Profiles

ICO on the global price crisis

More than 200 international government representatives of exporting and importing countries and national coffee boards gathered at the 122nd Session of the International Coffee Council (ICC) in September. In what can be described as the United Nations of coffee, council members gathered to discuss the industry’s emerging issues and long-term future for coffee producers, traders, and consumers. Earlier this year the United States’ withdrawal from the International Coffee Agreement was a hot topic, but on this occasion, there was only one thing on the minds of Council representatives: pricing. “I was pleased with the session but the event was overshadowed by the current low price situation,” International Coffee Organization (ICO) Executive Director José Sette tells Global Coffee Report. “This is a great concern to our members. The situation is very discouraging to growers, and this was repeated over and over. We had numerous expressions of concern from producing countries about the pauperisation of coffee growers and the long-term future of coffee.” On 18 September, the international trading price for coffee or C-Price fell below US$1 per pound for the first time in 12 years, its lowest price since mid-2006. According to Rabobank Senior Commodity Analyst Carlos Mera, for most of this year, and in September in particular, the Brazilian real has been an important factor in influencing Arabica coffee prices, as are other fundamental factors such as large crops in Brazil (a record harvest of about 3.6 million tonnes is expected, accounting for around 30 per cent of the world’s coffee production), and two record crops in Vietnam. However, he says the global surplus by itself isn’t enough to explain the extreme price drop. “We need to look at macro factors affecting the market – the weakening Brazilian real being one, meaning a competitive market, but also the non-commercial position of coffee Arabica, which recently reached a record net short position and is 2.6 times larger than any other net short position seen in previous years since records began in 2006,” Mera says. He adds that despite a significant recovery in prices of 12.5 per cent in the first two weeks of October due to the appreciation of the Brazilian real, the farmers are the ones facing the consequences. “Brazil’s weak currency helps the farmers and Vietnam has low cost of production but about 15 producing countries that have a strong currency such as those in Central America, Indonesia, India, and in particular some African countries like Kenya, we expect to see production drops as a result. “Crops in Central America, Colombia, and many African countries are coming now, from November to January, and producers from those strong-currency countries will find their income significantly reduced. We say that there about 20 million farmers around the world, so if we believe that Brazil and Vietnam and other small producing countries are still doing well, we have about 10 million farmers from producing countries with stronger currencies walking into poverty or becoming poorer.” The crisis could force Central American coffee farmers to abandon coffee production, switch to growing illicit crops, or aggravate already dramatic migration flows. This adds to growing concerns about the sustainability of future coffee supply on top of the expected negative impact of climate change. The last time the industry faced a similar situation was in 2001-02 when prices fell below US50 cents per pound. Again, good crops worldwide and an extremely weak Brazilian real were large contributing factors. This time, the Brazilian real has fallen 17.9 per cent against the US dollar for the year to date. ICO analysis suggests the worst part of the crisis may be approaching its end, but this will depend on the result of the Brazilian election on 7 October. “Coffee is a cyclical commodity that has its ups and downs, making prices hard to predict,” Sette says. “I think the market will be looking closely at next Brazilian crop. In the past Brazil has a pronounced a two-year cycle with an on-year in production, followed by an off-year when trees become stressed and are unable to repeat the performance in the following year. A lot will become clearer in the next year.” But in today’s current economic climate, Sette says wide disparities remain between the productivity and profitability of producers, and something needs to be done. “A large proportion of farmers are unable to cover the costs of production. We need to consider setting specific targets because farmers need higher prices. We are not talking about anything that would have a major impact on consumption, but I do believe there is room within the current price structure of the roasting industry to accommodate higher prices,” Sette tells GCR. In order to get the pricing market back to a “healthy state” or a “fair price”, Sette says roasters need to remember the most vulnerable part of the coffee chain. “Within this climate, there is a feeling that the roasting industry is prospering, it’s very healthy with lots of merger and acquisition activity and lots of interest in retail and roasting side of coffee. But it’s paradoxical that some links in the value chain are healthy while the most vulnerable part is struggling,” Sette says. “It is in roasters’ self interest to dedicate more than they already do to the sustainability of the growers. Our members recognise that the roasters already do a considerable amount of work in this regard but the general feeling is that this is not sufficient and that more should be done.” The first form of action, Sette says, is to engage the roasting industry in healthy dialogue around the subject and raise awareness of the current low prices. “Prices, prices, prices. It’s the message we need to get out. It’s the most pressing issue on people’s minds,” Sette says. “I’m not talking about starting anything that could cause anti-trust issues. Roasters do invest considerably in sustainability initiatives, whether in-house or public, but we have to acknowledge at the moment, we are struggling, and some parts of the growing community may not survive to see a change.” Starbucks