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Low Prices, Risky Times

For the 2017-18 harvest,ย theย International Coffee Organizationย (ICO)ย estimated global production of green coffee at 158ย million 60kg bags, an excess of 2.4 million bags compared to annual global consumption.ย For the 2018-19 harvest, the gap is expected to widen evenย furtherย due toย bumper cropsย in Brazilย and Vietnam.

In a market where price is firmly governed by supply and demand, thisย oversupply – along with the devaluation of the Brazilian Real –ย hasย triggered (and exacerbated) the low prices we have witnessed over the last few months.

ย ย ย 3 Minutes Read

Luis Guillermo Cortรฉs
Regional PECA Director

This scenario carries with it no small risk, as the current price of coffee has a direct effect on future production and quality. As described in a previous post, fertilizersย areย the firstย input that coffee producers will reduce or stop applying atย the firstย sign of crisis. Our PECA teamย regularlyย advises producersย which fertilizers they should use, in what quantities,ย and how to apply them in a manner that is sustainable and conscious of the environment.ย ย Whenย farmersย cease or dial back the application of fertilizers,ย the effect on productivity and quality is not immediately seen; aย decrease in production will be visibleย onlyย 14 months after cessation. Theย sameย timeline appliesย for the recovery of productivity. Coffee trees that have been left to fend for themselves for one or two years with little or no usage of fertilizer will not immediately recover, insteadย taking at leastย between 14-18 monthsย to do so.ย 

Globally, coffee is grown primarily by small-scale coffee producers, who usually lack the financial capitalย or savings necessaryย to withstand precipitous drops in price. During difficult times, these farmers usuallyย purchaseย fertilizersย withย creditย providedย by intermediaries,ย as banks generally do not lend money to smallย farmers.ย In return for providingย theย inputs,ย farmersย are then obliged to sellย their coffee to those same intermediaries, who buy it at the price they wish to pay farmers. Ifย market pricesย doย not recoverย rapidly, they enter aย viciousย cycleย whereย producersย need toย borrowย more moneyย toย maintain their production levels,ย but as prices remain low, their incomeย is insufficient to continueย borrowing money.ย Having endured these cycles before, many farmersย often simplyย forgo procuring credit and fertilizersย altogether.ย 

When prices are depressed, as they have been in the current market, producers will often tell us they lack the resourcesย to buyย inputsย and appropriately care for their trees, as theย price they sell their coffee forย isย below their cost of production. Fast forward one or two years, and even ifย pricesย haveย recovered, producers will describe a similar lack of resources, only now it is due to low production, which even with higher prices does not generate income sufficient to both live and also purchase inputs. From this pointย forward, even if the farmerย starts fertilizing and yields begin toย recover, it will take a few years forย yields to returnย to pre-crisis levels,ย at which point itโ€™s possible thatย prices will have dropped again.ย ย ย  โ€จ

We now enter a critical period for future coffee production.ย If todayโ€™s producers reduce their fertilizerย inputsย or stop completely, this will lead to quality problems in the short term: cherries and seeds will not develop properly onย treesย deprived of the necessary nutrients, resulting in underwhelming coffees. In the long term however, the problem is much more serious, as prolonged tree malnutrition decreases resistance to diseases such asย coffee leafย rustย (roya). Farms addled by disease and poor tree nutrition for consecutive seasons can often fail to recover, leaving the farmer in an ever more dire situation. ย 

Ensuring that producers receive the basic minimum price which allows them to utilize the inputs required to grow specialty grade coffee is integral to helping farmers ride out severe fluctuations in price. Without the means to maintain healthy trees, producers end up challenged by financial conditions every bit as daunting and pernicious as the natural threats that can beset a coffee farm.

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