Coffee at Risk in South America as Farmers Test Other Crops

The coffee-growing landscape across South America, the world’s biggest coffee-producing region, is changing. From the southern-most parts of the coffee lands in Brazil through Peru to Colombia on the northern tip of the continent, coffee farms have given way to new crops as years of low prices and volatile exchange rates have left producers wary of rising costs and dwindling income. Should the coffee industry be concerned?

By Maja Wallengren

Driving across coffee regions in Brazil from southern Paraná through Southern Minas and Cerrado in Minas Gerais state and all the way to Espírito Santo on the eastern coast, former coffee farms have given rise to new crops. From eucalyptus and sugar cane to pepper and grains, the Brazilian coffee sector is famous for being the first to respond to prices when the farm gate price fall below the cost of production. An issue long under-reported by the market, producers here say that for much of the past 17 years, coffee prices have been below the cost of production, which continue to surge because of increases in consumer inflation for key products such as fertilizer and fuel while labour becomes more expensive.

As the new 2017-18 harvest reaches its peak in Brazil, the world’s largest producer and exporter, coffee growers say the smaller harvest this year will make it difficult for many growers to cover costs and generate some net income. The Brazilian Agriculture Ministry’s crop forecasting agency, CONAB, has pegged the new crop to yield 45.563 million (60kg) bags, which is down from 51.369 million bags in the last 2016-17 bumper crop. And growers in Brazil are swift to act and confront anything that affects the price equation of costs or yields versus income.

“When we talked about coffee in Brazil in the late 1990s, we used to say that if a hectare of land produces less than 18 bags of coffee in a harvest, it would be put under observation,” said Joaquim Libanio Leite, commercial director at Terra Forte Cafés trading company, which is based in the Southern Minas coffee town of Varginha. One of Brazil’s largest coffee exporters, Terra Forte handles 5.7 million bags of coffee a year, of which 2.5 million bags are exported and the balance is sold in the domestic market, company statistics show.

“If the next year that land plot continues to produce below the average yield the farmer will uproot the coffee and plant something else as yields below the average is not considered to be economically viable,” Libanio told Tea & Coffee Trade Journal, adding that as the average yield in Brazil has gone up so has the threshold for what is economically viable.

The average yield has in the last five years reached between 24 and 25 bags per hectare, according to CONAB, and no more is the rule of economic viability put to the test than in the Cerrado Mineiro region in the northwestern corner of Minas Gerais. Producing between 5.5 to 6 million bags in an average harvest, and accounting for some of Brazil’s highest yields, the high-tech agricultural practices here require equally higher returns.

“If I harvest less than 30 bags per hectare I am not able to cover my costs with the prices of the market today, and then I would be producing coffee at a loss,” said Marcelo Dianin, a producer in charge of the family’s 130 hectare farm just outside Monte Carmelo, located about one hours drive northwest of the Cerrado coffee capital of Patrocinio.

Uprooting coffee in favour of switching to another crop is nothing new in Brazil where the always highly entrepreneurial Brazilian farmers have at least three or four other crops to choose from. Many other crops, such as soybean for example, also come with less risk and easier income-generating opportunities than coffee, which takes four to five years from when a seedling is planted until a full harvest can be picked.

Switching to Peppers and Eucalyptus

In Brazil’s southern-most coffee state of Paraná, decades of devastating frosts during the 1960s and 1970s led to a gradual switch out of coffee, first to grasslands and grains and in recent years increasingly to eucalyptus. Today, the state that once was Brazil’s leading grower with production as high as 22 million bags, grows only some 1.2 million bags.

In this new crop cycle, it is Espírito Santo that has seen a more dramatic decline in the size of coffee land with the overall area in production cut to 385,538 hectares in the current harvest from 410,057 hectares a year ago, CONAB said in its latest report released in May 2017. Of the total area planted with coffee in Espírito Santo, it is the Robusta regions that have suffered major damage from four years of consecutive severe drought, which were cut by 10 percent alone in the last 2016-17 harvest to 235,415 hectares from 260,032 hectares in production.

“We are seeing more growers in Espírito Santo switching to pepper due to the drought,” said Libanio. He said that while the coffee area in Espírito Santo is being switched to black pepper for economic reasons in Southern Minas, it is mostly areas considered “inappropriate for coffee” that have been switched to eucalyptus as a source of diversification. Analysts have reported similar findings in recent reports.

“Four years ago, we didn’t see any pepper grown in Espírito Santo,” Carlos Mera, an analyst at Dutch agricultural financial service company Rabobank International in Utrecht, said in a report published by the UK-based The Financial Times last March. “Three years ago, you saw a little and last year that increased. Now you can see hills covered with pepper plants,” said Mera.

In Brazil’s key coffee-growing region of Southern Minas, farmers are getting worried about the tight margins of the coffee prices paid in the market for the new crop and rising local costs. Even if the weakening of the exchange rate for the Brazilian Real in the last year has benefitted local growers, they still must accommodate up to 20 percent less crop in this part of Brazil, which makes farm gate prices a gamble they can ill afford to play.

