The International Coffee Organization (ICO) has published a paper looking in detail at the economic sustainability of growing coffee and has made a number of recommendations, not least that farmers need to be provided with risk management tools that can help them manage price risk. As it notes, since March 2015 the ICO composite price has been consistently below the 10-year average of 137.24 US cents/lb, raising concerns about the economic viability of coffee production and putting the livelihoods of coffee producers at risk in many countries.
“Prolonged periods of low prices strain liquidity at the farm level, resulting in less than optimal input use during the following production cycle, negatively affecting yields and quality,” said the ICO. “The expectation of future coffee prices too low to cover full costs of production can hamper important investments in renovation of coffee plantations. Replanting is particularly important as part of the mitigation of the impact of climate change and to respond to increased pest and disease pressure. Finally, low or negative profitability may lead to the abandonment of coffee production as farmers may switch to other more profitable agricultural crops. As a result, there is a widespread concern in the coffee sector that a prolonged phase of low coffee prices could negatively affect the supply of high quality coffee beans and could have adverse effects on household incomes in coffee growing communities. Hence, specific polices need to be formulated to address the issue of economic sustainability of coffee production, stabilising supply in the future and enabling farmers to be fairly remunerated.”
The aim of the ICO study is to assess the cost structure of coffee production in selected countries, and derive recommendations on how to improve the economic viability of coffee production. The study is based on an analysis of the coffee price levels using ICO market data, and an assessment of production based on cost data provided by Members.
“Over the past 10 years average short-term profitability (operating profitability) was low in most countries in the sample except for Brazil,” said the ICO. “We observe a large variation in operating profitability with years in which farmers on average could not cover the variable costs of production and other years where high profits could be realised.
“The variation in profits between years can be explained mainly by changes in yields and prices paid to growers where the latter seems to be the most important determinant.
“Costs of production have increased steadily over time and follow a clear upward trend. Due to methodological differences in data collection we cannot directly compare the levels of profits between countries. Hence, we conclude only cautiously that there are time trends within countries. In the limited context of the four countries under consideration we find producers with better economic performance throughout the 10 year time period resulting from cost-effective production systems and other factors such as the exchange rate (Brazil) and those with decreasing profitability (the remainder of countries).
“If coffee prices continue to remain low, this may lead to a spatial shift of production from less profitable growing regions to more profitable ones. An increased concentration of production in countries with advanced production systems and favourable cost structure could meet the growing demand for quality coffee worldwide in terms of quantity. However, concentration also comes at a risk as extreme weather events or pests and disease have a more severe impact in the context of concentrated rather than spatially diversified global production base. As a result, volatility of coffee prices could increase.”
Among a number of recommendations, the ICO said more research is needed to understand the economic viability of coffee production worldwide. Currently, research is hampered by data availability. It notes that across the board productivity increases (through more efficient use of fertiliser and new varieties) as well as adoption of modern agronomic techniques with the aim of mitigating production risk, can have a positive impact on the global supply of coffee and thus may also reduce price volatility.
“While increasing productivity can help farmers to become more cost-effective, they may still incur losses in years of low prices,” said the ICO. “Price volatility is part of market risk which includes also exchange rate, interest rate and counterpart default risk. The data suggests that market risk (that is price risk) is a particularly important variable. Hence, mitigation of price risk should rank high on the agenda. Farmers need to get access to risk management tools with the aim of mitigating exposure to risk and in order to strengthening resilience against inevitable shocks.
“Some countries have developed effective policy responses to factors which negatively affect the profitability of coffee farming. For example, Colombia responded successfully to the threat of coffee leaf rust, which Costa Rica has become a pioneer for measures to mitigate the impact of climate change in the coffee sector. These positive experiences should be shared between countries.”