Analysing Colombia’s internal coffee market price and the new Stabilization Fund

Image credit: Those Coffee People

Colombia made history back in February when it officially launched the Coffee Price Stabilization Fund (el Fondo de Estabilización de Precios del Café). After years of industry lobbying, the government finally brokered an agreement with the growers-union, the Federacion Nacional de Cafereros de Colombia (FNC), which established a guaranteed floor-rate that growers can access when market prices drop below production costs.

The context of this historic development is clear. The country’s smallholders had been severely impacted by the commodity price collapse over the last few years, forcing many to either abandon the industry or operate at a loss. So severe has the impact of this been, that there have even been serious discussions at high levels to create the coffee equivalent of OPEC among producing nations to artificially manage prices.

While the OPEC (Organisation of the Petroleum Exporting Countries) of coffee is not yet a reality, Colombia’s Stabilization Fund very much is. And now we’re at the other side of the first harvest under this new mechanism we can analyse pricing and any initial impact on the industry.

A historical perspective

The backbone of Colombia’s coffee-growing industry is the hundreds of thousands of smallholders growing commercial arabica crops. A significant proportion of these farmers sell their crops directly to the FNC, who provide a floating buy-rate, the fortunes of which correlate closely with commodity market prices.

The chart below tracks month-to-month fluctuations in the buy rate over the last five years. While the stabilisation fund has not published a specific floor rate that kicks in once prices drop below production costs, the FNC calculated production costs per carga (125kg) in 2019 at COP 780,000 (USD $215). Applying this as the break-even floor rate across the last five years shows there are substantial periods of time when farmers were selling at a loss (albeit without adjusting for inflation).

A look at the last harvest

Rather than the price stabilisation fund being required, the last harvest in fact provided an unexpected windfall for farmers, as can be seen by the price spike in the graph. While some suffered a loss of crops due to the broca beetle and a delayed start to the rainy season, the FNC buy rate was at record highs briefly reaching COP1,250,000 (USD $342) per carga (125kg), a 70% increase year-on-year.

The reasons for the price spike were twofold. First, domestic supply was curtailed somewhat by the delayed rains, while there were also bigger fears of supply shortages in global markets.

Second, and most significantly, the Colombian peso (COP) suffered a near 20% drop in value against the dollar.

As international buyers pay in dollars, the FNC was able to significantly increase its buy rate to entice as many small and medium-sized growers to sell to them as possible, as they scrambled to fill futures contracts and hedge against possible supply shortages. Thankfully, therefore, much of this exchange rate arbitrage made its way into the pockets of farmers.

Graph source: Federacion Nacional de Cafereros de Colombia

Could continued high prices create low incentives?

The intention of the price stabilisation fund is not to just forever be propping up prices when commodity markets are low. This would of course be unsustainable over the long term. A broader ambition is to enable more of the nation’s smallholders to make the switch from commercial crops to high-value specialty now that there is a guaranteed floor limit that they can use to reinvest.

However, while prices have dropped since the highwater mark of the last harvest, they remain high historically speaking. Price per carga (125kg) in July is COP 962,800 pesos (USD $263), which is a 24% increase versus last July and way above 2019’s production-floor cost.

This is obviously great news for farmers in the immediate term, particularly at a difficult time like this. But if the FNC buy rate remains high for regular commercial crops, the worry is that this could disincentivise farmers from making the switch, especially given the Covid-related uncertainty in the market.

After all, moving from commercial to specialty crops comes with plenty of risks. While farmers can sell their commercial crops to the FNC for the guaranteed buy rate, no such mechanism currently exists for specialty sellers. The open market price at which farmers sell specialty beans can, of course, be far more lucrative, but for farmers who have always sold their commercial crops to the FNC, this new way of doing business comes with much less certainty.

Ultimately, the trajectory of the FNC buy rate depends largely on the dollar/peso exchange rate. A continued weak peso will most likely keep the buy rate high and in so doing will prevent the need to use the price stabilisation fund anytime soon. But the hope within the industry is that any continuation of these high prices will not slow down the rate of commercial growers switching to specialty varieties, for their sake as well as the industry’s longer-term financial sustainability.

  • Jennifer Poole is the co-founder of Colombian specialty green coffee supplier Those Coffee People. Based in Medellín, Colombia, Jennifer spends her time traveling to remote towns and villages in search of the best specialty coffee the country has to offer.

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