Market Reports

Peru’s perfect storm

More than 1 million people visit the magnificent Machu Picchu ruins every year. But just 10 kilometres away, following the infamous Salkantay trekking trail, there is a small village named Lucmabamba that is home to 64 families who make a living harvesting coffee and other produce. It is in this high jungle that coffee production is at its best, particularly the Arabica varietal. Arabica, which comprises 100 per cent of Peru’s production, is grown at elevations of 900 metres or more. In fact, roughly 75 per cent of Peru’s coffee is grown at altitudes between 1000 and 1800 metres. While most visitors to Machu Picchu gasp for breath in the low-oxygen climate, Arabica coffee plants thrive. And because there is less oxygen, the coffee berries grow slower, giving their seeds (the coffee beans) more time to develop a rich, dense flavor. At 2026 metres, Lucmabamba is a prime coffee-growing area, part of the greater Junín region in Peru’s central highlands. Victoria Gamarra Ramirez lives with her family in Lucmabamba, where she manages a 2.5-hectare coffee farm. She comes from a coffee family and is very active in her local coffee community. In fact, her dining room is the regular meeting place for her association, Flor de Café, of which she is President. Ramirez launched Flor de Café with 15 other families two years ago to help the women of the village support their family and gain financial independence from their husband. Before starting the association, the women were operating and selling to the local cooperative independently. But when she actually evaluated her income against costs, “I realised I was losing money”, she tells GCR. “It wasn’t sustainable.” Ramirez took it upon herself to find a solution, and learnt about CARE, a nonprofit organisation that supports families, particularly women and girls, in rural and impoverished regions around the world. She attended training in a nearby village and talked to her friends about forming a group in Lucmabamba. CARE Peru provided them with education, training and about US$1500 to start their own association. Through Flor de Café, the women of Lucmabamba gained not only economies of scale, but also access to education and training, technical assistance, financial aid and other resources. Additionally, it gave them stronger negotiating power in the coffee market. According to global nonprofit Heifer International, coffee-growing families are joining coffee cooperatives and associations at an increasing rate not just for commercial interests, including stronger profit and greater access to competitive markets, but also for greater learning opportunities and social inclusion, especially for those in previously overlooked groups such as women and children. The organisation reports that only about 30 per cent of the country’s 110,000 to 165,000 coffee farmers are organised in associations, cooperatives or communal enterprises. Major cooperatives operating in Peru include Equal Exchange, CENFROCAFE, COCLA and CEPICAFE. Despite greater support, most of Peru’s smallholder farmers simply can’t get by with coffee alone, says Ramirez. “Even though we’re better positioned to sell our coffee, it’s still not enough for a livelihood, so CARE also taught us how to farm other produce and honey.” This is not uncommon in Peru, confirms Carly Kadlec, a green coffee buyer at US-based Equal Exchange: “Coffee is the most feasible crop, but nearly every farmer has secondary or tertiary products they sell on the local market. It’s important to have a diversified income.” In addition to Arabica coffee plants, Peru’s remote high jungle is also known for its lack of infrastructure, which leaves it particularly hard hit when diseases strike. Among these is the infamous roya amarilla, or coffee leaf rust. Roya first surfaced in 2012, arriving from Central America at Peru’s northern border. The fungus spread quickly to the south thanks to the country’s hospitable warm weather and humidity. Although roya can completely kill off its host plant, more often it kills the leaves, significantly diminishing the plant’s ability to photosynthesise and produce fruit. While other parts of Central America were already experiencing an epidemic in 2012, it wasn’t until 2013 and 2014 that roya truly wreaked havoc on Peru. According to the US Department of Agriculture’s Foreign Agricultural Service department, the fungus affected about 40 per cent of the country’s total planted area. The consequences were so serious that a state of emergency was declared. Many smallholder farmers simply don’t have financial and logistical access to resources for controlling roya. While the limited resources creates many organic coffee farms by default, the certified organic coffee farms can’t use the chemicals even if they had access to them. Considering Peru produces the most certified organic coffee in the world, the repercussions