Low Prices, Risky Times
For the 2017-18 harvest, the International Coffee Organization (ICO) estimated global production of green coffee at 158 million 60kg bags, an excess of 2.4 million bags compared to annual global consumption. For the 2018-19 harvest, the gap is expected to widen even further due to bumper crops in Brazil and Vietnam.
In a market where price is firmly governed by supply and demand, this oversupply – along with the devaluation of the Brazilian Real – has triggered (and exacerbated) the low prices we have witnessed over the last few months.
3 Minutes Read
Luis Guillermo Cortés
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, fertilizers are the first input that coffee producers will reduce or stop applying at the first sign of crisis. Our PECA team regularly advises producers which fertilizers they should use, in what quantities, and how to apply them in a manner that is sustainable and conscious of the environment. When farmers cease or dial back the application of fertilizers, the effect on productivity and quality is not immediately seen; a decrease in production will be visible only 14 months after cessation. The same timeline applies 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, instead taking at least between 14-18 months to do so.
Globally, coffee is grown primarily by small-scale coffee producers, who usually lack the financial capital or savings necessary to withstand precipitous drops in price. During difficult times, these farmers usually purchase fertilizers with credit provided by intermediaries, as banks generally do not lend money to small farmers. In return for providing the inputs, farmers are then obliged to sell their coffee to those same intermediaries, who buy it at the price they wish to pay farmers. If market prices do not recover rapidly, they enter a vicious cycle where producers need to borrow more money to maintain their production levels, but as prices remain low, their income is insufficient to continue borrowing money. Having endured these cycles before, many farmers often simply forgo procuring credit and fertilizers altogether.
When prices are depressed, as they have been in the current market, producers will often tell us they lack the resources to buy inputs and appropriately care for their trees, as the price they sell their coffee for is below their cost of production. Fast forward one or two years, and even if prices have 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 point forward, even if the farmer starts fertilizing and yields begin to recover, it will take a few years for yields to return to pre-crisis levels, at which point it’s possible that prices will have dropped again.
We now enter a critical period for future coffee production. If today’s producers reduce their fertilizer inputs or stop completely, this will lead to quality problems in the short term: cherries and seeds will not develop properly on trees 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 as coffee leaf rust (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.
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.