the livelihoods of no less than 100 million people depend on coffee.

With coffee exports, the producing countries earn a central part of their foreign exchange earnings, which they need for the import of consumer and investment goods or can use to service their debts. Compared to then, today coffee export earnings contribute to more than 25% of export earnings in only four countries. Both economic development and increasing individuality have made exports more diverse. Furthermore, low prices have caused revenues to decline.

Ninety-five percent of coffee is exported in raw form, with exports of processed products such as instant and roasted coffee accounting for the remaining 5%.

About 75% of the coffee produced is exported. Strong price fluctuations leave visible traces in the balance of payments of the producing countries. In 1986, a record amount of more than 14 billion U.S. dollars was earned worldwide from coffee exports. From 1985 to 1992, it averaged 8.5 billion annually; more than twice the amount earned by the two competing tropical products, tea and cocoa (1.6 billion U.S. dollars annually). In 1993, foreign exchange earnings from coffee fell below $6 billion. As a result, coffee dropped from second place (after petroleum) to eighth in the list of the most important export commodities of the producing countries. Green coffee price increases from 1994 onward have allowed export earnings to rise again to US$12 billion. This allowed the product to once again occupy its strong position in the world export balance. However, from 1999 onward, revenues fell again to just under US$10 billion and were thus only US$4.9 billion in coffee year 2001/2002.

"Quality Improvement Program of the International Coffee Organization

The "Quality Improvement Programme" under ICO Resolution 407 was launched in October 2002. In order to improve the coffee market situation, this program is considered the main instrument. The quality of green coffee is to be improved by excluding coffee qualities below a minimum standard from export. The goal of this quality improvement is to increase world market prices for green coffee in the long term, which should then lead to an increase in foreign exchange earnings. The ICO is conducting strenuous litigation to enforce this program. Some producing countries have already implemented the decision. To what extent it will be achieved that all countries supply according to the decision remains to be seen, as the decision is based on voluntariness.

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1.2 Marketing in the country of production

The marketing of coffee can be organized very individually in the country of production. How coffee moves from plantation to roaster or export is the result of social, historical, political and geographical processes.

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1.3 Marketing systems and routes.

Diagram: flow of money and goods in green coffee.

Depending on the type of coffee, the size and type of coffee plantations and the processing, i.e. whether dry or wet processing is used, very different sales channels are created. In principle, the following individuals can be involved in the marketing of coffee: cooperatives, growers, processors, exporters, and traders. According to the circumstances, the mentioned groups of people have one or more functions: For example, the grower takes care of all the routes to export, or the exporter also prepares the coffee because he has the appropriate facilities. As a rule, the more small-scale the production structures, the longer the marketing channels. Historically, coffee has been sourced mainly from large plantations and sold directly to international traders. The increasing number of smallholder farms, the importance of coffee cultivation for stabilizing rural structures and coffee exports as a foreign exchange earner have given rise to complicated systems of marketing.


1.3.1 Free marketing

Free marketing, as opposed to controlled marketing, has become the norm. Here, the producer decides when, what, in what quantities and to whom he wants to sell. Growers, cooperatives, traders and mill operators are responsible for finishing and bundling the coffee into exportable quantities. Government or parastatal agencies are limited to encouraging and advising, coordinating and providing limited control.


1.3.2 Controlled marketing

Since the late 1980s/early 1990s, marketing has been liberalized in almost all producing countries. State or semi-public institutions had increasingly proven to be too inefficient, expensive and uncompetitive.

In the past, these institutions set the purchase prices for green coffee and sometimes acted as the sole buyer and seller/exporter. For example, "marketing boards" controlled the marketing process in English-speaking producing countries in Africa. The coffee producer was paid on the basis of average sales revenue. In francophone African countries, the "Caisse de Stabilisation" (German: "Stabilisation Fund") set the price to be paid to coffee farmers. They also regulated the distribution and transportation cost margins until the coffee was shipped. In Central and South America, parastatal planter institutions and bodies helped organize the purchase of green coffee. Minimum purchase prices for planters could be determined. Further price adjustment was left to market events. It was at the discretion of the producers to sell the coffee to private institutions or to the respective institution. In addition, these companies offered a lot of services, such as quality care, consulting, technical assistance, credits, research, storage capacity, replanting and customization programs. At present, only in Colombia the "Federación Nacional de Cafeteros" still participates in the market in this way, its importance is decreasing.

The theoretical approach of all systems that have worked with minimum purchase prices was to fulfill a buffer function between strongly fluctuating world market quotations and steady, reasonable prices for the producer. This was done through certain skims or through subsidization.

