Coffee economics

Coffee leaf rust and sliding coffee prices

By Maja Wallengren Coffee prices forecasting is a tricky business, and recent happenings suggest this is no undefined

t about to change.

Since the coffee trade entered the full force of a free market system at the end of the Cold War, coffee forecasting these days is anyone’s guess.

With unpredictable factors, like the major weather crisis that caused the ongoing rust disaster in Central America, South America and the Caribbean, uncertainty seems to be the only certainty in the game.

Since harvesting started on the new 2013-14 crop across Central America in October, data on how severely rust will affect the final output has been widely conflicted. The most conservative figures, the London-based Man Group Plc’s coffee trading arm Volcafe/ED&F Man, said output for the region could be as little as 10.7 million 60-kilogram bags. At the same time, the US Department of Agriculture (USDA) has projected output from the region could reach 12.61 million bags. This is a staggering difference of some 2 million bags for a region of just five producing nations. 

“Central America and Mexico account for one fifth of the world’s Arabica production. The region’s production is forecast to decline 1.4 million bags, due to lower yields from coffee rust,” the USDA said in its first 2013-14 world coffee market outlook.

Meanwhile, Volcafe said in its quarterly report: “Rust-affected mild crops in Central America and in Peru are still a real concern. The 2013-14 crop is more severely affected and we see output falling a further 2.5 million bags.”

One green bean trader in the New York physicals market tells Global Coffee Review that the difference in the two forecasts is “very large”, considering the region only accounts for about 25 per cent of the volume produced by Brazil.

“The fact that there can be such a big difference shows the extent of uncertainty that still wraps the Central American rust situation and that we still could face quite a few more shocks on that side as far as supply upsets are concerned,” he says.

When news of the outbreak first reached the market last January, damage estimates varied from between 20 – 30 per cent in the now completed 2012-13 harvest. Damage was expected to be worse in the new 2013-14 cycle, at an additional 20 – 40 per cent on top of the last crop’s losses. The International Coffee Organisation (ICO) put final losses for the last crop at 2.7 million bags.

Honduras has one of the most conflicting forecasts in terms of the rust outbreak, at up to 1 million bags. The country has been Central America’s biggest grower in the past two years, with total production reaching a record 5.9 million bags in the 2011-12 cycle. The jump was attributed to extensive replanting and renovation programs, in addition to significant new plantings. While the USDA says it expects Honduran production to rebound 9 per cent to 5 million bags, Volcafe says it expects Honduras to produce no more than 4 million bags. The government-run Honduran Coffee Institute, Ihcafe, is sitting in the middle, saying it expects 4.6 million. The institute says that rust had damaged some new areas that, prior to the outbreak, had been projected to enter production this year.

“The disease has lowered crop yields, cost jobs, lowered incomes and damaged plantations, negatively affecting the 2013-14 harvest. The job losses are reflected throughout the coffee supply chain, from harvesting to exportation, especially in the populations that live in Honduras’ coffee areas,” Jaime Salazar, Institutional Advancement Director at the Zamorano University in Honduras, tells Global Coffee Review. The University advises Ihcafe on poverty eradication strategies in coffee dependent areas. “This will lead to lower purchasing power, deepening poverty, negative environmental effects of deforestation caused by the abandonment of farms and more migration to other countries.”

Disagreement about the level of impact is also high in Guatemala, the region’s second largest producer and leading exporter for most of the past decade. While the forecasts again vary greatly – from Volcafe’s 2.8 million bags to the USDA’s 3.9 million bags – there is a consensus on the significant impact of rust.

Production drops from rust is in conflict with the occurrence that coffee prices have yet to react. One factor that has prevented a lift in prices is that large stocks were left over from the 2011-12 bumper crop across the Central American region, which in Guatemala alone reached close to 3.9 million bags. These bags were not shipped until after the start of the 2012-13 cycle, hence softening the impact shown in export figures and not showing the market the “hard evidence” of the more significant drop from losses.

Coffee leaf rustSome analysts argue that the real size of the losses should not be measured in comparison to the most recent crop, but against the original forecasts for the 2012-13 harvest to produce another bumper crop in Central America. Officials from the grower-run Guatemalan Coffee Association (Anacafe), say the effect of stocks have made up a significant difference in export figures.

“We had a very high volume of carry over stocks from 2011-12 and this is why we are not seeing any significant change to the pace of exports. Of the total exports in 2012-13, between 7 – 10 per cent was all old crop and we are without doubt going to see more of an impact in 2013-14,” says Adolfo Boppel Carrere, former Guatemalan Agriculture Minister and a past President of Anacafe. “In some of the worst affected regions, like Atitlan, Fraijanes, Antigua, and Acatenango, we still see infestation levels of between 19 – 24 per cent.”

