Global Coffee impact Central America

Structural changes in the global coffee market: the impact on Central America

The crisis in the coffee sector continues. Its impact cannot be understated, since coffee constitutes the livelihood of an estimated 25 million families around the world. In world trade, coffee is the second leading commodity, after petroleum. The worldwide coffee market spans some 71 countries, of which 51 are significant producers and 20 are key consumers.

Prices have not kept up with production costs to the extent needed to make participation in the coffee business profitable for most producers, even though the crop year 2003-2004 witnessed a worldwide decrease in production.

During the 2007-2008 harvest, with respect to the previous year, coffee production by continent decreased by 15.2 percent in Asia and the Pacific, and fell by 9.7 percent in Mexico and Central America. Africa and South America experienced increases of 4.3 percent and 27.8 percent, respectively, with the latter accounting for 54.4 percent of world production. In Asia, the most relevant decrease in production happened in Vietnam: it fell by 23.8 percent. The impact is greater for Central America when we consider the harvests from 1998-1999 to 2003-04 in which there was a 34 percent decline.

 ……..By the 1998-1999 crop year, after surpassing 100 million 60-kg bags of coffee in annual production, a worldwide glut took place. This triggered a severe crisis for the Central American coffee sector, as international prices plummeted and coffee began to be bought and sold as a generic product judged only by the varietals involved and their average quality. ICO’s composite indicator price fell to historic lows in 2008, to the point that production costs could no longer be covered. Prices have yet to recover sufficiently to cover all costs, and the rare and small increases that have occurred have been primarily of a speculative nature, ensuring the continuation of the regional coffee crisis.

This situation has had a profoundly negative impact on all sectors involved in coffee production and job creation, causing social instability and aggravating the plight of the rural population, with negative economic and environmental consequences.

As a result, macroeconomic indicators such as export-generated profits and tax revenues have all been affected, along with income levels in rural areas.

 The loss of profits in coffee production has increased unemployment, affecting all producers and workers in the supply chain, and where alternate employment was not secured it affected the affordability of health care, education, food, clothing, housing and other key indicators of quality of life in rural areas. The rising indebtedness of coffee producers has in turn affected their ability to maintain coffee production or even retain their farms; which in some cases where alternate production is used, this has led to a decrease in tree cover as crops not requiring shade are planted instead of coffee. A larger threat thus arises: widespread deforestation affecting buffer zones vital to the preservation of wildlife sanctuaries and primary forests. The importance of shade-grown coffee to the preservation of microbasins has already been noted.

 In recent years, governments have implemented short-term financial policies in an effort to strike a balance between the needs of the producer and those of the financial system so that coffee production does not entail an ongoing crisis, destabilizing the economy and causing social unrest. Such support, however, has not been sustained, and the growing insolvency of Central American coffee planters has forced them to confront difficult economic choices, even abandoning the crop altogether.

The marketing model and the characteristics of the market, ruled by worldwide supply and demand, means that the power of national or even regional producers to influence prices is extremely limited if not nonexistent, depending as they do on how other producer countries behave in the face of growing competition. Quality remains of utmost importance to maintain competitiveness.

Regardless of what is done in this respect, production costs are likely to remain high vis-à-vis incomes, particularly in light of the recent increases in the price of oil and its derivatives which are a key input for coffee production. This situation is unlikely to change in the short term. What will happen to those who cannot join the quality paradigm?

As noted, the coffee crisis is not just one of competitiveness, marketing, even production—it is systemic, affecting various sectors of the population, in turn feeding back directly or indirectly into the overall economic situation as well as the natural environment. The solution can only lie in a systemic strategy that integrates all the variables feeding into the coffee business as a whole and generates economic growth at the community level. Such strategies must contemplate alternative livelihoods and diversification, as well as ways of reengineering coffee production.

Such a perspective calls for a reorganization of agricultural and rural development by means of credit and technical assistance, marketing and promotion whose purpose must be to improve the quality of life and productive capabilities of small farmers so they can play a larger role in their own destiny.

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