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September ’17 Editorial comment: Too big to fail, too important to ignore

September ’17 Editorial comment: Too big to fail, too important to ignore

This Editorial comment  first appeared in the September 17 issue of C&CI, click on subscribe now if you wish to read more informative articles in the September and future issues of C&CI. 

Production in Brazil is always keenly watched by the coffee industry because, as the world’s largest producer, the size of the crop in the country has such a significant effect on prices. Brazil accounts for more than a third of total world exports.

At the time of writing, the coffee price on ICE was 132.2 US cents per pound, having fallen from around 140.00 US cents at the end of July. In November 2016 the C price rose above 180 US cents. You have to go back to mid-2014 if you want to find a price above US$2.0/pound and way back to mid-2011 to find the C price at a level of nearly US3.0/lb. Since late 2014 it has generally been well below the level of US180 cents, a level that might once have just about allowed coffee farmers to break even.

So it was with interest that I read that Brazil’s Ministry of Agriculture (MAPA) anticipates that Brazilian coffee production will increase 8.3 per cent in 2018 reaching 52 million bags compared to 48 million in 2017. Of greater interest, however, was the ministry’s perspective on Brazilian production in the next 10 years.

MAPA expects that, by 2026, Brazil will be producing an average of 63 million bags a year, an increase of 31.3 per cent over 2017, although it says this figure ‘could be affected by climate change’ (which is true of coffee farming everywhere). Even more frightening if you are a coffee farmer anywhere else in the world is the possibility that MAPA is being a little conservative, but there is another side to this story and some other figures that you might like to think about that were enumerated by the well-known coffee analyst Carlos Brando recently.

The other side of the story is, of course, that Brazil is also one of the fastest growing consumers of coffee. Adding MAPA’s base case projections for domestic consumption and exports, Mr Brando arrived at a requirement for 28 + 46 million bags – that is, a staggering 74 million bags by 2026.

Could Brazil conceivably meet such a huge target? As Mr Brando points out, doing so would require a significant increase in the planted area in Brazil, and/or a significant increase in productivity, whether from new varieties, increased planting density, better husbandry or increased use of irrigation – probably all of the aforementioned. Increased use of irrigation could be particularly important if climate change causes drought and concerns about the Brazilian crop of a type that have caused prices to spike steeply at times in the last few years. If Brazilian consumption continues to grow at anything like this rate, production in the country will have to grow rapidly or exports will decline and the country could progressively lose market share.

What of production in other countries? One constantly reads of plans to double production in this or that country, but they rarely come to anything. Brazil is different, it may be challenged by climate change, but as Mr Brando noted, if the past holds any lessons for the future, the challenges faced by Brazilian farmers will be addressed and, despite the current crisis, and low returns, a huge increase in production in Brazil will happen.

Whether that’s a good thing for the coffee industry as a whole is another matter altogether. Dependence on a small number of leading producers has been increasing for a number of years. It can only lead to greater volatility if, as seems likely, climate change, drought, and events associated with climate change, such as increased incidence of pests and disease, occur. And is greater irrigation desirable at a time when water use in the production of coffee is coming under greater and greater scrutiny?

Like banks after the Great Depression, that were said to be ‘too big to fail,’ the Brazilian coffee sector could be the saviour of the industry as global consumption steadily increases, like a bank providing sufficient liquidity to industry. Or if it fails for any reason – because of climate change or an unforeseen event, perhaps even because of political problems – prices could go through the roof. Of course, it was ever thus. The more things change, the more they stay the same.■ David Foxwell – C&CI Editor

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