Ramacafe September 2008 Judith Ganes-Chase

Transcription

1 Implications of Rising Costs Ramacafe September 2008 Judith Ganes-Chase

2 Factors Influencing Coffee Production Trends Weather (especially Brazil) Producers continued drive to add value to production Consumers preference for perceived better quality coffee Recovery in market prices High cost producers inability to compete against lower cost producers Rising expenses

3 Farmers Hit with Soaring Production Costs Rising chemical costs have more than tripled coffee fertilizer prices. The cost 100lbs of fertilizer has risen from $14 to $33 over the past year and by April 2008 hit $62. Herbicide prices have similarly increased. A gallon of generic roundup costs up to $40. Many areas subject to rising labor costs and government mandated minimum wages and benefits. Also labor shortages as workers migrate to urban areas and find employment doing other things. Higher international prices are being offset for producers by the appreciation of currencies in some countries against the US dollar, although most recently the dollar has staged an impressive rally.

4 Fertilizer Costs Through the Roof $ per ton Nitrogen solutions Urea Diammonium phosphate Potassium chloride

5 Cost Implications Overall, soaring expenses may together be hiking the total cost of production by more than 30% and expenses are still rising. This estimate does not take into account rising energy costs, which have manifested themselves in increased fuel prices for farmers as well as higher shipping costs to ports and final destinations. Will these higher costs discourage farmers from the burden of additional investments needed to meet sustainability and certification requirements? Farmers might instead be tempted to do the opposite and cut corners.

6 Key Point: Future Supply Threatened by Higher Costs Rising costs could hinder investment in coffee farms and prevent global output from rising appreciably at a time when demand prospects are favorable. The situation is particularly concerning for producers that are no longer receiving as much of a premium as they should for investing heavily in fertilizer and other best care practices, serving as a disincentive to grow premium coffee. The competitive advantage and push to grow premium coffee disappears as the market rises, but now with costs spiraling, this is even more so.

7 Does the Market have the Potential to Rally Again? cents per pound 300 Arabicas 250 Robustas Jul-89 Jan-92 Jul-94 Jan-97 Jul-99 Jan-02 Jul-04 Jan-07

8 Supplies in Should be Ample World production is expected to rise to record levels in Brazilian and Vietnamese output expected to jump. Stocks in importing countries remains plentiful, never having been run down in despite a production deficit. High prices have encouraged strong selling by producers earlier in the year. A turn around in the dollar recently and weaker tone in commodities has added to the seasonal pressure to the coffee market but this seems to change rapidly.

9 Moderately Large Surplus Now Expected in millions of 60-Kg bags output use 1996/ / / / / / /09

10 World Production Forecast at Record Highs million 60-kg bags Other Brazil Source: USDA 72/73 75/76 78/79 81/82 84/85 87/88 90/91 93/94 96/97 99/00 02/03 05/06 08/09

11 Arabica & Robusta Output Forecast to Climb millions of 60-Kg bags Arabica Robusta 30 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09

12 : Top Ten Coffee Producers millions of 60-Kg bags Brazil Vietnam Colombia Indonesia Ethiopia India Mexico Peru Guatemala Honduras

13 Production Becomes More Concentrated millions of 60-Kg bags 120 Rank /00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09

14 : Coffee Producers Ranked #11-20 millions of 60-Kg bags Uganda Ivory Coast Costa Rica Nicaragua El Salvador Venezuela Kenya Tanzania Papua New Guinea Cameroon

15 Medium to Small Producers Struggling millions of 60-Kg bags Rank Others 0 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09

16 Brazil Harvests 2 nd Largest Crop Ever Drought hurt crops potential? millions of 60-Kg bags /61 64/65 68/69 72/73 76/77 80/81 84/85 88/89 92/93 96/97 00/01 04/05 08/09

17 Vietnamese Crop Rebounds? Dry weather & higher costs clouds the outlook millions of 60-Kg bags /86 87/88 89/90 91/92 93/94 95/96 97/98 99/00 01/02 03/04 05/06 07/08

18 North/Central American Recovery Hampered by Rising Costs millions of 60-Kg bags /93 94/95 96/97 98/99 00/01 02/03 04/05 06/07 08/09

19 African Recovery has been Slow millions of 60-Kg bags /00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09

20 Even Greater Production Needed to Avert a Shortfall World production has not been able to keep pace with growing world demand. To meet demand, exporters have run down stocks leaving little coffee left at origin. This leaves the market vulnerable to supply disruptions.

