As coffee connoisseurs consider the consequences of another price hike for their daily caffeine fix, they should spare a thought for farmers facing rises for all production costs at a time when unprecedented weather events are affecting yields worldwide.
Food commodity prices have risen 60 per cent since June 2010 – an increase reminiscent of the 2007/2008 price spike that spread anxiety among policymakers and low-income consumers. Prices for coffee, tea, fish, wool, and palm oil have also risen significantly since mid-2010, and all were higher in April 2011 than when they peaked in 2008.
According to International Coffee Organisation (ICO) figures, cultivation costs have jumped for the 2010/2011 crop in most coffee producing regions. Brazilian natural Arabica cultivation costs are now US$136.13 per 60kg bag. Labour (seasonal and fixed) costs are US$84.71 per bag, fertiliser at US$25.33 and crop protection products (fungicides, pesticides and herbicides) are US$12.72. With other production costs, this amounts to US$166.61 in total.
Brazilian Robusta production costs are US$91.52 with cultivation costs of US$59 (including labour at US$26.36) and fertiliser at US$16.21. Colombian washed Arabica cultivation costs are in line with Brazil’s at US$136.13 per 60kg bag. Labour (seasonal and fixed) is at US$86.42, while inputs amount to US$46.18 and fertiliser is at US$29.84. Further south in Ecuador, washed Arabica total costs are lower at US$71.16 per 60kg bag with labour (seasonal and fixed) at US$39.92.
All inputs, including fertiliser and crop protection productions, costs US$31.24. In Kenya, it costs US$139.11 for estate grown washed Arabica and US$105.89 for smallholders grown washed Arabica. Costa Rican washed Arabica total costs are also at the US$139.35 per 60kg bag mark, while fertiliser and crop protection products are US$69.71 with labour (seasonal and fixed) at US$39.21.
Labour issues, especially costs, are a universal concern right now, particularly in areas where options to mechanise are limited, according to Dan Kuhn, a Hawaiian coffee consultant who works around the world with coffee growers. India, the world’s sixth largest exporter of coffee, is facing a labour force fleeing to the cities for higher wages. But, zoning laws and the environment of existing coffee farms prevents a leap into mechanised production, Kuhn says.
“Some coffee growers could not pick crops on account of a labour shortage. The situation in Karnataka (in the country’s south west) is described by some coffee producers as critical, approaching levels of real concern for the future of coffee production.”
Indian coffee farmers have a difficult time hanging on to agricultural workers who are migrating to cities for better paying IT jobs. It is hardly a surprise. Indian coffee wages can be as low as US$1.50 to $2.00 a day, a far cry from US$10 to $15 an hour in Hawaiian coffee plantations, or even $16 a day in Costa Rica and $12 in Brazil.
According to Robert Simmons, of LMC International, labour as a proportion of total Indian Robusta production costs are 80 per cent for traditionally grown coffee, 60 per cent for semi-intensive shade grown and around 68 per cent for intensive crops.
Kuhn says Indian coffee trees are dispersed (not planted in lines for mechanical picking) and often in extremely steep areas. But, strict land classifications prevent coffee producers from moving to land suited for technological solutions.
So, with limited room to move on a large scale, prices for Indian coffee are not on an upward trajectory without considerable efforts to market Indian coffee in specialty markets, Kuhn says.
“India grows some wonderful coffee, but their production costs will continue to affect profits if they continue to rely on commodity markets,” he says.
India’s Coffee Board predicts coffee production may decline by about 10 per cent in the 2011/2012 season due to sporadic rains and irrigation problems with Robusta crops. Profits from recent coffee price increases have been moderated by increases in the price of oil (which affects the price of fertiliser and transport) and the steady devaluation of the dollar.
By April 2011, oil prices had almost tripled since the low point in December 2008. Costa Rican agronomist and coffee grower, Edgardo Alpízar, says rising oil prices have preceded the rise in costs of almost every input.
“Since some of them are not possible to eliminate, most producers cut off workers or reduce the amount of fertiliser and often both,” he says.
Alpízar says the first “solution” increases unemployment in coffee regions; the second one compromises the yield for the next crop. In coffee farming, the nutrients most widely used to enrich soils and improve yields are mineral fertilisers, mainly nitrogen, phosphate and potassium (NPK). Secondary nutrients or oligo-elements are also used to enrich the soil; these include manganese, iron, boron and zinc.
