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Triestespresso

Brazil: Potential vs. Power
(continued)


MARKETS
So who is buying Brazil’s beans? Everyone, of course-its steady supply alone ensures its popularity. Its main export markets are the U.S., Germany, Japan, France and Italy. Yet, most often it ends up mixed into mediocre blends. And while it may be true that a large portion of the beans are worthy of such an end, with the overall production volume at a high, Brazil’s odds of turning out quality coffee is also high. However, breaking through their reputation for quantity and not quality has been a long and frustrating road.

Foreign

“Times have changed and Brazil has changed,” stated Edivaldo Barrancos, export general manager of Iguazu Corporation. “Yet, the European Union continues to place a heavy tax on Brazilian beans. But we are confident that this will change in the years to come and have taken the appropriate steps to ensure that. The Brazilian Soluble Coffee Association is working with the European Coffee Congress, and they expect favorable results.”

Focusing on other countries is one way Brazil’s companies keep ahead. “Right now we see good potential in the Asian market, especially in Korea. This is one of the places we feel is worth concentrating our efforts on,” continues Barrancos. “But it is our policy not to concentrate on one market. That is why we have clients on all continents. We also make it a point to invest all the way. I don’t mean in reference to technology-although that is certainly a priority-but in cultivating personnel and in creating real-time information access. We are also always looking for companies to build strong alliances with and make it a point to seek out strong long-term partnerships with clients. This is extremely important to us and is where we place most emphasis.”

Brazil has alos set its sights on Eastern Europe, working off of the region’s strong traditional custom of coffee-drinking. Russia and Poland, which consume very deeply roasted coffees, are specifically target markets.

“Eastern Europe will probably be the next key market in terms of [increase in] coffee consumption,” remarks Olavo Agular, director of Branco Peres. “Take Russia for example, a tea drinking country that within a few years after the end of the communism became the biggest importer of soluble coffee in the world. We can predict that if, or when, the country can solve its main macroeconomics problems, we will watch them become a real long-term and important coffee- consuming country. Brazil is still exporting considerable quantities of instant coffee to Russia and just beginning to export green coffee.”

“Brazil has about eleven soluble coffee factories in existence today. Of the eleven, only about seven are operating normally. Given Brazil’s high annual exports figures, it is clear that the country isn’t utilizing its full capacity....But our company, fortunately, is not facing this problem and is working well to capacity. The future looks promising.”

Domestic
Brazil also happens to have 160 million people in its own backyard, a unique advantage over other producing countries. In the past 10 years, domestic coffee consumption grew from roughly 8.2 million to 12.7 million bags. The strategy for the future? Further expansion of consumption, market segmentation and an increase in exports of roast and ground coffee. The goal is to reach 15 million bags of internal consumption and 1 million bags of roast and ground exports in a few years.

Additionally, there will be a focus on the development of the specialty coffee sector. Companies such as Lilla, who provide roasting equipment throughout the world, have already begun to see an interest at home. “We have clients abroad as well as domestically, and the domestic end is beginning to heat up,” states director Ciro Lilla. “With either, our formula is the same-to create machinery that is as maintenance-free and durable as possible-keeping in mind businesses running in areas like the Amazon where labor is not only hard to come by, but sometimes non-existent…. We’re lucky to have Brazil as a constant testing ground.”

The U.S. remains Lilla’s largest foreign market, but the company has 32 other countries on their roster. And this does not include Brazil. “We are very excited about the focus on quality. We see how excited people get when they drink good coffee. The future here is in specialty coffee, with a sector just for specialty roasters, like in the States.”

It seems then that if Brazil plays its cards right, it can look forward to growth in several areas. Yet, obstacles loom everpresent for Brazilians. The devaluation of the real certainly took its toll on the markets. Additionally, Brazilians worry that as consolidation continues, it becomes harder to sell to bigger companies, equaling less profitability and more competition. “Consolidation is definitely being felt, all over the world and all over Brazil,” comments Lilla. “We used to have thousands of roasters, but now it’s quite different. Specialty coffee is really at its beginning. However, it’s not exactly the best time for it to be starting. The recession is slowing down the natural process of growth.”