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1.4 Effect of International and National Policies on Coffee Prices

Coffee remains one of the most significant products exported by developing countries. The coffee industry creates new jobs, provides income, and unites people to rural areas. Any change in the price of coffee reduces or increases export revenues, directly intervening in the socio-economic development of the producing countries.

These interconnections mean that there will always be influences at the political level to intervene in a guiding way in pricing and commodity flows, because coffee cultivation and export are usually characterized by instability and, because of the tendency to overproduction, by price weaknesses. In order to solve these problems, very early attempts were made to influence supply and demand accordingly through market interventions, so that prices would constantly evolve and their level would be increased. The idea of falsifying supply to stabilize prices not only led to the creation of national coffee production and marketing programs, but also to the emergence of producer cartels and various coffee agreements agreed upon by producing and consuming countries.

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1.4.1 National coffee policies in producing countries
1.4.2 International Coffee Organization (ICO) / International Coffee Agreements (ICA)
1.4.3.Producer cooperation as a means of price stabilization.
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1.4.1. national coffee policy in producing countries.

National coffee policies in a producing country can influence production levels, for example, by guiding investment. Isolated technical assistance, government storage, financial resources, and marketing services can be provided for smallholder coffee. Promoting quality is becoming increasingly important. The tendency is toward class rather than mass. Setting minimum purchase prices is now a thing of the past.

Export taxes are an important source of revenue for producing countries. The money helps to drive the country's economic development, meet debt service obligations, finance agricultural individualization programs or improve the infrastructure for an efficient coffee economy. Income tax from people working in the coffee sector and other taxes incurred in the production and distribution of coffee are also funds that support the national budget.

Of course, the National Coffee Policy cannot escape the influences of international agreements or other structural currents at its origin. For example, in the past, the International Coffee Agreements with their quota and price mechanisms required the implementation of the regulations in the member countries into national law.

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1.4.2 International Coffee Organization (ICO) / International Coffee Agreement (ICA)

As early as the late 1950s, communication between importing and exporting countries took place on the opportunities for joint price support measures. In 1958, a study group was established to create the conditions for an International Coffee Agreement (ICA) between importing and exporting countries. In 1962, negotiations for a coffee agreement were successfully completed at United Nations headquarters and it was signed in 1963. The unusual feature of this agreement is that producing and consuming countries are integrated in the design and implementation of the framework.

The first treaty of 1963 was followed by others: 1968, 1976, 1983 and 1994. As of 10.03.04, the International Coffee Agreement 2001 (running until 2007) had 58 member countries: 42 on the side of exporting countries and 16 on the side of importing countries. There were times when 99% of the world's coffee production and 90% of the world's coffee demand were scheduled in the ICO.

For example, one goal of these agreements is to balance supply and demand. Excessive changes in quantity and price are to be avoided, employment and income in the producing countries are to be secured, and predictable foreign exchange earnings are to be generated to stabilize the purchasing power of the exporting countries. Further still, worldwide coffee consumption is to be promoted and, in general, international cooperation is to be strengthened. For the administration of the coffee agreements, the International Coffee Organization (ICO), based in London, was founded in 1963 under the supervision of the UN.

The export quotas of the different coffee agreements were at the heart of the treaties up to and including the 1983 agreement. With these quotas, the export volumes of the exporting members have been fixed according to a certain key, so that coffee prices remain stable within a desired range. In practice, this looked like this: When prices were too low, the export volumes of member countries were reduced until shortages caused prices to rise again. If prices exceeded certain ceilings, the export volumes of the individual countries were increased. The increased supply then caused prices to fall again. The suspension of the quota system caused very high prices.

Depending on the location, the effects of these coffee agreements were evaluated differently. Although more than the periods achieved stabilization of coffee prices, the financial benefits of the agreements themselves to the producing countries were questioned. The failure of the '83 Commodity Agreement "Coffee" in 1989 occurred, creating aberrations and tensions that the little variable export quota system had generated in the market:

The quota system created non-demand-driven production structures and prevented coffee production from adapting to market needs.
Unequal volume control via export quotas led to an excessive increase in the price of sought-after quality coffee, while low qualities were offered in abundance and were correspondingly cheap.
The separation of the market into members and non-members meant that states that were not members of the ICO could purchase coffees at discount prices, while members sometimes had to pay double for them.
All efforts after 1989 to involve a new coffee agreement with opportunities to intervene in the market ultimately failed. In March 1993, these attempts came to an end. Quite quickly, the producers then formed their own organization, the ACPC (Association of Coffee Producing Countries). There was agreement to maintain the ICO as a forum for organized dialogue on coffee in the future, so member countries quite quickly succeeded in adopting a new "International Coffee Agreement 1994," followed by the next one in 2001. It does not include an export quota system. In 2007, the now 77 members of the International Coffee Organization (comprising 31 importing countries and 45 exporting countries, plus the European Community as an international institution) concluded an International Coffee Agreement to strengthen the global coffee economy and promote its sustainable development by means of numerous measures.

