Colombia's return to market means pain for coffee growers

November
  13, 2013 4:41 pm
  Emiko Terazono
 ©Bloomberg

 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
  grower. 

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
executives.  

“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
  Ms Haque.

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
  bean.

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.