13, 2013 4:41 pm
Coffee drinkers have cause to celebrate the return of Colombia, the leading producer of high quality arabica beans, to the market, but for growers the timing is unfortunate. After a virulent strain of coffee fungus ravaged the country’s coffee farms five years ago, output has recovered after an extensive four-year restoration programme where 40 per cent of coffee trees were replanted. However, the Latin American country’s harvest, which is expected to rise almost a third this year to 10m 60kg bags, has come at a time when the world is awash with arabica – the higher quality bean used in espressos and cappuccinos – and prices are plummeting.
Having fallen to a third of its 34-year peak of $3.089 a pound in 2011, ICE March arabica is trading at $1.0655 a pound, having fallen to a five-year low of $1.0415 earlier this month. “$1 coffee. How low can it go?” asked Kona Haque, analyst at Macquarie in London, adding that she struggles to see any supporting factors for the price.
While the price fall is good news for coffee drinkers, it has been devastating for growers. The cost of production in many countries is now higher than the price, and many are relying on government subsidies to keep on farming.
Average production costs have risen for growers, with Central America and Colombia
seeing costs at about $1.40-$1.50 a pound – a level the market breached in
February this year. Last month, arabica coffee prices fell below $1.20 a pound,
the production costs for Brazil, the world’s largest and most efficient coffee
Although for many commodities, the cost of production tends to provide a price floor,
coffee growers tend to be slower in responding to weaker prices. Unlike annual
crops such as grains and oilseeds, where farmers can adjust the sowing of seeds
to cut production in the face of a supply glut, lower prices do not lead to
coffee farmers felling the perennial trees.
After two years of excess output, the market faces the prospect of another year of
the same. The arabica market was oversupplied by 800,000 bags in 2011-12 and
7.4m bags in 2012-13, according to Swiss coffee trader Volcafe. Brazil is
expected to have another bumper crop, while Colombia is likely to continue to
see strong output. Barring adverse weather hitting both countries, analysts
estimate a surplus of about 2m-3m bags in 2013-14.
The current low prices will eventually feed through to production numbers as
farmers refrain from investing and maintaining their trees, say coffee
“The natural reaction to low prices – decreased use of inputs, insufficient
husbandry, diversification and abandonment – will be intensified,” said Carlos
Brando, director of P&A International, the marketing and consulting arm of
Brazilian coffee machinery maker Pinhalense.
“A fundamental turnaround for the coffee market will be ahead of the Brazilian
2015-16 crop for which the flowering of the trees starts in October 2014,” said
One ray of hope for farmers is a move away among coffee roasters and blenders from
robusta, the lower quality bean, into arabica. After arabica coffee hit its
highs two years ago, many roasters started to use more robusta in their blends
or introduced cheaper coffee products using a higher proportion of the cheaper
This year’s sharp decline in arabica prices has seen some roasters switch back to
the higher quality bean, especially in Brazil, the second largest coffee
consumer, as well as other parts of the world, according to traders.
Anecdotally, some traders are noticing an increase in arabica imports in the
Mediterranean countries, while others say Japan and the US are also purchasing
more arabica beans.
However, the impact of bean switching is expected to take time to filter through. Until
then, farmers will need to weather the losses.
Luis Fernando Samper of the Colombian Coffee Growers Federation says the country’s
farmers have managed to cut some costs thanks to rising production yields after
the renovation programme. There is also a push to increase margins by producing
high end specialty coffee beans.
In the short term, the vast majority of the federation’s coffee growers are facing
a difficult situation. “The pain is particularly felt by many of the small
growers, who depend on the coffee income. We need the government to give us a
hand during this price cycle,” said Mr Samper.