From the beginning of the year, Colombian coffee farmers are suffering of a huge fall or Arabica coffee price at the New York market which affects the country.
Because of a decrease of the coffee price below $1 per pound, coffee growers in Colombia are not able to cover their production costs and to generate a profit.
The reason is that the New York market is highly focusing in Brazilian coffee production and not enough on Colombian and Central American production. We will talk about it in details further in the bulletin.
The result of a fall of the coffee price will decrease the production of Arabica coffee from Colombian farmers. Knowing that Arabica coffee production in Colombia is highly correlated with the country’s GDP, a fall of their production will decrease the country’s economy because its coffee exports will decrease as well.
Moreover, a fall in price of coffee will impact the income of Colombian farmers because in this country, the coffee harvests are managed by farmers and not by giant coffee plantations operated by multinational corporations such as in Brazil (540’000 families’ farmers).
According to our opinion, an increase of the level of poverty is possible in Colombia. As a conclusion, Colombian coffee farmers would like to sell their coffee beans without being tied to market prices. They would like to set by themselves a price amounted to $1.50 – $1.60 per pound in order to ensure at least the coverage of the production costs.
Details about the factor that impact the Colombian coffee harvest – increase of Brazilian coffee supply
A part of the reason that decreases the global price of coffee is a bumper harvest in Brazil. Indeed, Brazil made a record by producing 62 million bags of coffee beans in 2018 that had increased its supply. A significant information to know is that Brazil produces Arabica and Robusta coffee beans, Colombia produces only Arabica coffee beans. Knowing which type of coffee beans Brazilian coffee producers produce will make clearer how the increase of Brazilian coffee supply had impacted the coffee price at the New York market.
As a whole, an increase of the supply will decrease the price of a commodity and makes it more interesting for buyers. This is what occurred, even if the expected production of Brazilian coffee beans were planned to be 53 million bags for 2019, Brazilian coffee supply would still be considered as a record and would probably keep the coffee price low at the New York market.
Another reason that affects the decrease of the coffee price is the ongoing fall of the Brazilian currency. Coffee is traded in US dollars, Brazilian currency is losing its value at 45% below its 20 year average against the US dollar. As a result, this fall in the currency will strengthen the competitiveness of Brazil against producers in Colombia and Guatemala because the purchasing power of coffee buyers will be higher in Brazil.
Coffee futures/forward curve
By comparing the historical spot prices of coffee on the graph above and the coffee’s futures/forward curve, we could conclude that the coffee market is currently in contango since the futures/forward curve is upward sloping.
Having the coffee’s forward price higher than the spot price, this means that currently the coffee’s market is a bearish market.
As a conclusion, we would recommend coffee producers to store their coffee beans and to sell with futures or forward contracts.
Coffee and worldwide daily warehouse levels
By using the certified data about the warehouse stock report from ICE – Intercontinental Exchange, we could see that from the beginning of 2019 Brazilian daily warehouse levels were low compared to Colombia. The fact that Brazil reported low inventory level than Colombia demonstrates the interest of the New York market and the roasters (buyers) in buying Brazilian coffee beans which are at a low price.
The second graph shows the “worldwide” daily warehouse stock of coffee beans. The countries included in each total are Brazil, Burundi, Colombia, El Salvador, Guatemala, Honduras, India, Mexico, Nicaragua, Papua New Guinea, Peru, Rwanda and Uganda.
Certified data about the warehouse stock report from ICE – Intercontinental Exchange
Ghana: Dying Cocoa plantation
Let us remember the presentation from Eric Bourgeois (head of cocoa department) at Walter Matter (family owned business, niche market, medium size).
Some Facts on Cocoa:
Coco trees needs : hot, humid, shadow, Tropical regions (in the equatorial region).
Total production 4,65 mio tons.
- Cote d’ivoire 2 mio tons (43%),
- Ghana 0,9 mio (19%),
- Indonesia (0,29 mio, used to be 0,3; 0,4, but reduced by taxes and investment in other commodities more profitable like palm oil),
- Ecuador (0,28mio),
- Cameroon (0,24mio),
- Nigeria (0,23mio)
Main processing countries (semi-finished product)
- Cote d’ivoire 0,58 mio
- Netherlands 0,55 mio
- Indonesia 0,45 mio
- Germany 0,41 mio
- USA 0,39 mio
- Brazil 0,23 mio
- Ghana 0,22 mio
News from Ghana
Ghana is the second largest cocoa exporters. However, it could lose its position because of badly managed plantations and drought.
Small farmers growing Cocoa have been using chemical pesticides and fertilizers, and clearing woodland to boost production.
Better planting methods would negate the need for such chemical treatments. NGOs such as SNV, a Dutch organization, are encouraging the farmers to plant shade trees such as banana or Cassava (manioc) trees to keep the cocoa trees cool and reduce the use of water. Moreover, these farmers will be able to increase income since they have bananas and Manioc to sell too.[
Details about the project over there:
Project goal: Modernizing cocoa farming in Ghana by improving growing conditions for new trees and helping farmers to overcome lean times.
Project size: Some 750 farmers are preparing their fields for new trees. Four tree nurseries are being built to grow 600,000 new cacao trees. Approximately 20,000 shade trees will also be planted.
Project partners: SNV Netherlands Development Organisation – Smart Development Works, International Climate Initiative (IKI).
Project budget: The initiative is part of a larger project taking place in Vietnam, Peru and Ghana, which IKI financed with€1,966,384 ($2,243,791).
Sources
Coffee historical price. Market Insider (online). (Consulted on 5thMarch 2019). Available at the URL: https://markets.businessinsider.com/commodities/coffee-price
HESSLER, Uwe, 2019. “Colombian coffee growers retreat from New York market amid falling prices”. DW (online). 28thFebruary 2019. (Consulted on 5thMarch 2019). Available at the URL: https://www.dw.com/en/colombian-coffee-growers-retreat-from-new-york-market-amid-falling-prices/a-47724249?maca=en-rss-en-all-1573-rdf
Coffee futures forward curve. MarketQview(online). 4thMarch 2019. (Consulted on 5thMarch 2019). Available at the URL: http://marketqview.com/forwardcurvechart.php?ID=15&TYPE=Price
Coffee certified stock reports. ICE(online). (Consulted on 5thMarch 2019). Available at the URL: https://www.theice.com/marketdata/reports/42
DW (online) (consulted in 6thmarch 2019) https://www.dw.com/en/in-ghana-farmers-try-to-boost-ailing-cocoa-production/a-47372825?maca=en-rss-en-all-1573-rdf