“In regions with higher altitude the maturation was late and the producers are afraid the harvest will get more expensive while they also must deal with a labour shortage so they started the harvest early to make sure they will get some profit as they are concerned the costs will go up in the next months,” said Fernando Barbosa, who is a grower and on the board of directors of the AMOG coffee association in Lower Mogiana.

“The result is that they are harvesting a lot of green beans and the quality goes down so this practice is very risky, I saw coffees being harvested with just 18 percent ripe cherries,” said Barbosa.

Colombia Eyes Grass & Livestock

From prices to costs and yields, the South American coffee lands, home to some 60 percent of total global output in any given harvest cycle, are changing and it is not only in Brazil that coffee is being swapped for alternative crops. In Colombia and Peru, which together with Brazil alone account for close to half of the world’s entire coffee supply, years of low prices have had a long-lasting effect on areas where coffee traditionally was the only crop planted.

In Peru, scores of the country’s organic coffee producers were reported to be on the verge of bankruptcy last year after five years of crops sharply reduced by the coffee leaf rust pest. Peruvian coffee and government officials openly debated concerns over whether the low coffee prices coupled with the devastating effect of the rust epidemic would encourage some growers to switch to illicit crops like coca. This year, however, the Peruvian Coffee and Cocoa Industry Chamber is breathing a sigh of relief as the country is set for its first significant recovery with production pegged to reach between 4.2 and 4.5 million bags after picking 3.8 million bags in the 2016-17 cycle.

“The last few years have been extremely difficult for our growers but this year the crop is looking better and we should have a healthy harvest of at least 4.2 million bags. We are hopeful this will mark a more permanent recovery even though we are still far from the record of 5.4 million bags we produced in the 2011-12 harvest,” said Eduardo Montauban, the chamber’s general manager. With plans supported by the government to renovate and replant 80,000 hectares of the country’s coffee park in the next few years, he said production should gradually start to rise again — a welcome change after the recent low of 2.88 million bags in 2014-15.

Colombia’s central coffee region, known as the Eje Cafetero, meanwhile, has seen large areas of coffee lands permanently removed and switched to grass land and livestock instead. This has resulted in the region’s share of as much as 23 percent of the national harvest slump to about 16 percent today, official figures show. The change is particularly visible in the coffee region of Palestina, built around the town of the same name in southern Caldas province, where many local producers gave up on coffee in the years that followed the coffee crisis from 2001-03 when prices fell to historic lows.

“Look at all these grasslands, all of this used to be coffee farms,” Pablo Hernandez, a smallholder coffee grower living on the outskirts of the town of Palestina, told T&CTJ during a recent visit, as he pointed out over the horizon where the hilly landscape dominates the view.

The lost coffee lands aside, the Colombian Coffee Growers Federation, also known as the FNC, since 2009, has undertaken a marathon effort to renovate and replant the entire Andean country’s 930,000 hectares coffee park. With production now back at 14 to 14.5 million bags from the 50-year-low of 7.652 million bags in the 2011-12 harvest, the FNC’s CEO, Roberto Vélez, is taking all efforts to ensure output will remain stable.

“If we want to maintain our current production of about 14 million bags a year it is imperative to replant at least 90,000 hectares a year, or 10 percent of our coffee area to keep trees productive,” said Vélez. “This requires that the Colombian growers maintain their average productivity at a minimum of 21 bags per hectare,” he said. The cost of such aggressive renovation plans is estimated at USD $23 million to $27 million a year. But if yields fall below this target, Colombian growers will not be assured they can meet the cost of production associated with constantly renovating and replanting 10 percent of their land a year, said Vélez.

To industry stakeholders and coffee lovers, who particularly crave the top-quality Arabica beans that Colombia is the world’s biggest producer of, this is all news that gives reason for hope. But in times where the supply line for roasters has become increasingly unstable because of the rising problems from low prices aggravated by the growing negative impact on crops from climate change, the Colombian solution is expected to work for only a few select coffee-producing countries, which are dominated by hundreds of thousands of tiny smallholder growers. As analysts point out, the large scale financial support the FNC provides toward the sector is an effort very few other coffee nations have the capacity to offer.

“The bottom line is that for the past 20 years we have had less than a handful of countries led by Brazil, Colombia and Vietnam that have continued to lead efforts in increasing production through replanting efforts and new plantings but these countries can’t continue to increase production this way as yields are closed to be maxed out,” said Pedro Echavarria, an independent analyst in Colombia.

“When we look at the situation in Brazil, the big stakeholders in the global coffee industry really should be concerned because for every hectare of coffee land that is switched to something else, it will result in less coffee and this at a time when world coffee consumption continues to experience a boom,” he said.

There is no denying that overall size of Brazil’s coffee park has been dwindling for years – to 1.9 million hectares in the current harvest from 2.3 million hectares in 2002 – CONAB figures show. But this may not be a reason for concern, said Marcelo Vieira, a producer and a founding director of the Specialty Coffee Association of Brazil.

“Indeed, the total coffee area has been decreasing for many years, but at the same time production has been growing due to gains in productivity as growers have to focus on more productive, low cost areas,” Vieira said.

Maja Wallengren has been writing about coffee for more than 23 years and has specialized in coffee during her travels as a reporter to 46 coffee producing countries across Southeast Asia, East and West Africa and Latin America. She may be reached at: [email protected].

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