Alpízar says measures taken by technified producers in Costa Rica last year to reduce costs included eliminating one fertilisation cycle (from three to two), replacing ammonium forms of nitrogen by nitrates/sulfates and increasing the use of organic fertilisers.
Increases in international demand for fertilisers have played a major role in their dramatic price rise. In the case of nitrogen fertilisers, world demand increased by nearly 15.5 per cent between 2001 and 2011. For phosphates it increased by more than 15 per cent and for potash by 12.4 per cent. The ICO is worried.
“The increase in fertiliser prices threatens to undermine the efforts of coffee exporting countries to increase and maintain their productivity. The impact of fertiliser price increases in coffee exporting countries can be measured in terms of the production cost structure,” it says.
This means not all growers are affected equally, but fertiliser price spikes affect all growers. Farmers across the world felt the pinch when phosphate prices increased by 387 per cent, rising from US$70.9 per tonne in 2007 to US$345.2 per tonne in 2008.
Since April 2010, market prices for potash climbed 5 per cent to US$526 per tonne and phosphate prices rose 31 per cent to US$661 per tonne. India and Brazil, the coffee exporting countries that are the biggest consumers of fertilisers, are increasingly impacted by the vagaries of fertiliser production capacity and costs, transport and logistics.
Maritime freight has become increasingly important in the fertiliser trade, particularly in the case of potash, for which 80 per cent of global production enters world trade. Brazil imports around 85 per cent of its potash consumption – the main fertiliser used in coffee farming.
Since potash is the world’s most widely traded fertiliser, its price is significantly affected by developments in maritime freight charges. A recent survey conducted by CONAB, the government agency responsible for agricultural estimates in Brazil, found that the share of fertilisers in total production costs now varies between 16.2 per cent and 23.2 per cent for Arabica growers, with the exception of the state of Bahia, where many plantations are highly technified and a share of 32.2 per cent is recorded.
In Colombia, data provided by the National Federation of Coffee Growers indicates that fertilisers accounted for 23.7 per cent of production costs two years ago while Vinacafé says fertilisers accounted for 14.2 per cent of Vietnamese Robusta coffee production costs.
As farmers juggle with fertiliser, input and labour costs, industry commentators are warning of decreasing yields from plantations nearing the end of their economic life. Alpízar says the only way to increase yield in Costa Rica is through “an aggressive change” of old coffee plantations with new varieties.
“But, this is impossible for a small to medium producer with current prices received, even for some of those paid a premium for certified coffee,” he says.
The “differential price” received by small to medium coffee growers who decided to produce in a certified way still does not reach the necessary income to pay US$3800 per hectare renovation cost. With a monthly minimum wage of US$300 and one worker required for every five hectares, plus US$3800 required for the first year plantation renovation cost per one hectare, only Costa Rican growers with more than 50ha have the economy of scale to profit.
A coffee grower on a five hectare certified farm with a gross profit of US$8625 and a US$100 per hectare cost of certification and other costs, is left with too little to consider upgrading a coffee plantation.
A decade of low prices for coffee have meant thousands of Latin American coffee farms have been run down, according to Silvio Cerda, executive director of the Red Café, an organisation representing the interests of small-scale coffee producers.
“They weren’t well cared for and many times they were abandoned, there was no investment or renovation. The principal effect we see today has been a reduction in productivity and in production of coffee volumes,” Cerda says.
A recent survey of 19 Nicaraguan producers’ organisations by Catalan research organisation, Alba Sud, found that, since 2009, the Fairtrade price has fallen significantly below that of uncertified coffee. This has tempted farmers to abandon Fairtrade and deterred others from joining, while price spikes also have a destabilising effect on small producers.
There were increasingly urgent calls for a stronger safety net for farmers if prices fell and assistance for producer organisations in securing more pre-financing to purchase coffee from their members. An expedited review of the Fairtrade coffee standards in January this year was organised to address current market conditions. It is hoped the new Fairtrade Standard, approved in April, will quickly increase investment in coffee-growing communities.
Grower organisations welcomed the increase of the Fairtrade minimum price to US$1.40/lb for washed Arabica coffee from the current US$1.25; Arabica naturals will increase to US$1.35/lb from US$1.20. There was also an increase in the Fairtrade premium to 20 cents/lb from 10 cents/lb, of which 5 cents, will be earmarked for productivity and quality improvement efforts.
These are improvements badly needed to stem what some industry analysts deem an inexorable decline, unless growers make more concerted efforts to expand production globally.