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Coffee Tea Business Mag


Tropical Depression:
Brazil at the Worst of Times

By Glenn Cheney

It has been said that coffee is good business because too often it’s bad business. And in Brazil, it’s getting very bad. But that’s good...at least for the strong who survive. Here’s the situation: By some mysterious miracle of the global economy, prices are down despite a lousy harvest in Brazil, the world’s largest producer of coffee. Aggravating the situation, the quality of this year’s crop was generally poor, the cost of fertilizers was up, carry-over inventory from last year is suppressing prices further, and Vietnam has been pumping out the Robusta faster than the Amazon pumps out water.

To top it all off, the president of their senate just got busted for thievery, their currency is circling the drain, their reservoirs are drying up, their lights are going out, the weather’s been weird, and Argentina just defeated them in a Football World Cup play-off.

Tough Times
The angst among coffee growers in the Brazilian state of Minas Gerais, which includes the famous Cerrado and Sul de Minas regions, would break the heart of even the most hard-edged Darwinist. A lot of growers - maybe even a third - may soon go the way of pterodactyl and the dodo.

The Nova Suica farm, one of two owned by Veloso Producao e Exportacao de Cafe, producer of a respectable Cerrado coffee in Carmo do Paranaiba, MG, fully expects to survive, but the farm is yanking up coffee trees. Perhaps a fifth of its plantation will bite the dust by year’s end.

“Everybody’s replanting,” says Haroldo Barcelos Veloso, production director. “The harvest was low after a dry spell followed by too much rain followed by more dry. For the first time, we have low price, low supply and low quality. These are tough times.”

Some of the plants that Nova Suica has been knocking down with a bulldozer in early September were just beginning to flower, but they were getting old and had nematode problems. Even if they were healthy and young, the lack of rain in the forecast spelled doom for the flowers that were to become coffee beans. A similar climactic situation last year led to problems of this year. The irregular weather led to irregular flowerings which led to irregular ripening which raised the cost of harvesting and processing and resulted in the worst coffee in many years.

Still, Veloso’s coffee isn’t all that bad. Illy has always bought it and paid well for it, and it will likely buy more. Trouble is, a lot of the world’s other big buyers aren’t as willing to pay for quality. Recognizing the ongoing glut and the availability of lots of low-cost Robusta for the foreseeable future, the buyers, in the spirit of capitalism, are taking all due advantage of the producers.

Veloso isn’t even sure what he’ll plant to replace what he’s uprooting. There’s no affordable financing available for new coffee plants. He’s thinking that maybe passion fruit or bananas might be a better business. One thing, he says, is for sure: If he plants more coffee, it will be irrigated by drip equipment. It may cost more to install, but water and fertilizers are becoming increasingly expensive here in Brazil, and irregular weather has been too devastating to suffer again. From now on, it’s drip, drip, drip.

Veloso’s neighbor, Ismael Andrade, a grower, exporter and marketer of the second most popular roast and ground coffee in Minas Gerais, Sabor de Minas, is equally pessimistic. “The end stock for the world - the inventory at the end of the year - is half what it was in 1989, yet the price is the same,” Andrade says. “There’s something wrong here, no? The numbers say one thing, the market says another. Everybody talks about fair trade agreements, but nobody does it.”

Andrade expects that between the nadir of Brazil’s seven-year production cycle, the growth of worldwide Robusta production, and Brazil’s worsening drought, the crisis will go on for at least a couple more years. He predicts that few producers of commodity coffees will be among the survivors. He sees Colombian and Central American coffees earning a 20- to 30-cent premium over the New York exchange prices while Brazilian commodity coffees are selling at a discount of ten cents. They are selling for $50 what it cost them $80 to produce. Brazilian specialty coffees, however, are still managing to bring in a 10-15-cent premium. “The specialty coffee producers and those with a niche in quality will be the only survivors,” he says.

Hoping to be among the survivors, Andrade’s company is easing away from production and focusing more on industrialization, earning its profit by adding value to coffee through roasting, grinding and marketing. Through smart marketing, a consistent product and a good record of awards, Andrade now sells to such big chains as Walmart and Carrefour.

In the nearby town of Patrocínio, the Expocaccer coffee cooperative is doing what it can to help Cerrado producers hold on until better days. Expocaccer was born of the organization that first recognized that coffee from the Cerrado region was something that deserved its own marketing identity. They registered the “Cafe do Cerrado” name and allowed its use only on coffees that come into the co-op from the Cerrado region.