of an epidemic are significant for farmers who depend on their product’s slightly higher premiums. In addition to providing fungicides where feasible, in 2013 Peru’s Ministry of Agriculture and Irrigation established a US$70 million program to renew 80,000 hectares of coffee land through 2017. Despite the program’s more favourable terms, replacing plants is costly. The USDA’s FAS annual GAIN Report estimates that coffee farmers require US$4000 per hectare to replace old, less productive or diseased plants. “Not only is it a huge cash expense to switch over an entire farm, but also plants take three to five years to reach full production capacity,” says Kadlec. Unfortunately, farmers in that 40 per cent affected didn’t have much choice, so many at least replanted with a varietal resistant to roya called Cattimor.  “Production has been going down every year [in our region],” says Wenceslao Altamirano, a partner at Huadquiña Cooperative near Lucmabamba, where Ramirez’s husband is a member. Altamirano attributes much of the epidemic to climate change: “The increase of rains and heat [have been] generating a positive environment for pests like roya.” Aside from hampered production, “an impact of coffee leaf rust and climate change has been an increased difficulty estimating harvest volumes”, Kadlec tells GCR. “Pre-climate change, you could project your coffee volume based on flowering and cherries forming. Coffee used to be reliable and predictable.” The flow-on effect of falling and volatile production was skyrocketing coffee prices. In 2014, as Peru and other Latin American countries reeled from the effects of the epidemic, world coffee prices jumped nearly 44 per cent to $2.03 per pound, according to market research firm IBISWorld.In the following year as the dust settled and production volumes picked back up, prices dropped to about $1.60 per pound, and have been slowly inching up since. Volatility in prices and production have made it difficult for farmers to accurately forecast their income and future harvests, and then for manufactures to accurately reflect their raw material costs in their retail prices, reports IBISWorld. During the next five years, prices are expected to increase, but only at a modest 0.8 per cent per year on average. Increasing prices are positive news for Peru’s farmers, but history has proved they aren’t reliable, so farmers continue to find other ways to generate income. Lucmabamba’s proximity to Machu Picchu also opened another stream of coffee revenue in tourism. Throughout the year, Ramirez hosts tourists who want to learn about coffee. CARE Peru and the tourism arm of COCLA came in and trained her family in hosting tourists. In addition, her husband is constructing a large camping site near their farm to welcome trekkers along the Salkantay trail. After many tourists expressed interest in purchasing Flor de Café coffee, the association started producing consumable coffee for sale. They bought a roaster, grinder, scale and packaging, and now sell coffee under the brand Flor Café. The association’s next goal is to obtain organic certification, but that’s just one more expense that many rural farmers can’t afford. Ramirez claims it would cost nearly US$3000, so in the meantime she retains access to organic certification through Huadquiña Cooperative. “Peru is one of the most important origins for certified organic coffee,” says Kadlec. Of Peru’s annual production – about 3.3 million 60-kilogram bags in 2015-16 – about 25 per cent is certified organic. Peru also has one of the highest export volumes of certified Fair Trade coffee.Global coffee consumption is on the rise, and consumers are increasingly demanding organic and fair trade coffee. Considering its position, the Ministry of Agriculture has prioritised promoting Peru’s organic coffee through its export promotion agency, PromoPeru. Domestic consumption is something else the government is actively promoting. Despite doubling during the past five years, domestic consumption remains low – Peru exports nearly 95 per cent of its production – with Germany and the United States long remaining its largest coffee importers. Together, they represent more than 50 per cent of its output, followed by Holland, Belgium and France. While IBISWorld reports that US and Australian coffee consumption have remained stable during recent years, countries such as Germany, Russia and China have demanded it at a steady clip. Because coffee harvests have become so difficult to predict, there are conflicting opinions on whether next harvest will be a good one. Nonetheless, there are many factors finally in Peru’s favour: rising global demand, popularity of organics, domestic consumption, production volumes and global prices. Ever so slowly, Peru is becoming a country known for its coffee, rather than “the country with Machu Picchu”. GCR

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