Implications of Rising Costs Ramacafe September 2008 Judith Ganes-Chase
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
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.
Fertilizer Costs Through the Roof $ per ton 1300 1100 900 Nitrogen solutions Urea Diammonium phosphate Potassium chloride 700 500 300 100 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
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.
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.
Does the Market have the Potential to Rally Again? cents per pound 300 Arabicas 250 Robustas 200 150 100 50 0 Jul-89 Jan-92 Jul-94 Jan-97 Jul-99 Jan-02 Jul-04 Jan-07
Supplies in 2008-09 Should be Ample World production is expected to rise to record levels in 2008-09. Brazilian and Vietnamese output expected to jump. Stocks in importing countries remains plentiful, never having been run down in 2007-08 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.
Moderately Large Surplus Now Expected in 2008-09 millions of 60-Kg bags 145 140 135 130 125 120 115 110 105 100 95 90 output use 1996/97 1998/99 2000/01 2002/03 2004/05 2006/07 2008/09
World Production Forecast at Record Highs million 60-kg bags 145 125 Other Brazil 105 85 65 45 25 5 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
Arabica & Robusta Output Forecast to Climb millions of 60-Kg bags 90 80 70 60 50 40 Arabica Robusta 30 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09
2008-09: Top Ten Coffee Producers millions of 60-Kg bags Brazil Vietnam Colombia Indonesia Ethiopia India Mexico Peru Guatemala Honduras 0 10 20 30 40 50 60
Production Becomes More Concentrated millions of 60-Kg bags 120 Rank 1-10 100 80 60 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09
2008-09: 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 0 0.5 1 1.5 2 2.5 3
Medium to Small Producers Struggling millions of 60-Kg bags 24 20 16 12 8 4 Rank 11-20 Others 0 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09
Brazil Harvests 2 nd Largest Crop Ever Drought hurt crops potential? millions of 60-Kg bags 55 45 35 25 15 5 60/61 64/65 68/69 72/73 76/77 80/81 84/85 88/89 92/93 96/97 00/01 04/05 08/09
Vietnamese Crop Rebounds? Dry weather & higher costs clouds the outlook millions of 60-Kg bags 24 20 16 12 8 4 0 85/86 87/88 89/90 91/92 93/94 95/96 97/98 99/00 01/02 03/04 05/06 07/08
North/Central American Recovery Hampered by Rising Costs millions of 60-Kg bags 25 22 19 16 13 10 92/93 94/95 96/97 98/99 00/01 02/03 04/05 06/07 08/09
African Recovery has been Slow millions of 60-Kg bags 19 16 13 10 7 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09
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.
Average Production Trailing Average Use in Brazil 50 millions of 60-Kg bags 40 2-year avg production 2 year avg use 30 20 10 0 61/62 66/67 71/72 76/77 81/82 86/87 91/92 96/97 01/02 06/07
Brazilian Production/Use Deficit Continues 8.0 millions of 60-Kg bags 4.0 0.0-4.0-8.0-12.0 61/62 66/67 71/72 76/77 81/82 86/87 91/92 96/97 01/02 06/07
Even With Large Brazilian 2008-09 Crop Global Stocks Remain Precariously Low Relative to Demand 0.45 Stocks/use ratio 0.4 0.35 0.3 0.25 0.2 1996/97 1998/99 2000/01 2002/03 2004/05 2006/07 2008/09
Global Stocks Continue to Shrink 50 Million 60-kg bags 40 producer importer 30 20 10 0 1996/97 1998/99 2000/01 2002/03 2004/05 2006/07 2008/09
Importer s are Still Sitting on Large Stockpile millions of 60-Kg bags 27 24 21 18 15 12 9 6 3 0 1984-85 1987-88 1990-91 1993-92 1996-97 1999-00 2002-01 2005-06 2008-09
U.S Coffee Stocks Relatively Stable 10 9 8 7 6 5 4 3 2 1 millions of 60-Kg bags Jan-88 Jul-90 Jan-93 Jul-95 Jan-98 Jul-00 Jan-03 Jul-05 Jan-08
US Certified Coffee Minimal; Non-Certified Growing millions of 60-Kg bags 6.5 Certified Non-Certified 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 Jan-01 Sep-01 May-02 Jan-03 Sep-03 May-04 Jan-05 Sep-05 May-06 Jan-07 Sep-07 May-08
LIFFE Robusta Coffee Stocks Increased Millions of 60-kg bags 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 May-94 Jan-96 Sep-97 May-99 Jan-01 Sep-02 May-04 Jan-06 Sep-07
Looking Ahead: Supply & Demand Expected to be Out of Sync Again in 2009-10 millions of 60-Kg bags 145 140 135 130 125 120 115 110 105 100 output use 95 1996/97 1998/99 2000/01 2002/03 2004/05 2006/07 2008/09
Implied Demand in Consumer Nations million 60-kg bags 100 95 90 85 80 75 70 65 60 1997/98 1999/00 2001/02 2003/04 2005/06 2007/08
Producing Countries Importing More Coffee millions of 60-Kg bags 4.5 4 3.5 3 2.5 2 1.5 1 0.5 1996-97 1998-99 2000-01 2002-03 2004-05 2006-07 2008-09
Domestic Use at Origin on the Rise million 60-kg bags 36 34 32 30 28 26 24 22 20 1992/93 1994/95 1996/97 1998/99 2000/01 2002/03 2004/05 2006/07 2008/09
Pivotal Factors for the Global Overview Prices rose sufficiently to draw out some supply earlier this year. Brazil started their 2008-09 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.
Review: Looking Ahead to 2008-09 & 2009-10 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 2009-10 production and beyond.
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
www.jganesconsulting.com