GLOBAL COFFEEPLATFORM

When profits become negative: growers’ revenues failing to meet production costs


11 / Jan / 17

6Th Ico Meeting

Sacks of coffee being weighed in Colombia.

The ICO Head of Operations, Marcela Uruena, presented a study on the economic sustainability of coffee growing in Brazil, Colombia, Costa Rica and El Salvador over ten years at the ICO’s 6th Consultative Forum on Coffee Sector Finance in London.

The results show steep production cost increases, mainly attributed to labour and agro-input price hikes, capital goods resulting from trans-national yield pressure and exchange rate developments. Alarmingly, growers’ revenues hardly keep pace with production costs increases, even adding up to “negative profits” in recent years for Costa Rica and El Salvador.

Even for Colombia, which rated more positively in the ICO study, one of the panelists reported that an astounding 39% of the higher value supply chain growers lived below the poverty line and 95% of the growers would not advise their children to continue coffee farming.

Causes

Other panels discussed on the inter-related causes for this dilemma:

  • low productivity
  • lack of finance due to high risk and high interest rates
  • limited access to technology
  • adverse effects of climate change
  • diminishing natural resources (soil, water)
  • old farmers and trees
  • the underlying reluctance of youth to continue coffee farming and the need to rejuvenate plantations
  • “competition” of more profitable crops and white-collar-jobs in the cities
  • lack of extension, and if available, its tendency to be gender blind

This situation is exacerbated in individual countries by political unrest, policy neglect, the Ebola outbreak in Western Africa, generally high interest rates of 20% and urbanization.

Price risk management and strengthening resilience

Recommended remedies include price risk management tools and resilience strengthening at farm – and best practice policy experience sharing and increased collaboration at national levels, supported by continued research and data collection.

The introduction of new technology and high-speed internet was proposed as a proven option to help to connect the youth to the world and cities and encourage them to stay in coffee.

However, while viable pathways to address challenges include productivity & efficiency increases and the adoption of a more entrepreneurial approach to farming, it was stated that most of the root causes and therefore potential remedies, lie beyond farm level.

Private and public sectors must align to create a united sector through organisations such as national platforms, the Comprehensive African Agricultural Development Programme or the Global Coffee Platform.

An imbalanced sector

There was consensus that the C contract futures market has severe limitations in facilitating price discovery, and if at all it only reflects a fraction of the global market. Unlike the more powerful and resourceful supply chain actors, farmers’ businesses are most inert and least able to adapt to price volatility, propelled by global commodity speculation, and to apply appropriate risk management tools.

Market prices also don’t reflect growing (hidden) cost of production, nor do they value other societal and environmental benefits of coffee farming, such as carbon sequestration or agroforestry. At the same time, there is an imbalance along the supply chain in value addition and profit and a (growing) distribution disparity of revenue in favour of downstream supply chain actors.

The result is that the coffee sector is highly imbalanced: one stark example is that the cost of one high-end espresso in consumer markets equals the cost for an annual health insurance premium for a coffee farmer in Burundi, which he cannot afford.

“It is time to feed the chicken to get the best-quality eggs”

To ensure sustainability of the sector it was noted that it was “time to feed the chicken to get maximum quality eggs”, in other words, identify a mechanism to achieve economic sustainability for producers and to address the challenge of risk, revenue and resilience disparity within the supply chain.

On a structural level, options to revise the price discovery and value distribution regimes were discussed, through a block-chain approach to physical coffee clearance that is independent of the futures market, a participation of coffee producers in futures markets, or an agreement on longer term contracts.

A stronger integration and shared responsibility of the entire supply chain, possibly including the consumer, was also considered important to facilitate co-investments and increase transparency (e.g. on value addition) from farm gate to the consumer. Direct farmer support in terms of financial advisory services, facilitation of credit or other training services will of course be vital to strengthen farm level economic viability.

However, this will remain cosmetic in the absence of structural sector changes, including the revision of price discovery and market mechanisms and joint investments through a broad public-private sector collaboration.

Further information

On 21 September 2016, the ICO hosted its 6th Consultative Forum on Coffee Sector Finance in London. The conference was chaired by Juan Estéban Orduz of the Colombian Coffee Growers’ Federation and an illustrious group of panellists discussed widespread coffee sector challenges and shortcomings of price determination mechanisms and associated risks for producers. Read more of the findings on the ICO Blog.