Yet, there are signs of growing appreciation for gourmet coffees, spawned in large part by the specialty growers themselves. Beatriz Junqueira has opened up a retail coffee shop where she sells her beans and other fine products to customers.

“I didn’t start this shop for the money, really-it’s the idea that we have this good product and we want to show it off. It makes me happy-I can’t not do it. I have to admit that it’s a challenge to get people’s attention. Some Brazilians have never even tasted a fine cup of coffee. But when someone tastes my brew and their eyes widen, or when someone comes in and thanks me for the effort, it makes it worthwhile.”

Coffee Retention Plan
Is the green coffee retention plan an angel of success or a demon of demise? I’ve heard it proclaimed as both. On the one hand, growers anticipate the possibility of having a higher fixed price for their coffee. However, the actual picture is showing producers with high quantity business initiatives in place finding themselves unable to commit to most deals because of looming uncertainty. And there is additional fear that corruption has windows through which to enter, should it be welcome.

As of the beginning of August, Brazil is not in a competitive position. In July it shipped out 700-800,000 bags of green coffee, down from an average of 1.4-1.5 million bags a month. Ideally, with enough demands for exports, the plan could work. But global oversupply from a previous strong years combined with a recent Y2K overstock panic would seem it give the retention plan a slight chance at success, at best. Shelling out sizable added costs for sampling, tracking, and warehousing, not to mention the 20% over cost of exports, is enough to bring Brazil to a standstill. And, slowly but surely, it seems to be doing just that. Companies have been backing out one by one, leaving the bigger Brazilian players (whose credit lines can only stretch so far) and the rest of the producing countries (who are only too happy to have Brazil out of the game).

Harry Jones, Tea & Coffee Trade Journal correspondent and consultant for the specialty coffee firm Café Fazenda da Serra, is pessimistic about the success of the Association of Coffee Producing Countries’ (ACPC) attempt to stop the bleeding of international coffee prices. He feels that recent history has shown that plans to raise prices by retaining or intervening in futures exchanges have never worked in the past and have only cost Brazil millions of dollars with lost markets and credibility. “Coffee is a perennial agriculture commodity,” he states, “and unlike petroleum, cannot be turned on and off at will. An over-supply cycle takes time to adjust to economic laws regardless of man’s plans to interfere....The cost of retaining export sales can be better managed by the cooperatives and large exporters, but the risk and financing problems for the less structured firms will eventually mean their demise.”

Jones further notes that, as has happened in the past, low international prices, below production costs, will force growers in Brazil and other producing countries to abandon coffee crops. Eventually the world supply and demand picture has the potential to leverage a better balance. However, it should be remembered that sometimes the balance is hastened by climatic factors, particularly in Brazil can still make or break the coffee market.

Yet, coffee has always had its wavering production cycles. This unpredictability has been met and alleviated with extensive investment in research. Generally speaking, it is only recently that the coffee world has had to pay meticulous detail to coffee’s role as a consumer product. And as a commodity, coffee is subject to move with trends. From the mid-1990s on, the specialty market was in full swing and more and more people were drinking coffee. As consumption levels rose, so did planting increase around the world. However, that pattern was relative to the patterns the product had experienced throughout history. Today, farmers are struggling against a leveling 1.5% increase in consumption-not nearly enough to support the many farmers who had banked and built their businesses on the success of a booming market.

The ACPC has stepped into the job of trying to manage the market to bring out a certain level of security. The green coffee retention plan based on the standard supply and demand platform, but shifts significant focus onto the patterns of consuption that have manifested in coffee’s recent product cycle past; this plan is to metamorphose the current economic strategy of the global coffee market into a structure that can foresee and remedy issues of oversupply. In essence, to offer a buffer against extreme shifts in market prices which tend to damage producers and favor speculators. However, like any new system, it asks for patience while trial and error have their way.

“I think the problem lies not in the plan, but in the time allotted for adjustment,” confides a government branch executive. “I just spoke to an exporter who has deposited and got his money--no problems. [The plan] is starting to work, but people don’t want to see this. People want things to happen overnight, especially Brazilians- they want it done yesterday. I understand that we are in a difficult situation, but studies have been done for a reason, with direction and focus and based on the findings of industry and financial experts. This is not just something to have arisen as a fleeting idea, as some people are treating it. After all that has gone into it, to not try it makes no sense.”