Cafe do Cerrado is especially prized in Japan and has been gaining recognition in Europe. The name is so highly esteemed that middlemen have been known to attach the trademark to inferior coffees. Sometimes they blend inferior coffees into Cerrado coffee, sometimes seriously impairing its quality.

Oddly enough, it is contrary growing conditions that allow Cerrado growers to produce such fine beans. The relative paucity of rain makes it possible to use irrigation for greater control of flowering and avoiding the harvest-time humidity that can spoil a crop before it dries. The bland soil can be brought up to snuff with the right balance of fertilizers and other corrective elements.

The Cerrado region is also the most mechanized in the world. The well-defined rainy season leads to a more condensed ripening period, which means less need for hand picking. The flat savannah terrain allows machines to pick the beans, giving Cerrado farms an economic advantage over the coffees of the hilly Sul de Minas region, not to mention the perennially rainy and prohibitively mountainous Colombia.

A Professional, Rather Than Traditional, Approach
Andre Gomes Peres, Expocaccer commercial director, says that the region also benefits from a certain professionalism. “Coffee-growers came to Cerrado relatively recently,” Gomes says. “In Sul de Minas, it is old families that grow coffee. They may love their product as much as they love their children, but they aren’t necessarily the most professional of growers. Cerrado growers came here from other regions with the intent of starting businesses, so they have a professional rather than traditional approach. That’s important in something as complex as coffee.”

Peres also points out that Expocaccer is one of few cooperatives in Brazil that is administered not by its members but by professionals who have been hired by the council that is appointed by the co-op’s members. This eliminates favoritism and cronyism that might otherwise compromise the competence of the management.

In Sao Gotardo, MG, CDJ Exportacoes is using smart marketing to survive the price crisis. The company is successfully marketing upper-end and lower-end products, both ground and roasted before export. Hapy Coffee, a dark, full-flavored blend, is selling well in Europe. Donn Borges, blended to reach the lowest possible price for a reasonable coffee, is being imported by Global Traders Operatives (GTO) for distribution through a major West-coast chain of mixed merchandise stores. Negotiations are underway to create an instant coffee brand of the same name.

“We are using the low price of coffee as an opportunity to enter new markets,” says Cires F. Borges, CDJ director. “We have a good foothold in California now. Donn Borges is being accepted by consumers of budget coffee, and we expect to be able to expand into even more North American markets.”

Max Radi, president of GTO, says that with so much good coffee on the market at such competitive prices, professionalism was a deciding factor in choosing a supplier in Brazil. “We’ve experienced too much confusion in Brazil,” Radi says. “When we found a supplier that answered e-mail promptly and did what they said they would do and did it well, we knew we had found our partner.”

Impressed with the general quality of Brazilian coffees, Radi plans to do what the government of Brazil has been talking about for decades. He is going to promote the concept of Brazilian coffee. His coffees will say “100% Brazilian Coffee” on the label - a rare selling feature in the U.S., where it’s easier to find a coffee identified as coming from Papua New Guinea than from Brazil. Radi is currently developing opportunities to provide Brazilian coffee to the Asian market via GTO’s distribution network in Russia. GTO and other international traders will be excited to hear about a high-tech attempt to clarify some of the confusion that tends to accompany business in Brazil. A new B2B web site, CafesAll.com, promises to revolutionize transactions in green coffee. Efficient and well organized, the site facilitates transactions by mitigating the historical market inefficiencies in the coffee trading business.

CafesAll.com can be said to be the first substantive change in the century-old procedure of selling and buying green coffee. CafesAll’s transaction process is rooted in the principles of market transparency, the reduction of transactional costs, and improved product pricing. It facilitates the exchange of information by offering a single marketplace. It increases the efficiency of the exchange of goods by eliminating multi-tier distribution. It wraps up the deal by coordinating payment components such as letters of credit and direct payment. “The CafesAll system provides a specialized exchange highly customized for the coffee industry,” says André Emrich, founder of the company. “As neither a buy- nor sell-side solution, CafesAll provides a market-making platform capable of processing orders across multiple buyers and sellers.”

It’s still too early to detect the impact that this comprehensive web site will have on the industry - it went online on September 14 - but its efficiency is without parallel in the world. Sitting in the center of the world’s biggest producer and second-largest consumer of coffee, a country that offers so many options in coffee qualities, CafesAll.com is quite likely to deliver the revolution it promises.