The tasks that arise for the ICO from these new regulations are the preparation and collection of statistics as well as the dissemination of information about coffee. Furthermore, it has the function of a proposing body to the Common Fund for Commodities, a government institution that provides development aid funds for commodity projects. The ICO still fulfills a central role as a basis for the exchange of ideas between producer and consumer countries and can serve for a possibly later desired increased cooperation of all parties involved in the world coffee trade.

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1.4.3 Producer cooperation as a means of price stabilization

Agreements between producer countries to reduce coffee exports have also existed for more than 50 years. In 1945, 14 Latin American countries joined together in FEDECAME to protect their coffee interests. After 1956, when initial talks for an international coffee agreement were unsuccessful and prices fell, seven Latin American countries signed an export quota program ("Mexico City Agreement"). In 1958, this developed into the "Latin American Coffee Agreement" (LACA), in which the 15 most important coffee countries on this continent then controlled their exports.

The "Inter African Coffee Organization" (IACO) began its work in Africa in 1960. Its objectives are to coordinate the interests of African coffee producers and to promote quality, marketing and knowledge among growers. Almost all African coffee producers belong to the IACO. In 1960, the African and Malagasy Coffee Organization (OAMCAF) joined forces. For the member countries, this association bundles the coffee production and export of the further, it is representative with all international coffee committees.

Even though there were already agreements in which producers and consumers pursued common goals, ad hoc producer cooperatives always joined forces in quota-free periods to change coffee prices. Producing countries jointly intervened in the New York market in 1966. Twenty-one coffee-producing countries, which had come together in the Geneva Agreement and were responsible for 90% of the world's coffee exports, attempted to withhold nearly 10% of their shipments in 1973. In 1973, four major producer countries also planned to withhold stocks and invented a "buffer stock plan" that had become known as "Café Mondial." Due to fewer competitors and frost-induced higher coffee prices, these countries abandoned their plan in 1975.

Another stop on the road to coffee price stabilization was the 19-producer Caracas Cooperation in 1974, the Bogotá Group in 1978, and PANCAFE from 1980. Their joint projects were attempts to drive up coffee prices through export control, inventory price reductions and intervention in the futures markets. The coffee trading company PANCAFE (Productores de Café Asociados S.A.), for example, pursued the interests of the coffee institutions of the countries Rica, El Salvador, Guatemala, Brazil, Costa, Mexico, Honduras, Colombia and Venezuela in the market. PANCAFE, which emerged from the Bogotá Group, had capital of about $480 million at the start, which it brought in to buy and store coffee. Efforts to raise prices were unsuccessful and were resumed at the end of 1980, after which the members of the International Coffee Organization again agreed on a working arrangement.

In mid-1989, all chances of stabilizing prices within the framework of an "International Coffee Agreement" ended for the time being (see section 5.4.2.). As a result, there was a massive slump in green coffee quotations, which were to remain at a low level for several more years. The failures in the discussions for a new coffee agreement with economic clauses, i.e. "export quotas" under the ICO, caused Guatemala, Costa Rica, El Salvador and Nicaragua, and later also Brazil and Colombia, to suspend 20 % of their exports from the fall of 1993. Indonesia and African producers also joined these restraints. The Association of Coffee Producing Countries (ACPC) was formed. 14 members, controlling about 75% of the world's coffee production, belonged to this institution. These countries are Angola, Brazil, Colombia, Costa Rica, India, Indonesia, Ivory Coast, El Salvador, Kenya, Democratic Republic of Congo, Tanzania, Togo, Uganda and Venezuela. An agreement was reached by the countries at government level, which was to use the so-called restraint to confirm green coffee prices at a higher level. According to the price development, the withheld coffee quantities were returned to the market. The institution's headquarters were in London. However, the seat was abandoned there in the spring of 2002, and so to speak, its activities.