21 Average Production Trailing Average Use in Brazil 50 millions of 60-Kg bags 40 2-year avg production 2 year avg use /62 66/67 71/72 76/77 81/82 86/87 91/92 96/97 01/02 06/07

22 Brazilian Production/Use Deficit Continues 8.0 millions of 60-Kg bags /62 66/67 71/72 76/77 81/82 86/87 91/92 96/97 01/02 06/07

23 Even With Large Brazilian Crop Global Stocks Remain Precariously Low Relative to Demand 0.45 Stocks/use ratio / / / / / / /09

24 Global Stocks Continue to Shrink 50 Million 60-kg bags 40 producer importer / / / / / / /09

25 Importer s are Still Sitting on Large Stockpile millions of 60-Kg bags

26 U.S Coffee Stocks Relatively Stable millions of 60-Kg bags Jan-88 Jul-90 Jan-93 Jul-95 Jan-98 Jul-00 Jan-03 Jul-05 Jan-08

27 US Certified Coffee Minimal; Non-Certified Growing millions of 60-Kg bags 6.5 Certified Non-Certified Jan-01 Sep-01 May-02 Jan-03 Sep-03 May-04 Jan-05 Sep-05 May-06 Jan-07 Sep-07 May-08

28 LIFFE Robusta Coffee Stocks Increased Millions of 60-kg bags May-94 Jan-96 Sep-97 May-99 Jan-01 Sep-02 May-04 Jan-06 Sep-07

29 Looking Ahead: Supply & Demand Expected to be Out of Sync Again in millions of 60-Kg bags output use / / / / / / /09

30 Implied Demand in Consumer Nations million 60-kg bags / / / / / /08

31 Producing Countries Importing More Coffee millions of 60-Kg bags

32 Domestic Use at Origin on the Rise million 60-kg bags / / / / / / / / /09

33 Pivotal Factors for the Global Overview Prices rose sufficiently to draw out some supply earlier this year. Brazil started their marketing year with stocks near 60- year lows. Brazilian government stocks are nearly gone. Producer stocks outside Brazil are also limited, preventing exports from climbing too much on future price advances. Roasters have resisted running down their coverage. Credit squeeze is restricting producer forward sales.

34 Review: Looking Ahead to & World production is becoming more concentrated than ever before with production in larger countries growing and smaller countries staying the same or even shrinking. Higher prices have not yet encouraged expansion in planted area. Both Robusta and Arabica prices would seem attractive enough for producers to consider revamping plantations, but this is offset by weak dollar and escalating costs of energy and fertilizer. The real challenge will continue to be having world production keep up with strengthening global demand. This is a first for the market. In the past decade, the perspective was on how to limit production increases. Vietnam can t seem to expand fast enough. Brazil s on crops aren t enough to meet needs during the off years. Supplies will be just sufficient the next two seasons, but worries continue because of limited producer stocks and curtailed investment in farms that could impact production and beyond.

35 Producers Facing Production Challenges Aside from spiraling costs and labor shortages, producers are also facing other challenges. Climate change can have a pronounced impact on output long term. The effects of this, however, are already being felt. In Brazil, producers in the north are facing drought and higher temperatures. Production in the south, the traditional cool spots vulnerable to frost, are now being considered for expansion. In Central America coffee is being grown at higher altitudes. Meanwhile, consumers are demanding traceability back to the farm for environmental reasons and for food security. Carbon neutral offsets are the new buzzword and need to be considered

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