Coffee: Is there an elephant in the room?

Coffee: Is there an elephant in the room?

July 1, 2016 - by Frank Rubio - 0 comments

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My colleagues and I have just returned from the annual World of Coffee event in Dublin organized by the Specialty Coffee Association of Europe (SCAE). The event hosted over 10,000 participants from all across the coffee value chain including traders, wholesalers, coffee machinery vendors, producers, government representatives, and others. Interestingly enough, Oikocredit was the only social lender present at this event.

Oikocredit participates annually in the US version of this same fair which is three times the size of its European counterpart. Oikocredit sponsored this year’s fair for the purpose of expanding our contacts in European markets. The fair was a great success for us and we were able to generate many new contacts. 

The event was also important for further promoting awareness of Oikocredit through our sponsorship of the SCAE Awards Ceremony. Ging Ledesma, our interim managing director, gave an inspiring presentation on our work in the coffee sector worldwide.

But behind all the hand shaking, networking, barista competitions, cupping trials, business dealing, and massive consumption of delicious coffee, there was an unspoken truth that the industry is at a crossroads and that changes will soon be taking place. Herein some sobering facts that I was able to gather through my meetings and informal conversations:

  • 80% of the world’s coffee is produced by small producers. In numbers that means 25 million small producers worldwide.
  • Overall coffee yields for small producers can be as little as a tenth of what they are for large farms. For example, in Nicaragua, small growers produce on average six bags per hectare while large farms produce up to 28 bags per hectare.
  • Climate change is wreaking havoc on these already low production levels in Central and South America. Peru alone has seen 20% declines in production in 2015 due to the Coffee Yeast Rust Fungus and the Coffee Berry. Once thriving coffee plantations in Honduras are being converted into cacao farms given ever increasing world demand for chocolate and cacao’s greater resilience in the changing climate.  
  • Coffee prices have dropped significantly since 2014 making it a losing business for smallholders. Some estimate that prices need to be as high as US$ 4.00/pound for farmers to generate a sustainable income from coffee. Prices currently are at US$ 1.35.  Even higher prices offered by fair trade with organic premiums (FTO) which are currently at US$ 1.80 are not enough to make coffee a viable business for small producers.
  • Further downstream in the coffee value chain, what was once a thriving and eclectic group of social minded traders, roasters and importers are being bought out by multinational corporations who see vertical integration and more control of the production process as critical to higher margins. Independent roasters and traders who sell to these large conglomerates are now subject to longer payment terms that eat into their already minimal margins. Lower margins for roasters mean even less money for the small producer.

These trends are also having an impact on Oikocredit’s coffee portfolio. Although coffee continues to take the largest slice of the Oikocredit agricultural portfolio, from 2014- 2015 the number of Peruvian coffee partners and active portfolio in coffee has declined. As prices continue to stay low, production continues to drop and down-streamers continue to consolidate, long-term growth perspectives in coffee for social investors that focus on small producers, like Oikocredit, comes into question.

Oikocredit remains committed to supporting the smallholder. There are in fact efforts underway by Oikocredit’s AgriUnit and our regional offices to improve farmer productivity; install climate smart technologies to better control pests and diseases; strengthen coffee farmer capacity to mitigate price risks; and support socially conscience traders through bridge loans that offer cash. But will this be enough? How will these trends affect our overall business over the coming years, and more specifically, our core constituents small marketing cooperatives? Finally, what will our coffee portfolio look like in 2020?

Here is one possible scenario based on what is happening in the microfinance industry: fewer actors in the value chain controlling greater amounts of production; fewer smallholders participating in the coffee market as large corporates establish their own plantations; and remaining smallholders relying on these corporates to off-take their product through contract farming schemes. Cooperatives will always make up an integral part of the coffee value chain. But more than likely, only those cooperatives with strong governance and price risk skills will be able to compete in the market. Would Oikocredit have a role in this new dynamic? I think so, and we need to be able to offer our value proposition to these industry players in order to ensure that smallholders receive their fair share. I think Oikocredit is well-positioned in the agri-sector to face these challenges in the future.

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