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1.5 Producing countries and their own consumption

Even though coffee is mainly an export commodity, it is also consumed in many producing countries. Around 24 % of the world's coffee production, which corresponds to a good 27 million bags, is consumed in the producing countries for their own use. In the Philippines, the coffee beverage is so popular that additional coffee has to be imported to cover domestic consumption. In Haiti and Cuba, over 80% of production is consumed. In countries such as Colombia, Brazil, Venezuela, Mexico, and additional Central American countries, coffee consumption is very important. The coffee drink is also popularly consumed in Indonesia, Ethiopia and India.

In the producing countries, the best qualities are used for domestic consumption, as these allow significantly more money to be earned on the world market. In addition, from the European point of view, an individual type of roasting and preparation turns the inferior coffee into a valued beverage in the style of the country.

Producing countries have realized that coffee consumption develops depending on the standard of living and the degree of industrialization of a country. As economic aspects improve, the consumption of coffee increases and so does the demand for quality.

Diagram: coffee producing countries with high level of domestic consumption.

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1.6 Coffee export

Coffee exports of producing countries amounted to nearly 78 million bags in 1997/98 and increased to 88.6 million in 2002/2003. The volume of production depends on crop supply, price level, storage availability, export regulations as well as consumer behavior.

If the share of Arabica was still 80% in 1960/61, this has fallen to around 60%. A look back shows that overall coffee exports expanded considerably after World War II. 40 million bags were identified per year in the 1960s. 60 million bags brought the 70s as export level, while nowadays 89 million bags of green coffee exports are needed per year to satisfy the consumption needs of importing countries.

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1.7. quantities and composition of exports.

The main coffee exporting countries are Brazil, Vietnam and Colombia, which can account for up to 57% of world exports. Other important countries are Indonesia, Guatemala, India, Uganda, Peru, Honduras, Ivory Coast, Mexico, Ethiopia, Costa Rica, El Salvador and Papua New Guinea. These 12 countries account for around 31% of world coffee exports. Together with Colombia, Brazil and Vietnam, they account for as much as 92%.
From the countries of origin, coffee is mainly exported in its raw form. About 6% of total exports are soluble coffee and only 0.1% of exports are roasted coffee. For this illustration, the finished products have been converted to their green coffee base using the international factors:

1 part roasted coffee = 1.19 parts green coffee

1 part soluble coffee = 2.60 parts green coffee

The most significant producer-exporting countries for soluble coffee are Brazil, which accounts for half of total shipments, followed by India, Colombia, Mexico and Ivory Coast. In terms of roasted coffee exports, Brazil is also in the lead with a share of over 50%. It is followed by Mexico, Costa Rica, Colombia and Vietnam.

In addition to the export goods from the countries of origin, the international foreign trade structures naturally show a considerable flow of coffee goods from the so-called importing countries. These "re-exports" amount to about 20 million bags of green coffee per year, and more than two-thirds of them take place between European countries.

The fact that producing countries export mostly green coffee, rather than processed coffee products, comes from the fact that they have little ability to compete with the efficient coffee industry in consuming countries. Missing things include: Market-driven products, modern technology and more efficient marketing strategies. Lack of funds far from the market thus makes advertising and market research difficult. High financial expenditures for efficient roasting and packaging technology as well as logistical difficulties make market entry problematic. Optimally packaged coffee with a long shelf life can only be produced to a limited extent despite high demand. Because roasted coffees are usually blends of different countries, producing countries would have to import coffees to meet this standard. So-called "single-origin products" have good market opportunities. These are predominantly specialty coffees from a defined country that have an excellent image among consumers worldwide, organic coffees as well as fair trade coffees.

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1.8 Coffee as a cargo

The green beans have traveled thousands of kilometers from the producing countries before they end up in the roasting machines of the coffee processing industry in the consumer countries.
Photo: Loading coffee sacks, Colombia
Loading of coffee bags, Colombia
Coffee was first shipped via wooden barrels. Centuries later, it began its journey in sacks. Stacked in ships, the coffee crossed passages of the world's oceans for weeks.

More than 25 years ago, coffee sacks were packed into containers that previously arrived filled with export goods to the countries of origin. With the global gain of containers and the associated development of transport infrastructures, this form of shipping became widespread.

