LATIN AMERICA: Coffee woes continue despite price rise

Analysis

Coffee prices have rallied since the end of November. The International Coffee Organisation (ICO) composite price rose to 53 cents per pound at the end of December, after falling to around 50 cents per pound in the first two months of the 2003-04 crop year (October and November). Though higher than over most of the past three years, current prices are still significantly below levels that could signal an end to the current crisis in Latin America's coffee sector (see INTERNATIONAL: No stimulus for coffee prices - August 26, 2003). Moreover, the European Coffee Federation has rejected efforts by the governments of Brazil, Colombia and Honduras to establish mechanisms for sustaining coffee prices.

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Falling exports. The estimated value of global coffee exports in the twelve months to November 2003 is 5.5 billion dollars. During this period, Latin America exported 62% of the world's coffee output by volume. Of the 53 million bags (one bag is equivalent to 132 pounds) exported by countries in the region, Brazil accounted for 49% (about 1.3 billion dollars -- a 6% year-on-year increase, due to higher prices), Colombia 20% (0.9 billion dollars -- a 5% year-on-year increase), Guatemala 7%, Mexico and Peru 5% each, and Honduras 4%.

The volume of global exports dropped by 17% year-on-year during the first two months of this crop year. In particular, exports of Brazilian naturals -- low grade arabicas -- fell by 30%, Colombian milds -- the highest grade of coffee -- by 13%, and other mild arabicas -- produced mainly in the rest of Latin America and India -- by 14%. However, exports of robustas -- the lowest grade of coffee, mainly from Africa and Asia, but also Brazil -- rose by 1%.

Production outlook. The ICO confirmed that global production in 2002-03 was 120 million bags, which is expected to drop by more than 15% in 2003-04. This is likely to be lower than the volume of coffee consumed in 2003-04, which could lead to upward price pressure. However, after several years of surplus, stocks in importing countries are high, which will limit price increases.

While production of robustas is only expected to fall by 1% in 2003-04, and levels for Colombian milds and other mild arabicas are likely to remain stable, production of Brazilian naturals is projected to fall by over 40%. Indeed, many Brazilian producers have reacted to the low prices of recent years by moving into sugar cane and soybeans. Production in Guatemala is also expected to fall by 18%. However, in Mexico -- in part due to government subsidies -- and Honduras, production is likely to rise by at least 14% this crop year. In Colombia, marginal coffee growing areas are ceasing production, while the best producing areas are being modernised, and their production intensified under a government-sponsored 'coffee renewal programme'. The total area being cultivated is expected to halve, to 350,000 hectares, over the next three to five years.

The Brazilian government announced last month that overall production is likely to increase again, from 28.5 million bags in 2003-04 to 35.8 million bags in 2004-05. The main reason for the increase is that 2004-05 is an 'on year' in the biennial cycle of the crop. A restructuring of the Brazilian coffee sector means that while the production of higher quality naturals is set to increase in 2004-05 (by 41%, to 27.8 million bags), production of robustas is projected to fall by 8%, to 8 million bags. However, figures for both 2003-04 and 2004-05 are lower than had previously been expected by the markets -- the range of estimates had been between 38 and 55 million bags for 2004-05. This is contributing to the current upward pressure on prices.

Consumption. Exporters are seeking to encourage consumption, both in traditional coffee importing countries, and domestically:

• Import markets. Consumption in importing countries totalled 83.3 million bags in 2003, which is only 2% higher than in the previous year. The major coffee importers by quantity are the United States, which imports around 27% of the total, Germany (17%), and Japan, Italy and France (9% each). Latin American coffee producers hope to increase their share of these markets, and encourage growth, by establishing minimum standards to remove lower quality coffee from the market. Guatemala, Mexico and Costa Rica have had some success in marketing 'gourmet' coffee, which is a rapidly growing niche market. In October, Colombia also launched a three-year gourmet coffee marketing programme.
• Domestic demand. According to the ICO, Brazil -- the second-largest consumer of coffee after the United States -- is expected to consume 47% of the coffee it produces in 2003-04, while the figure for Colombia is only 12%. These levels have been stable for several years. However, domestic consumption is being heavily promoted in Brazil. The Brazilian Coffee Industry Association (ABIC) has set a target of 16 million bags per year for domestic consumption in 2006, which would be an 18% increase on 2003-04 levels. Colombian domestic consumption is also expected to grow thanks to rising economic growth, the improving quality of the coffee being sold, and continuing marketing efforts by the Colombian Coffee Federation (FNC).

Other markets. Latin American coffee producers have recognised the need to move away from exporting green coffee beans, and capture more of the higher value-added processing (grinding and roasting) and retail markets:

• Processing. Currently, European and US companies, particularly Nestle, Kraft Foods, Sara Lee, and Procter and Gamble, process 90% of Brazil's exported coffee crop. However, the country's largest coffee producers' cooperative, Cooxupe, has begun to export roasted coffee to China. While this still occurs on a very small scale, the aim is to increase the roasting for export business, and make inroads into this lucrative section of the market. However, these moves could damage Brazilian producers, as it will be necessary to import different types of beans to produce blends. As a result, Brazil's entry into the roasting business is likely to be slow and complicated.
• Retail. The value of the global coffee retail market was estimated at 70 billion dollars in 2003. The major Latin American coffee producing countries currently capture very little of this market outside of their own countries, but are starting to take steps to change this. Following its success in Colombia in 2003, with sales totalling 0.7 billion dollars under the 'Juan Valdez' brand, the FNC announced in December that it would open ten retail outlets abroad. This is a small, but bold step in a competitive market, which, if successful, may pave the way for similar initiatives from elsewhere in the region.