Challenges and perspective of the C a e ges a d pe spect e o t eCentral American coffee sector

Bernard Kilian and Lawrence PrattINCAE/CIMS Costa RicaINCAE/CIMS, Costa Rica

Presentation at SCAA Symposium, Atlanta, USAApril 15 16th 2009April 15 – 16th, 2009

StructureStructure• Price development in the coffee industryp y• Challenges of Central American coffee

productionproduction– Prices

Costs– Costs– Climate change?

Additi l d ti t• Additional production costs• Conclusions

200Prices paid to growers (Arabicas): nominal terms

150

200

100

150

nts/

lb

Brazil

50

100

US

$ ce Colombia

0

50 Costa Rica

Guatemala01978 1982 1986 1990 1994 1998 2002 2006

Guatemala

Source: ICO, 2008

Prices paid to growers (Arabicas): real terms

250

Producer prices index 2000=100

150

200

nts/

lb Brazil

Colombia

50

100

US$

cen

Costa Rica

Guatemala

01978 1982 1986 1990 1994 1998 2002 2006

Source: CIMS with data from ICO and OECD, 2008

• What is the future of Costa Rican coffeeWhat is the future of Costa Rican coffee industry?

• What is the future of coffee in Central A i ?America?

Productivity development of coffee in Central AmericaCentral America

Productivity development of coffee in Central AmericaCentral America

Productivity development of coffee in Central AmericaCentral America

Challenges for Coffee industryChallenges for Coffee industry

• PricePrice• Costs

Cli t Ch• Climate Change

Coffee prices at NY BOT

Coffee prices at NY BOT 2007 - 20092007 - 2009

International labor efficiency i ff d tiin coffee production

40

5038 - 47

20

30

1.3

9.412

10

20

4.3 - 9.53.9 - 4.8

0 8

9.83 - 8

1.30

Labor costs Labor efficiency Labor input costs

$ $

0.8

$/day days/100lb $/100lb

Brazil Vietnam GuatemalaSource: Technoserve 2003Source: Technoserve 2003

Increase of production costs between 2006 and 20082006 and 2008

70%

50%

60%

30%

40%Fertilizer CostsL b C t

20%

30% Labor Costs

0%

10%

Source: Baltodano 2008

Costa Rica Guatemala El Salvador Nicaragua Honduras

What are the coffee production costs in Costa Rica? (2005/2006)Costa Rica? (2005/2006)

Farm Gate $/qqL b 21Labor 21Inputs 20.3Harvesting + gtransportation 26Indirect costs 19.6Farm Gate Sub Total 88Farm Gate Sub-Total 88MillingWet + Dry mill 10.9yMill profit 9.2Milling Sub-Total 20.1Total production costs 1 Quintal 108.1Source: Icafé

Coffee production costs of a sample of Costa Rican coffee farmers - 2008Costa Rican coffee farmers - 2008

160

180

120

140

160

q

80

100

120

sts

in $

/qq

40

60

80

Cos

0

20

0 20 40 60 80 100Percentile

Economic information available for other cropsother crops

Relationship between Production C d Yi ldCosts and Yield

80180

60

70

140

160

40

50

100

120

in $

/qq

in $

/qq

Costs ($/qq)

30

40

60

80

yiel

d i

Cos

ts Costs ($/qq)

Yield (qq/ha)

10

20

20

40

000 20 40 60 80 100

Relation between Net Income and Production costsProduction costs

5000

160

180

3000

4000

120

140

160

a

2000

3000

100

120

ome

in $

/ha

s in

$/q

q

Costs ($/qq)

100060

80

Net

Inco

Cos

ts

Net Income ($/ha)

020

40

-100000 20 40 60 80 100

Effects of a further increase of labor costs

250

200

100

150

sts

in $

/qq

Costs+10%

50

100

Cos +20%

+50%

00 20 40 60 80 100

Percentile

Effects of a further increase of labor costs

250

200

100

150

sts

in $

/qq

Costs+10%

50

100

Cos +20%

+50%

00 20 40 60 80 100

Percentile

Economic impact of further price i f l bincrease for labor

250

200

150

in $

/qq

Costs ($/qq)

100

Cos

ts

+50%

0

50 Farmgate price ($/qq)

00 20 40 60 80 100

Percentile

What about Costa Rican’s production i i i i hb ?cost in comparison to its neighbors?

250

200

150

C t Ri ($/ )

50

100Costa Rica ($/qq)Guatemala ($/qq)

0

50

0 20 40 60 80 100Percentile

Understanding Coffee Economics –Precision AgriculturePrecision Agriculture

Distribution of coffee production according the altitude

What is not included in “costs”?Investments and Improvements

P i f l d• Price of land• Capital investment for improvements• Quality upgradesQuality upgrades• Certification

– Cert, +….– Related environmental and social

improvements• Irrigation (now or in the future)• Irrigation (now or in the future)

LandLandLand investment: Changing or expanding the harvest g g p g

area

Costa Rica: The current cost of 1 Ha of “clean” land in DotaCosta Rica: The current cost of 1 Ha of clean land in Dota is $13 000.

Assuming payment in one year this is the equivalent of-Assuming payment in one year, this is the equivalent of US$433 qq, (or US$4,33 per pound.)