Coffee bag shipping, Brazil
For almost 10 years, coffee has increasingly been shipped in bulk in containers. The special technical term for this is "bulk cargo". Expertise with this new form of transport was gained with special "bulk containers", which were filled by means of openings in the roof surface. Further still, standard containers with or without ticking, so-called "big bags" made of polyethylene, were used. The results collected with loose coffee in the box were positive. Concerns about quality, temperature development, moisture content and damage frequency were unfounded. This transport system brings the following economic advantages:

-a better utilization of the container volume
-a significantly cost-saving handling
and a reduction in costs by dispensing with bags, as well as a reduction in environmental pollution due to the elimination of bag disposal.
Bulk shipments have long since completed the test phase. The standard container as a means of transport with ticking has proved to be economically optimal. The producing countries have adapted their infrastructure with container filling facilities to bulk shipments. Container filling puts the focus on the beneficios or husking stations in the producing countries. In the consumer countries, roasters have purchased receiving equipment for the bulk product. However, the special bulk container is a discontinued model for coffee, as it is too cost-intensive and inflexible in use.

Photo: Ship with coffee containers in the Panama Canal
Ship with coffee containers in the Panama Canal
Photo: Loading process with container
Loading process with container
The safety of the unloader at the origin, the filler of the container, is a major requirement of the new mode of transport. He must guarantee the perfect condition of the goods, the recipient does not want to experience any negative surprises in the country of comsumption. Today, closed and sealed containers are accepted without the contents being seen.

Coffee is also sometimes shipped in bags. These are high quality specialty coffees with low harvest volume and coffees that take place on the stock exchange, or goods that are to be transported by truck to another country.

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1.9 Importing Countries and Their Demands

Coffee consumption worldwide currently reaches nearly 108 million bags annually. Of this, the importing countries require around 80 million bags per year as a base product for roasted and extracted coffee. The production countries' own consumption amounts to over 27 million bags (see also section 4.5).
Consumption is concentrated in Europe, North America and Asia. Japan continues to record growth in consumption. Overall, Europe is only achieving a slight increase. In the United States, consumption is growing again after years of decline.

In the importing countries, consumption habits and also the level of consumption are very individual. Neighboring countries show similar consumption patterns. Otherwise, the compositions of the blends, the degrees of roasting and the method of preparation differ from country to country. Traditional relationships of certain consumer countries to production countries, which still date back to colonial times, play a central role. Robusta flavor is emphasized in Western and Southwestern Europe. Scandinavian countries and Italy prefer a high proportion of Brazilian coffee in their varieties. Central European countries like to use washed and unwashed Arabicas in their blends. Innovative roasting processes as well as the internationalization of taste are causing robustas to gain in importance. In Central and Eastern Europe, the lower-priced and harder Robusta varieties are in the lead.

Consumption in coffee producing countries is mostly coffees that cannot be sold on the export market. Therefore, it is no wonder that the coffee quality in the coffee producing countries often does not match the quality expectations.

Diagram: development of world green coffee consumption in the last 250 years.

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1.10. Taxes and import duty

Government-imposed levies on coffee, such as duties and taxes, have decreased significantly in consumer countries over the course of historical development. Apart from sales/value added tax, many countries do not impose any levies on coffee. Some countries operate import duties and a few additional ones impose consumption taxes in addition to import duties.

Import duty
Customs duties on goods of caffeinated green coffee in Germany have now been lifted. Within the EU, customs duties will no longer be levied on caffeinated green coffee as of July 1, 2000. Canada, USA, Japan, and New Zealand, for example, also have no import duties on this form of product.

Indirect taxes
Only very few industrialized countries still have special excise taxes on coffee. These taxes date back to colonial times, when coffee was considered a luxury good. With these revenues, political intentions could fill the state coffers, or the high levies were intended to distract from consumption, because the import of expensive green coffee always meant an undesirable outflow of foreign currency.

Coffee tax in Europe today is levied only in the states of Germany, Denmark and Belgium. The coffee tax rate in Germany is €2.19 for 1 kg of roasted coffee and €4.78 for 1 kg of soluble coffee.

Goods containing coffee (products containing 10 to 900 g of coffee in 1 kg of the product) are also taxed in Germany. For products of German manufacturers, the percentage of coffee in dry matter is based on € 4.78. For products of foreign manufacturers sold in Germany, the following regulation applies:

From this regulation - depending on the share - distortions of competition between domestic and foreign suppliers can result.

Across Europe, there is a wide range of percentages for the sales tax on coffee. Countries such as Denmark with 25%, Norway with 24%, Austria and Italy with 20%, and Finland with 17% have the highest VAT rates in Europe. In Germany, the VAT rate is 7%. In Great Britain and Ireland, no VAT is levied.

It is certain that, depending on the market situation, a good third of the final consumer price for coffee in Germany is accounted for by levies to the state.

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