Cooperativa Guaxupe has openly denounced the plan. Leite comments: “Many exporters and producers feel that Brazil is just holding the umbrella for other countries. As a player, Brazil needs long-term commitment from its partners. In theory, the plan would seem to be able to work, but in practice it’s a different story. It’s quite simple: if you take a partner, you must take on all its conflicts, and that has included Indonesia with its civil war, Vietnam with its aggressive political tactics, and the Centrals that need to sell fresh in order to make a good price. Brazil can be very competitive on its own. A lot of Brazilians are very upset and wonder what the government wants with this. Plus, you have to deal with the slow motion of bureaucratic decision-making that can be a real disaster sometimes.”

Robert Griffin, director of Capricorn Coffee, is in a more objective position as a broker. Yet, he shares a similar perspective: “To take this finely-tuned machine we call ‘The Brazilian Coffee Sector’ and jam this huge spanner called ‘Retention’ into the works is an act of great courage. Not surprisingly, the engine is slowing rapidly due to lack of financing-and it’s the buyers who end up paying the ever-tightening differentials. Those buyers have had to opt for alternative transport for the time being.

“In the meantime, the harvest has been in full swing, and rather than being commercialized, is going straight into cooperative or private warehouses. Producers have established a floor price below which they are not prepared to sell. With the flowerings in September and October, much more will be known about the prospects for the coming crop and its initial potential. By then, however, the machine will have ground to a halt, unless ample financing becomes available or producers decide to come to the market. The latter is a bitter pill for growers to swallow, but unfortunately seems the more likely outcome.”

Future

Brazil’s business strategies and the futures of many of its people are intertwined. Coffee remains a big part of the economy and the public sector’s involvement in policy-making is becoming increasingly vital. One Brazilian coffee executive acknowledges this need to move toward a more proactive role in government issues. He feels that, as world markets move toward a global economy, the relationships between governments and societies are changing, and Brazil is not exempt from this transformation. “We are babies in terms of citizenship,” he states. “Brazilians do not want to lose their country to the globalization tendencies of the Americans and Europeans, but we were really never shown the extent to which our opinions can make a difference. It’s been left to those with money and power in the past. But I can see this changing. Whether or not you have a computer in Brazil, you still know about the internet, and that opens doors to the world that you didn’t even were there before. A man whose boss is cheating him out of pay is learning that he can do something about it, like research on the internet or something. At the same time, a small farmer knows he can find out the real price for his coffee.

“The trick is for the government to invest in a forward- thinking mentality because for years it has not only not been visionary, but has been very backwards in thinking at times. I am teaching my children the concept of rights that I am still learning about. The next generation will be very sharp and very competitive.”

More and more markets are moving toward functioning on a global level. Technology opens new doors and has the ability to empower people around the world with knowledge that was previously unattainable. It is also at the center of a revolution in the way the world does business. However, it is necessary to acknowledge that, while parts of the world are experiencing economic growth and wealth due to the Digital Revolution, many other countries are on the opposite end, facing an increasingly struggling economy. Yet, the countries involved in coffee stand to benefit greatly from this new and developing field. To this end, Brazil has made headway by creating web sites including agrosite.com.br, which is a portal for grower’s agricultural and industrial needs, and cafesall.com, which will be providing a platform in which to trade Brazilian coffees.

There are still many gold mines out there to be had in the coffee industry and Brazil is not exempt from these rewards. Obviously, for an importer or roaster seeking a stable supply, Brazil is the ideal partner. With an ability to produce coffees with many different tastes and an enormous volume capability, this giant could very well call its own shots. However, for the most part, the Brazil name now seems to rest on the accomplishments of a few artists creating precious coffees worthy of praise.

Does this mean that Brazil will be growing and shipping only strictly high grade coffees from now on? Of course not. The truth is that “other” cherries continue to be sought out, hence, will continue to be produced in the future. Yet, the fact remains that Brazil now has a strong foundation for growing a high quality commodity worthy of an equally high premium. This giant may even be well on its way to realizing the power it holds. Will the coffee industry be ready if it does?


Tea & Coffee - September/October 2000
Coffee & Tea Fest

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