Pioneering Professionals
José Carlos Grossi was a pioneer who helped bring coffee to the Cerrado region. Before his time, Cerrado was a land of cattle and grass. But in 1972 Grossi arrived in Patrocinio with $12,000 in his pocket, a degree in agronomy, and a certain kind of can-do courage he earned by bumming around Europe after he got out of college.

Today he owns eight coffee farms, a stunning tropical home and office in Patrocinio, and a tree he planted in his backyard that he cannot reach halfway around. His $12,000 went to good use. His farms spread beautifully across the rolling hills of the Cerrado, the plants in concentric circles or long wavy lines in accordance with the irrigation systems. “A farm is a canvas and the farmer is the artist,” he says, a belief proven by the way he has laid out his land.

With measured modesty, Jose Carlos Grossi is pretty sure his farms are among the best in the world, and so is his Alto Cafezal coffee. He has reason to think so. Just as he was among the first to plant coffee in Cerrado, he was among the first to see the value of working with Illy. Illy taught him how to raise coffee to excellence, and for the last 10 years, Illy has endowed Alto Cafezal with an award for being among the best producers in Brazil. Every year for 10 years, Illy has bought thousands of bags of green coffee, much of it bound to serve as a hearty foundation to espresso blends. “Much of what I learned about quality was from Illy,” Grossi says.

Grossi’s demand for quality has led him to ISO 9000 certification, and he’s going to go for ISO 14000 soon. His holistic approach to agronomy has naturally led him to respect nature and plant accordingly. He meets all national labor requirements, pays his people well, and makes sure all workers are at least 18 years old. He is also the founder of a day care center and a chain of schools for poor children. He is an artist, it would seem, with not only with his land but with his people.

Not too far away are the two famous Daterra farms. Daterra is the world’s first and so far only coffee farm to receive ISO 14001 certification. Fully half the area of the farms is ecological reserves. Some surround astonishingly beautiful waterfalls and streams. Daterra is meticulously careful with its waste products. It minimizes use of consumables. It carefully divides and recycles paper and containers. Water used to wash and process coffee is recycled as irrigation. Water used to wash trucks is collected so that residues of oil can be separated out. And they make sure the company disposes of the oil responsibly.

The company is equally careful, of course, with its product. Throughout processing, batches of beans are kept separate according to species (for the most part Novo Mundo, Catuai and Bourbon), harvest time, and type of processing. This way problems and successful techniques can later be identified. Fernando Augusto Vicentini, director of production at Daterra, says the company is obsessed with the quality and consistency. “Once the bean is off the plant, it begins to suffer losses,” Vicentini says. “We try to minimize those losses and damage to the beans. We use good equipment, test it often, and train our people to work well.” Daterra sells most of its product directly to buyers in Spain, Italy, France and Japan, avoiding any losses that might occur at a co-op.

A Frustrating Irony
Vicentini says that lack of appreciation of quality is a big problem in today’s coffee market - a frustrating irony for a country that has done so much to improve its overall quality and distance itself from an obsolete reputation for mediocre commodity coffee. But Brazil has re-invented itself, Vicentini says, and “Cafe Santos” no longer has meaning. A coffee going through the port of Santos can be from the highly prized Cerrado, Sul de Minas or Alto Mogiana region, or from the Robusta areas of Zona da Mata, Bahia or even the sultry lowlands of Rondonia.

Brazil really deserved its old reputation as a powerhouse of plain commodities. A handful of exporters controlled the market, and they paid once price per sack regardless of quality. Farmers had no incentive to plant or process carefully. About 10 years ago, new national policies opened the market to new buyers, some of whom were willing to pay a little more for coffee a little better. Ten years has been enough for Brazil to plant new trees in new formations and to develop new processes that avoid the need to pick each bean by hand in order to ensure even ripeness. Beans can be picked by machine, separated according to ripeness and processed as natural, pulped and semi-pulped. The result is a variety of coffees, some of which can compete with the Colombians for taste if not for marketing or brand awareness. “Buyers want quality, but they aren’t will to pay for it,” Vicentini says. “We believe that someday people will pay extra for quality, so we keep producing it.”

The Brazilian government and a handful of Coffee associations, including the Brazilian Association of coffee Industries (ABIC, in its Portuguese abbreviation), the Brazilian Association of Soluble Coffee Industries (ABICS), the National Coffee Council (CNC), and the Council of Coffee Exporters (Cecafé), have been working to repair the image of Brazilian coffee. Having utterly neglected any institutional marketing of Brazil’s most valuable product, they decided to pump $4 million into an international campaign.

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