World coffee growers warned not to raise production

by Anil Penna
Sun Feb 25, 5:20 PM ET

Coffee-growing nations risk killing a nascent price recovery should they boost production to take advantage of a fall in Brazilian output, a top industry executive has warned.

Brazil expects production to fall by eight to 10 million bags from last year’s 41.5 million bags — at least 20 percent — when it harvests the next crop in April-May, said Nestor Osorio, executive director of the International Coffee Organisation.

“The market is going to be short of coffee because stocks are already at the lowest point in history,” Osorio told AFP in Bangalore, where he attended the three-day Indian Coffee Festival ending Sunday.

The Colombian-born official forecast production for the next crop year at 110 million bags, each weighing 60 kilos (132 pounds), and demand at about 120 million bags, a deficit he said will likely extend the recovery after a crisis that started in 2000 when coffee prices fell below production cost.

“We are at a turning point at which the days of crisis are over,” Osorio said. “The recovery of prices should continue.

“But a lot remains to be done and producers have to be cautious, not to think that the present situation could lead to more production,” he added.

“The name of the game should be value, not volume.”

Last year, coffee-growing nations produced 120 million sacks of the beans that go into making the world’s favourite hot beverage and importers consumed 117 million bags.

Brazil is the world’s biggest producer with a 25 percent share — followed by Colombia and Vietnam — and determines the fate of a market on which 25 million farming families in 60 countries depend for their livelihood.

“We have a saying that when Brazil sneezes, everyone in the coffee trade catches a cold,” said Sahadev Balakrishna, a coffee planter from India’s southern Karnataka state.

A debilitating winter frost withered the Brazilian crop in 1994, chilling the international coffee market and causing prices to shoot up as high as two dollars a pound.

Speculators in the futures market pushed up prices three times that year.

“If there is another frost in Brazil, there will be panic,” said Osorio.

Rival producers planted more coffee in the late 1990s and Vietnam tripled its output of low-cost, low-quality Robusta variety, leading to excess supply and the crisis of 2000, when prices fell to as little as 60 cents a pound.

The value of exports plunged to five billion dollars in 2001 from 12 billion dollars in 1996, but recovered to 10 billion dollars last year.

Now, coffee is priced at one dollar and five cents a pound, a little above production cost, based on a composite indicator price compiled by Osorio’s organisation — still only roughly half its peak price.

“What happened in the late 1990s led to the crisis of early 2000s,” Osorio said. “What we do today in terms of planting coffee determines the price for the next three to four years’ time.”

In India, which exports three-fourths of its coffee output, some growers committed suicide to escape the burden of mounting debt.

“There’s a long way to go before we recover from the crisis caused by the historic price crash,” said G.V. Krishna Rau, who heads the Indian Coffee Board.

“A large number of coffee growers are still reeling despite the recovery in prices.”

India’s banks rescheduled and waived loans and interest after the government intervened, but those benefits did not reach growers who had not taken loans and who also suffered from pest damage to their plantations, Rau said.

Coffee is one of the world’s most heavily traded commodities and for many developing countries second in value only to oil as a commodity source of foreign exchange.

Among consumers, coffee accounts for 70 billion dollars in retail sales.

This year the coffee crop may also be damaged by the El Nino weather phenomenon, which could hurt production in countries such as Vietnam and Indonesia, Osorio warned.

“To what extent prices could go a little bit higher is difficult to say. It will depend also on the volatility in the market, speculation at the points of investment.

“But I think that within a range of 15 to 20 percent, the market could go up … or down. I think we have to be optimistic and confident with some caution,” he added.
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