Drowning in cheap coffee

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Latin America's economy

Drowning in cheap coffee

Sep 29th 2001 | MEXICO CITY AND PATROCINIO, BRAZIL From The Economist print edition

A slump in the price of coffee is adding to economic misery in Latin America—and no relief is at hand Reuters A long way from cappuccino economy

IN NICARAGUA, coffee pickers with malnourished children beg for food at the roadside. In Peru, some families have abandoned their land, while others have switched to growing drug crops in search of cash, just as they have in Colombia. From Mexico to Brazil, tens of thousands of rural labourers have been laid off, swelling the peripheries of the cities in a desperate search for work.

The continuing slump in the price of coffee, one of Latin America's main cash crops, is spreading misery across the region. A glut, caused partly by surging production in Vietnam but also by Brazil's dramatic recovery from poor harvests in the mid-1990s, has led to two years of sliding prices, causing hardship for growers on a scale unseen for three decades.

The Association of Coffee Producing Countries, whose members account for two-thirds of world output, has tried since last year to reverse the slump with a scheme to hold back 20% of exports. The hope was that this would push the ICO composite, which reflects the price of a basket of mild arabica and cheaper robusta coffees, above 95 cents per pound. But some members struggled to find the money to pay for this retention scheme, and non-members—notably Vietnam—simply increased their exports. On September 24th, as the price scraped a new low of 40.5 cents (see chart), the scheme was abandoned.

The coffee slump also affects many African countries. But its impact is especially severe in Latin America, which accounts for 60% of world output, and where coffee has long been a big export-earner and a backbone of the rural economy (see map). To make matters worse, the slump coincides with a general economic downturn. Coffee growers are pleading for aid just when governments are cutting spending in their efforts to reduce budget deficits.

The suffering is worst in Central America, where the coffee-price collapse has coincided with drought. In Mexico, Colombia and Peru, many coffee growers have small farms, and lack easy alternatives. But even in Brazil's fertile Cerrado region, where the growers are among the world's most efficient and also now benefit from a weak currency, many are still suffering. Moacir Nunes de Castro, from Patrocinio in Minas Gerais, Brazil's biggest coffee-producing state, reckons that each 60kg (132lb) sack of beans costs him 130 reais ($48) to produce, but it sells for only 110 reais. “How can we survive?” he asks.

The question may seem odd to consumers in rich countries, who nowadays pay a small fortune for a cup of froth at trendy coffee bars. But only a tiny fraction of their money goes to the grower. In fact, the price of raw coffee has long been subject to wild swings. High prices cause a surge in planting, followed by a glut and market collapse. Efforts to boost the price through buffer stocks worked fairly well while mismatches between supply and demand were temporary. But the intervention scheme operated by the International Coffee Organisation, which includes consuming countries as well as producers, collapsed in 1989 because of the unwillingness of consumers to finance mounting stocks.

Since then, better growing techniques and the swift rise of output in Vietnam have resulted in chronic oversupply. That has caused the failure of the exporters' retention scheme this week, and has placed similar national schemes, such as that operated by Colombia's Federation of Coffee Growers, under great strain.

Mexico and some Central American producers are now proposing an alternative plan to reduce supplies instead of stockpiling them, by buying and destroying low-quality beans. This was discussed by the ICO this week. But its chances do not look good. India and Indonesia, two big producers, say they will not take part. And Brazil, by far the biggest exporter, is reluctant. Producer countries would probably have to finance the scheme, and most cannot afford to. They would like the World Bank to help; they say it financed Vietnam's coffee expansion (though in fact it played only a minor part).

A more promising approach, however, might be to boost demand, and to improve marketing. “If only all the 6 billion people on earth drank one little cup of coffee a day,” dreams Marcos Costa, another grower in Patrocinio. He has a point: if the growth rate of coffee consumption were to double to about 3% annually, matching that for soft drinks, then it would keep pace with rising production. Since consumption varies widely between countries, there is scope for expansion—even in some coffee-growing countries: a marketing campaign in Brazil in the early 1990s almost doubled consumption there. Brazilians now consume, on average, 4.5kg a year, more than twice as much as Colombians and five times as much as Mexicans. Such efforts may be helped by recent studies casting doubt on the conventional view that coffee is bad for health.

Coffee growers also need to persuade consumers to pay more for quality—and to capture a bigger share of the final price of a cup of coffee. One model is Colombia: by investing in technical advice, quality control and branding, its Coffee Growers' Federation has ensured that Colombian coffee attracts a premium of 10 cents a pound over other arabica coffees. Costa Rica commands a smaller premium. A second model is Jamaica, which achieves high prices for its branded Blue Mountain beans. Even in Colombia, some producers are now trying to secure a higher premium by marketing “single-estate” coffee, following the example of fine wine.

Growers across Latin America are now trying to copy such successes, and in some places aid agencies are helping to market “organic” or “fair-trade” coffee. A Brazilian growers' group is marketing top-quality beans under the Café do Cerrado brand. Cans of chilled Cerrado coffee can now be bought in convenience stores in Japan. Selling a brand rather than a commodity has helped the group to by-pass middlemen; a Japanese roaster buys the beans directly for twice the bulk-market price.

Brazil's government would like its coffee industry to go further still: instead of seeing exporters selling mainly green beans to foreign roasters, it wants Brazil to become a big producer of processed coffee, and will soon launch a subsidy scheme for new roasting plants. To Brazil's annoyance, some consuming countries protect their coffee-processing industries with tariffs on imports of instant coffee. But roast and ground beans do not face such barriers. Creating the right products and marketing them well could bring rewards.

Not all growers can produce single-estate coffee, nor will all consumers want to pay for it. Many farmers will have to seek other crops. Those with small plots may move to subsistence farming. But other opportunities exist. World demand for meat and fruit is rising, and Latin America has plenty of scope to supply these.

In the Brazilian state of Minas Gerais, pig farming is expanding, helped by government loans. In Patrocinio, the local council has helped growers like Mr Castro to start producing passion fruit. But there are pitfalls. A sudden cornucopia of passion fruit last year overwhelmed the local market and sent prices plunging. And export markets are often protected by tariffs, quotas or tough sanitary standards.

Coffee enjoys booms as well as busts, and it will continue to be a main source of income for many of the region's farmers. Improved marketing and diversification could reduce the pain of future slumps. But they take time. Meanwhile, the coffee bust is bringing misery to millions, with little sign of recovery in sight.

http://www.economist.com/world/la/PrinterFriendly.cfm?Story_ID=797619



-- Martin Thompson (mthom1927@aol.com), October 03, 2001


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