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 $
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 $
in $
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 $
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 $
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 $
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.
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