“They Grow an Awful
Lot
of Coffee in
Brazil
”
©
2003 Brian Martell
“You
date a girl and find out later
She smells just like a percolator
Her perfume came right off the grill
Why they can percolate the ocean in
Brazil
!”
(From
the "Coffee Song," made popular by Frank Sinatra)
Brazil
’s
position in the green coffee market of producing nations has, for the last
150 years or so, been that of numero uno. And as such, their market
domination has ebbed and flowed from 30% of total supply to over 40%. To
say
Brazil
played a key role in the dynamics of the green coffee market would be akin
to saying Wayne Gretsky was a good hockey player; both are true, but
fundamentally understated. Out of the total world production, which
traditionally runs at 100 million bags of coffee (each bag weighing 60 kg
or 132 lbs.),
Brazil
traditionally produces between 30 and 40 million bags.
Recently,
the Brazilian coffee producing industry has decided to regain some of its
lost prestige among the ICO (International Coffee Organization) members
and retake its traditional position of 40% or greater of total world
production. What made this a curious strategy is the relatively depressed
prices on the NYBOT’s CSCE (New York Board of Trade’s Coffee Sugar and
Cocoa Exchange) market. For the past few years, the supply of coffee
world-wide has been superior to demand. In 2002, the production of coffee
was 113 million bags, with consumption at about 106 million bags. This
imbalance was further aggravated with total world stocks of coffee at 40
million bags. So why would
Brazil
be
so keen to increase production?
The
answer lies partly in
Brazil
’s
almost unique ability to harvest its crop mechanically. The low lying
regions of some of the great coffee growing areas in
Brazil
are
more hospitable to mechanized agricultural practices than many of the
other coffee growing regions of the world. In some countries, burros
cannot even be used in helping coffee pickers harvest the crop because the
terrain is just too steep. With a technologically advanced agricultural
base,
Brazil
can
produce coffee much more cost effectively than many other coffee growing
countries.
To
put current prices in perspective, using inflation-adjusted dollars, the
price for coffee on the CSCE has not been this low since the early
1900’s. Once upon a time, the break-even level to which farmers could
count on for coffee stability and equilibrium was about $1.00 US per pound
of green on the CSCE. Current spot prices are about 35% lower than that,
forcing many of the farmers to abandon coffee production as a viable crop.
But even with the reduced prices,
Brazil
is
still able to retain a growth plan with positive returns.
The
Brazilian dependence on coffee is also an issue of misunderstanding.
Coffee is responsible for only 0.3% of Brazilian GDP, in spite of the
sheer volume of export. These days, automotive, aerospace and high tech
are carrying the lion’s share of
Brazil
’s
Gross Domestic Product, with all agricultural output taking up the rear.
As
the downward pressure on coffee prices continues unabated, the
ramifications in the market as a whole mount. Low pricing is driving out
quality producers or forcing them to reduce the level of field husbandry
once employed. This, in turn, leads to a shortage of good quality coffee
on the market, forcing the differentials on quality coffee up
(differentials are the premiums paid for superior quality coffees above
the exchange grade coffees). The structural imbalance in the coffee market
does not mean that it cannot be corrected, however. While
Brazil
may indeed increase its market share, supply and demand will once again
find common ground. This will happen with either an increase in
consumption, a decrease in supply, or a new “normal” price for coffee
in the industry.
Read
more articles by Brian Martell:
Brian Martell Coffee Article
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