ECONOMY: Coffee Weathering Crisis

• by Gustavo Capdevila (geneva)
• Thursday, April 16, 2009
• Inter Press Service

The economic crisis has arrived, with an intensity that Carazo himself may not have imagined. However, coffee has continued to perform well, and has maintained its position as one of the least affected commodities on the international markets.

The coffee sector is buoyed by favourable circumstances, the executive director of the International Coffee Organisation (ICO), Néstor Osorio, from Colombia, told IPS.

Demand has been very dynamic in recent years, growing at an average rate of between two and 2.5 percent per year, equivalent to an extra two million bags (each weighing 60 kilograms) being consumed every year.

Domestic consumption in producer countries has also increased, a trend encouraged by the ICO, a London-based intergovernmental body of coffee exporting and importing countries.

The first analysis the ICO carried out on the impact of the economic crisis on the coffee industry came to the conclusion that coffee consumption should not suffer much, Osorio said, except for the area of specialty coffees, sold at trendy coffee shops.

The coffee at these select locales has been overpriced for a long time, and some of the companies involved have had to close shops or cut their prices, he said.

Osorio disagrees with the classification of coffee as a 'dessert.' A cup of coffee is a customary part of many families' meals, he said.

Christian Meeus, head of international relations at Efico, an international company that sells coffee from all over the world from its offices and warehouses in the Belgian port of Antwerp, shares this view.

Meeus told IPS that he would not presume to say that the former Costa Rican president was wrong, but in his view, 'fortunately, coffee is not a dessert, but part of people's daily diet.'

'Consumption of basic food products, and I would include coffee among them, is not being affected so much by the present crisis,' he said.

The singular performance of coffee on the international markets became evident in the first few years of this decade, when the prices of agricultural and mineral commodities soared to levels unheard of for over 40 years.

In contrast, coffee prices peaked between 1994 and 2000, and then fell sharply, discouraging production and new investment.

As a result, output in African countries fell by about 20 percent, particularly in Côte d'Ivoire, the Democratic Republic of the Congo, Uganda and Angola.

Vietnam broke into the world market and its production partially replaced that of African countries. But Vietnam, which displaced Colombia as the world's second producer, after Brazil, lacks the capacity to process all of the coffee beans it produces.

'It has made important efforts, but that is still one of the problems of production there,' Osorio said.

'From 2000 to 2005, the coffee sector went through a critical situation such as we have never seen before, when the level of prices was half the cost of production,' the ICO director said.

This prompted more than 400,000 workers to emigrate from coffee-growing areas in Central America and Mexico to the United States, or to urban areas in their own countries.

'As a result, production in Central America was reduced by 20 to 25 percent,' Osorio said.

From 2005, the trend was reversed and coffee prices recovered until late 2008, while the prices of other commodities were plummeting because of the financial crisis that broke out in the United States in August 2007 and then spread to the rest of the world.

The recession affected coffee prices from September 2008 onwards, and they have fallen again by close to 20 percent.

However, Meeus said what is happening with coffee is very strange, because 'at present, demand is rising,' and the product 'is not directly affected by the crisis.'

The only apparent difficulty in the industry’s operations is a lack of credit, which could affect coffee to a certain extent, Meeus said.

Coffee is currently selling at 1.15 to 1.20 dollars a pound.

'A price of 1.20 dollars is manageable, but not high enough to prompt new developments or new plantations,' Osorio said. 'I think that levels from 1.50 to 1.70 dollars could be easily absorbed by the market without creating problems of consumption.'

On the supply side, Osorio acknowledged that with the current dynamic demand, there will probably be 'a deficit in production this year, because it is the 'off' year of the biannual cycle of Brazil, which one year produces a high quantity of coffee, and a lower amount the next.'

Brazil's output varies by between 15 and 20 percent each year because of the natural cycle of branch and bean growth in coffee trees. It is a normal reduction, termed 'queda' in Brazil, the world's largest producer country, said Osorio.

Annual coffee production worldwide is currently 130 or 135 million bags. Consumption, which has increased by 25 million bags in the last few years, now stands at around 130 million bags.

The picture is further complicated because 'there are virtually no stocks in the hands of producers. Thirty years ago, Brazil held stocks equivalent to 75 percent of annual world consumption, but today there are no stocks in Brazil, and the same is true in all producer countries,' Osorio said.

'The only cushion that we see in the markets today is the inventories in the hands of importers, the coffee that is in the free ports or the warehouses of the roasters, and that is no more than 20 million bags,' he said.

Osorio estimated the value of coffee bean exports from producer countries at some 15 billion dollars a year. The retail value of this coffee to end users is six times greater, at 90 billion dollars.

It seems like robbery to buy a product so cheaply that is so expensive in the cup, Meeus said when asked about this by IPS. But the cup of coffee sold to a customer is not just the processed beans: things are not that simple, he said.

The costs of importing, financing, shipping, insurance, warehousing, roasting and packaging have to be added, he said, noting also that labour costs are high in Europe, for example. Then there are retail and distribution costs, all of which contribute to the high price, he said.

Another challenge facing the industry is the critical issue of the choice between using agricultural land to produce food or biofuels, Osorio said.

'Arable land and available water are being disputed today by those who need and want to produce food, and those who need and want to produce energy. Now that oil prices have eased a little, there is less tension, but nevertheless the problem is still there,' he said.

'This is a difficult situation in terms of the sustainability of products like coffee or cocoa. Only in areas like Colombia or Central America, where coffee is grown in the mountains and nothing else could be cultivated there, is there a kind of protection.

'But in areas like Africa or even Brazil, the possibility of coffee being less lucrative than producing food or energy is a real threat for coffee,' Osorio said.

This will be one of the topics debated at the third World Coffee Conference, to be held by the ICO in Guatemala City in February 2010.

A multi-stakeholder consultation on trade and development issues related to coffee, convened by the United Nations Conference on Trade and Development (UNCTAD), was held in the second week of April at the Geneva headquarters of the U.N. agency.

UNCTAD Secretary-General Supachai Panitchpakdi emphasised that 'coffee generates cash incomes in subsistence economies, and because it is labour-intensive, it provides rural employment for both men and women, making it instrumental to poverty reduction.'

© Inter Press Service (2009) — All Rights ReservedOriginal source: Inter Press Service

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