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Productivity improvements have changed the cost structure of the coffee bean industry, leaving many traditional growers in the red. A McKinsey study suggests that they go upscale, diversify, or get out.

Odds are that your morning cup of coffee started life as a net loss for the farmer who grew the beans. Coffee growers have long struggled with fluctuating prices, national politics, and capricious weather, but today's crisis stems from deeper structural change. Few countries today can boast that a majority of their growers make a profit, and the exceptions generally have the largest and most diversified coffee industries. Productivity improvements from big coffee producers in Brazil, as well as competition from efficient new entrants such as Vietnam, are erasing many growers' margins—especially, as the chart shows, in the Americas.

A recent study by McKinsey and TechnoServe¹ highlighted two promising though painful responses. Some growers of traditional Arabica beans, which are known for their quality, should invest in production equipment to compete in the small but fast-growing specialty coffee segment. Those who can't keep up on cost or quality—perhaps as many as half of the world's growers—must consider diversifying not only into other food crops, such as organic fruits and vegetables, but also into flowers and hardwoods. Some growers will have to exit the business.

For more on the difficulties faced by bean growers, read "Easing coffee farmers' woes."

¹TechnoServe is an international not-for-profit organization that applies business solutions to the problems of rural poverty.