-Assuming amortized over 10 years, this is US$43,3/qq or US$0 43 $/lbUS$0,43 $/lb

CertificationCertifications investment:

Cost varies since it depends of many factors butCost varies since it depends of many factors, but approximately:-RA certification: $600-700/10 Ha farmF i t d $1800 ti 50 b-Fairtrade: $1800 per cooperative < 50 members

-Organic: $30/ha assuming 50 ha farm But that is only for the audit for certificationBut that is only for the audit for certification• envirnomental improvements to comply?• social improvements to comply?• additional recordkeeping

CertificationCertificationValue of Certification• Preference• Preference• Price Premium

2006 Sales and Certified Global 35003500

3000

3500

3000

3500

2000

2500

ags

2000

2500

ags

1500

,000

ba

1500

,000

ba

500

1000

500

1000

0Utz Certified Fair Trade Rainforest Organic SBUX

CertifiedSold As Source: Giovannucci, CIMS, Transfair Utz, R.A.

0Utz Certified Fair Trade Rainforest Organic SBUX

CertifiedSold As Source: Giovannucci, CIMS, Transfair Utz, R.A.

Coffee prices along trade channels in the USAin the USA

12

8

10

$/lb

4

6

Pric

e in

$

0

2

Farmer Exporter Toaster ConsumerConventional Organic Fairtrade

Source: CIMS 2004 and ICO 2004

30

Source: CIMS 2004 and ICO 2004

To get “X” US$ to the farmer, we will be asking customers to pay…..

13 2

6,5Fairtrade

g p y

13,2

10 0 Farmer/Toaster

23,1

10,0Organic

Farmer/ Toaster

Farmer/ Consumer

15,0

7,5Conventional

0 5 10 15 20 25

Price Ratios

WaterWastewater treatment (aguas mieles)Wastewater treatment (aguas mieles)

-Example: Guatemala-- $14 600 for 162 ha producing 4400 qq green coffeeproducing 4400 qq green coffee - US$3,32/qq (0,03 per lb)-Example: Colombia-- $515 for 3 Ha producing 90 qqExample: Colombia $515 for 3 Ha producing 90 qq green coffee- US$5,72/qq (0,06 per lb)

Drip irrigation system-Costa Rica: *Installation and equipment =$1530/ha q p(US$51/qq or US$0.5/lb)

*Assuming producers already possess water source and pump

Costa Rica: Coffee farm costs distribution(harvest 2006-2007)(harvest 2006 2007)

Financing coffee farm costsAnnual costs distribution

25%

Annual costs distribution harvest 2006-2007

20%

25%Planting and renovation

Pruning

Desuckering

10%

15% Pest management

Shadow management

Weeding

5%

g

Pesticides

Fertilization

Harvesting0%

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Harvest 1

Harvest 2

Harvest 3

Harvest 4

Harvesting

Source: CIMS based on ICAFE dataSource: CIMS based on ICAFE data

SocialSocial investment:Social charges for 1 permanent worker inSocial charges for 1 permanent worker in

2008 is approximately $1515Quality of life investements for permanentQuality of life investements for permanent

and temporary workers?Yield investmentYield investmentThe renovation cost (almácigo)of 1 Ha of

coffee farm in Costa Rica is $980coffee farm in Costa Rica is $980 (US$32,67/qq)

Financing costs: different scenarios

5

6

7

140

160

180

200

3

4

5

80

100

120

140

S$

cen

ts/l

b

US

$/H

a

1

2

20

40

60

80

USU

00

20

5% 8% 10% 15% 30%

Interest rates

Source: CIMS, 2008

US$/ Ha US$/qq

Production costs rise: Oil and fertilizers are closely relatedfertilizers are closely related

Crude oil, natural gas, and nitrogen-based fertilizer prices move together

Producer Price Indexes, 1992=100

250

300

100

150

200

Nitrogen fertilizer

Natural gas

0

50

100

Crude oil

1990 1992 1994 1996 1998 2000 2002 2004 2006

Source: Producer Price Indexes, U .S. Department of Labor, Bureau of Labor Statistics.

Source: USDA Agricultural projections, 2008g p j ,

0,43*Land

Investments (annual)

0,05

0,05

Irrigation

**Social charges

0 02

0,02

0,03

****Warehouse

***Yield (almácigo)

Financing (15% interest)

0,01

0,01

0,02

******Waste water

*****Certification (Organic)

****Warehouse

0,00 0,10 0,20 0,30 0,40 0,50

US$/lb*Amortization during 10 yearsAmortization during 10 years**Annual social charges for 1 permanet worker, assuming 1worker/10 Ha ratio***Almácigo cost for 5% annual renovation of a 10 Ha farm****Amortization during 10 years of a 60 m2 warehouse, assuming 1 warehouse/10 Ha ratio*****Annual certification cost for a 50 Ha farm******Waste water plant treatment assuming 10 years period of amortizations

S CIMS 2008Source: CIMS, 2008

Key Findings• There is no “magic number” on costs or

priceprice• Evidence of an unsustainable future

E i– Economic– Social– Environmental

• Dramatic under-investment (by default)• Key step has to be on-farm income

Three “Frontiers”• Price issues

important b t not determinant- important, but not determinant• Cost issues and Productivity

– Productivity• Value Chain

– Price premium (consumer backward) is extremely inefficient in passing benefit.