is one such company that has already announced its support by committing up to US$20 million to temporarily relieve impacted smallholder farmers until the coffee market self-corrects and rises above the cost of production. “A majority of the coffee we purchase comes from smallholder farmers and the coffee crisis in Central America related to low prices cannot be ignored,” Michelle Burns, Senior Vice President, Global Coffee and Tea said in a press statement. “We have a role and responsibility in helping smallholder farmers sustain their livelihoods. Their success will help ensure the long-term health of coffee productivity.” Funds will go directly to smallholder farmers in Nicaragua, Guatemala, Mexico, and El Salvador to subsidise farmer income during the upcoming harvest season in Central America. At the ICC, ICO Professor Jeffrey Sachs, of Columbia University, presented the preliminary results of a study on prices based on ICO data, an initiative of the World Coffee Producers’ Forum with a contribution from the ICO. The ICO’s assessment of the future of coffee and spot prices and the updated coffee market analysis were presented to council members, including suggested options under review to support industry and consumers to transfer funds back to poor growers. To allow coffee stakeholders to access funds and technologies, the session at the ICC meeting included a forum in innovation, Donors’ Forum, and a Partnership Fair. These brought together key donors, international organisations, and financial institutions, as well as technology providers to address the situation of price and productivity on livelihood of small growers and climate change. Solutions aim to facilitate access to funding, how to blend public and private funds, and to contribute to the de-commoditisation of coffee, thereby reducing the vulnerability of green coffee price shocks. The Council also decided to launch a global communication plan to raise awareness among consumers on the economic reality of the coffee sector as part of its efforts to contribute to the 2030 agenda for sustainable development. “In order to achieve environmental and social sustainability, economic sustainability is key,” Sette says. “Coffee demand is growing at 2 per cent per year, a positive sign, but in order to cater to the demand, there are also many questions to face. This includes whether the industry will have sufficient production in the future to meet the demand, especially with the social and environmental challenges at present, including climate change, ageing farmers and the gender gap.” Gender central
Aptly timed, ‘women in coffee’ was the thematic focus of this year’s International Coffee Day celebrations on 1 October to recognise the importance of women across the coffee value chain. Sette says the aim is to promote the empowerment of women to achieve gender equality, and to increase productivity, supply and sustainable consumption, particularly in a climate of low prices. On the same day, the ICO also published the ICO study ‘Gender equality in the coffee sector’. This showed that fostering the empowerment of women in the coffee sector contributes to closing the gender gap and achieving gender equality, one of the 17 goals under the 2030 Agenda for Sustainable Development adopted by the United Nations. It found that providing women with access to knowledge and finance can increase quality, yield with positive impact on family wealth and health. The report found that up to 70 per cent of labour in coffee production is provided by women and around 25 per cent of coffee farms worldwide are managed by female growers. However, compared to men, female farmers face constraints in accessing production factors, markets, finance, and extension services, resulting in a gender gap in coffee yield and income. According to the International Trade Center, around five million of the estimated 25 million coffee producers worldwide are women, with approximately 90 per cent represented in field work and up to 80 per cent in harvesting activities. Just by closing the gender gap, global agricultural output would increase by 2.5 to four per cent according to the FAO. The gender gap extends further along the coffee value chain where women can face social, cultural, and economic barriers preventing them from reaching their employment and entrepreneurship aspirations. “The conclusions are interesting and point the way forward for further research to be done,” Sette tells GCR. “The ICO no longer has the power or mandate it used to in terms of market intervention. We do not have any instruments to directly affect the market, but we can play an important role as an aggregator and a catalyst to bring people together, heighten the visibility of the gender issue, and increase dialogue. I do think things are changing and this change will accelerate over time.”
 At the ICC, a Memorandum of Understanding was also approved and officially signed between the ICO and the International Women’s Coffee Association to pursue collaborative efforts to promote gender equality across the coffee sector. In order to heighten the visibility of women and close the gender gap, Sette say the ICO is working hard on long-term factors to enable a sustainable economic and environmental future, but united collaboration is needed. “We have to work in partnerships. We cannot have the pretension of solving things by ourselves. In the short term, the main support measures for farmers must come from within individual countries.”
Sette says one of the main lines of work in his administration is to try and open up the ICO to partnerships with the outside world. He says initiatives from Global Coffee Platform and Sustainable Coffee Challenge have been impactful because under their umbrellas they can bring together a large number of NGOs and private initiatives to spread the message together and make much greater impact than just ICO government membership. “We have to remember that the coffee world does not live in a bubble,” Sette says. “All of these challenges we face – gender based and economic – are societal in many ways. We’re in this together.” 

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