After prices skyrocketed due to the frost in Brazil this year, which caused billions in losses for coffee growers and the industry, from my perspective, uncertainty has risen as well for Latin American producers. The belief tends to be that as prices go up, producers automatically generate more income. While this is technically accurate, as prices have risen and reached a relatively optimal level, the reality is more complex. This is related to the increases in costs of production, which vary according to each producing country and even specific regions therein.
Since 2017, Caravela has been conducting studies and paying close attention to the costs of production for coffee growers in Latin America. In our updated Cost of Production Study carried out earlier this year, we have seen that the costs of producing coffee in Latin America continue to rise, even though some countries such as Colombia and Peru have experienced substantial devaluations of their currency vs the USD. Despite the higher market prices in 2020 and 2021, most farmers are still not making a living. From 2017 to 2021, costs of production rose in 22%. Just from 2020 to 2021, they rose 8%, well above the rate of inflation. See the graphics below.
What could be causing costs to keep pace with – and even exceed – inflation? Let’s look at some factors that directly impact the cost of production:
The Cost of Fertilizer
Maintaining quality through healthy plantations requires proper plant fertilization. In general terms (this can vary according to the plant’s requirement) a plant might need 12 ounces of fertilizers per year, necessitating the financial ability (liquidity or access to loans) to perform three rounds of application during the cycle. This does not include the input of coffee leaf rust and pest control products, foliar applications, or the cost of labor.
For example, how much can it cost a farmer to control weeds on a productive hectare? Farmer 1 has bought the product with a local supplier and Farmer 2 can negotiate a price with another local supplier. Recently, the cost of inputs has doubled, yet assuming producers face a 20% increase, how would this affect them?
** This dosage can vary based on the producer’s decision-making and plant requirements.
Fertilizer prices are skyrocketing around the world. This is a market reality, which is affecting consumer goods, especially food. A few factors driving this include disruptive weather events, increased natural gas prices across the world, and container shortages, resulting in price increases and making coffee production less sustainable for farmers. And unfortunately, coffee plants do not wait. They need the fertilization at very specific moments of their growth cycle and coffee producers must buy these inputs at price that they find, otherwise, their coffee trees and yields will be affected.
The cost of finding labor plus corresponding wages for coffee pickers remains a turning point. In countries like Nicaragua, internal and external migration creates labor shortages during harvest. Since we all know the increase in price in the local market, the pickers demand a higher wage per kilo harvested. Let us see a scenario between El Salvador and Nicaragua in terms of the cost of collection.
On average, a producer in El Salvador can pay $ 1.50 per 25 pounds 11.33 (or one “arroba” equivalent to 25 pounds in the country), while a producer in Nicaragua can pay during harvest peak 40 Córdoba (local currency) per each 13.15 kg collected (or one “Lata” equivalent to 29 pounds). If two pickers collect the same kg per day, how much can they earn?
*Arroba and Lata are unit of measures for picking cherries.
Currently, producers in El Salvador are required by law to increase the minimum wage paid to producers to $1.94 per 11.33 kg collected. While this is great for all workers, it leaves farmers to figure out how to ensure it is sustainable in the long run. In Nicaragua, there is no minimum requirement, but if producers want to find labor, usually they increase prices to 50 Cordoba, which is around $1.43 per kg.
For further reference, here you can see the minimum wages in the origins where we operate, with a notable increase per year since 2017. Nicaragua is the country with the lowest wage and Guatemala and Ecuador with the highest. These differences also help explain us why the price of coffee, among other factors, varies from country to country.
Other factors are also affecting the COP and the margins producers will be able to achieve this upcoming harvest. Among these, we cannot forget the strong relationship between coffee cultivation and climate change. The weather is becoming increasingly unpredictable, and this leaves coffee growers exposed to more challenges, volume losses, cup quality decrease, or increase in costs such as transporting due to higher gas prices.
No time to wait
Today, immediacy is the name of the game. Growers cannot wait for the weather to improve during harvest time. They face complex decisions, such as whether to stop harvesting coffee because the rains are too heavy, or instead substantially increase their picking wage, as otherwise they will not be able to recover part of their investment.
When farmers are forced to make decisions on the spot, it often leads to short-term decisions that affect coffee quality but yield greater cash liquidity. A farmer can choose to sell it in cherry instead of processing the coffee to sell it as dry parchment, which leaves less quality coffee available in the market. At any given time, the focus of many farmers will not be quality, but the analysis of benefits vs costs. Why wait when you can get a return faster by selling at the current market price.
The cost of production will continue to rise, and the immediate effect will be greater and greater. Meanwhile, we invite you to share with us your questions and concerns about this important topic.
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