Colombia creates a source of stability

In the face of sustained low coffee prices and continued uncertainty in the market, the Colombian Government has acted to protect its producers from volatility.

On 11 July 2019, Colombian President Ivan Duque announced the creation of a Coffee Price Stabilisation Fund (FEPC), worth COL$218 billion (about US$64 million), which launched in February 2020. The fund has been a long-time aspiration of the nation’s coffee producers, Colombian Coffee Growers Federation (FNC) CEO Roberto Vélez Vallejo tells Global Coffee Report.

“The fund will help coffee growers when prices come down to stabilise their income,” Vélez says. “There has been a desire from coffee growers to have a less volatile coffee price. Moreover, they want something that supports internal prices when the market falls below the cost of production.”

He says it’s important to note the FEPC will not simply maintain an artificial price when the market falls. Instead, it will be used to launch a set of mechanisms that will stabilise the income of growers.

While decisions have not yet been made of how to allocate fund, Vélez suggests subsidies for agricultural products like fertiliser or insurance premiums as one alternative.

“Colombian producers are pretty excited about the fund, although I’m not sure everybody understands what this stabilisation fund is and what actions it will take,” he says. “There’s a little bit of confusion as there is not a clear image of what the stabilisation fund will do just yet. A secretariat will be appointed to propose mechanisms that can be implemented with the fund.”

The FNC will play a role in handling and decisions regarding the FEPC. The federation will also contribute money from coffee growers through the National Coffee Fund (FoNC) it administers.

“About half a cent from every pound of coffee exported will go to the stabilisation fund,” Vélez says.

Producers have paid a small coffee tax for every pound of coffee exported from Colombia since 1928, which is used to provide collective benefits for the industry.

The FoNC was formerly established in 1940 and is the primary source of funding for the purchase guarantee, scientific research and technological development of Cenicafé, Extension Service, and marketing of Colombian coffee.

“The fund provided a price support mechanism that used to collect money when prices went up and maintained a sustainable price when prices come down,” Vélez says.

“That function of the coffee ended in the late 1990s or early 2000s. But coffee growers maintained the idea there should be a mechanism to support prices when the market collapsed.”

The government has also contributed a majority of the money going toward the FEPC. Third parties including international donors, individual growers, and local governments will also be able to support the stabilisation fund.

Vélez says he hopes the FEPC will prevent circumstances from occurring like the 2013 Colombian coffee growers strike. The high Colombian peso and low US dollar in the early 2010s led to internal prices falling below production costs. Producers went on strike from 25 February to 8 March 2013 to force government support, interrupting logistics and coffee processing in the country.

“Growers were anxious for help them during those times. Eventually, the government came in and provided money to support them, but it was a difficult time for many growers,” Vélez says.

“Fortunately, in recent years, our currency levels have helped growers survive low market prices. But this is the case of Colombia. In other producing countries, the situation is really traumatic. If our ideas work for Colombian producers, I hope they serve as a model for other countries to follow.”

Coming up short
Since late 2019, there has been significant fluctuation in international coffee prices. However, Vélez says that even at their highest points, prices are still too low. He adds the increasing differential between mild or washed coffees and Brazilian naturals suggests prices are not truly reflective of the current coffee market.

“The differential for mild coffees is more than 30 or 40 US cents per pound. That demonstrates a couple of things we’ve been preaching for a long time,” Vélez says. “When you talk about why the price is low, people say ‘there is too much coffee’. But there’s something wrong when you see differentials going that high. It means there’s not that much washed coffee available.”

He attributes this to Brazil’s heavy influence over the C Market. Brazil’s record-breaking harvest of 62.6 million bags in 2018 rippled through the market, reducing prices across the board.

“Differentials are supposed to recognise the lack of one origin against others, but the market reflects the prices or availability of Brazilian coffee,” Vélez says. “When the C Market was created, Colombia would get two US cents over the market price as a recognition of quality, but today it’s around 40 cents. It’s the market that should be 40 cents up, not the differential. Brazil’s crop is anchoring the market at US$1.”

In order to address these inconsistencies, Vélez is calling for greater communication across the coffee supply chain.

“We need to all sit together and talk. Had we known the needs of the industry in terms of coffee, we could have been better prepared. But the industry is not ready to talk to us,” Vélez says. “There must be a recognition that there is something wrong with the way the C Market is operating.”

In order to establish a sustainable coffee supply chain, Vélez says the industry cannot be blind to deficits in the market while paying producers below production costs.

“I’m not asking anyone to cover inefficiencies. Find the most efficient coffee producer in Colombia, see their cost of production, and say ‘this is the minimum I will pay’,” Vélez says. “At the same time the industry is running low on coffee, we have several clients knocking on our door, asking us to ship immediately.”

With the COVID-19 pandemic posing a threat to future supply chains, Vélez says it’s more important than ever that roasters ensure their supply.

“We’re facing something we’ve never seen before. It is very hard to say which way the market will move,” Vélez says. “After all this is over, the world needs  to start thinking if this just-in-time system is really okay. There are many things we  need to do to give the industry a sustainable future.”

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