For Central America’s smaller growers Costa Rica and Nicaragua, official forecasts put production at around 1.4 million bags in each country. Some producers in Costa Rica say this might be too optimistic, and officials in Nicaragua warn output could be much more severely affected. Over 90 per cent of the coffee land in Nicaragua is managed by smallholder growers, who have not had the means to fumigate or apply any other level of control.

Juan Carlos Munguia, President of the Nicaraguan Specialty Coffee Association, says that production could “easily fall by as much as 30 per cent or the equivalent of 460,000 bags” in the 2013-14 cycle. He echoes the views of the Nicaraguan Agricultural Producers Union (Upanic) that says the lack of any level of control in large parts of the country could provoke losses so severe that the new harvest will not surpass 950,000 bags.

Official coffee research institutes in Costa Rica and Nicaragua reported that 67 per cent and 36 per cent of the countries’ respective coffee areas are still affected by rust.
“All these areas where there has been little or no assistance to small producers provide a scenario that at any given point could provide the perfect storm as to higher than expected impact,” says Costa Rican trader Rodolfo Mora.

Central America’s smallest grower, El Salvador, could become even smaller in this new harvest. El Salvador’s official coffee research institution, Procafe, said in its first forecast released in September that it expects the total volume of “exportable production” to drop to around 700,000 bags, with an additional 80,000 bags available for domestic consumption. This would be the smallest crop in history since figures first started to be registered more than 50 years ago.

For roasters and green buyers looking for replacements among Latin America’s traditionally Mild Washed Arabica producers, there is little source of encouragement. The rust epidemic has spread to most producing countries. In Mexico’s biggest growing state, Chiapas, which accounts for about a third of total national output in any given year, rust is being reported in over 40 per cent of farms. In Ecuador, rust fungus has hit over 50 per cent of growing areas. In Peru, the spread of rust has continued to worsen during the past four months, with up to 25 per cent of coffee areas now affected to varying degrees.

An official at Peru’s National Coffee Council, also known as La Junta, says some 10,000 Peruvian coffee growers have lost their entire crop because of “extensive damage caused by rust” and losses could reach 1.5 million bags.

Despite these supply concerns, global coffee prices have fallen to their lowest levels in more than four and a half years. Producers who are growing less coffee, and getting less money for the coffee they are growing, are getting increasingly desperate.

Prices are staying low because the market shows little preference for where the coffee is coming from, and major players Brazil and Colombia are making up for most of the Arabica losses. In Colombia, recovery is finally coming along. The new 2013-14 Colombian harvest is approaching double-digit figures for the first time since the 2007-08 cycle. In Brazil, the country’s producers are picking the biggest off-cycle crop in history.

“There’s plenty of Arabica supply out there,” said Mark T. Smucker, President of J.M. Smuckers, in a recent teleconference. Smuckers owns the Folgers coffee brands in the US.

The situation, however, isn’t entirely positive. Brazilian exporters and traders Comexim, which generally has been known to take an optimistic position in forecasting, recently made a stunning withdrawal from previous positive projections.

Senior Comexim Trader John Wolthers said that ahead of the 2012-13 harvest, flowering and weather conditions looked set to produce “the mother of all crops” of at least 60 million bags. Ahead of the 2013-14 harvest, Wolthers predicted Brazil to hit at least 55 million bags. Wolthers now tells Global Coffee Review that Brazilian producers and traders have become “bearishly brainwashed” in a market sentiment that bodes ill for future crops. 

“The reason for the overall bearish sentiment is the fact that most Brazilian warehouses are reported with high stocks. This, combined with relatively friendly weather for the next harvest so far, does not exactly stimulate our producers to continue investments in the fields. Also, low prices are impacting the production levels and will definitely claim consequences,” says Wolthers, who last August cut Comexim’s figure for the 2013-14 crop by 3.8 million bags to reach a total 49.4 million bags after reporting massive damage to Brazil’s Robusta crop.

The conflict over the outlook for supply in the medium term begs the question, what exactly can industry stakeholders expect in the next cycle? Volatility is expected to be a potent factor at any given point. Changes in prices from unexpected scarcity in demand may be played out in the cash market. Differentials at origin could repeat what happened in 2009 when Colombian and Central American premiums surged on the supply deficit needed to fulfill contract obligations, because of the shortfall of Colombian coffee.

Volcafe summed up the situation in a recent report: “This should be a classic differential story, but could coffee surprise us again?” 

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