The consolidation of coffee production threatens more volatility, Sucden warns

21.11.2016

The long-term consolidation of the coffee industry, as unprofitable farms switch to other crops, while farmers in areas with a low cost of production up their output, will leave the coffee market more vulnerable to volatility from weather and pests, Sucden Financial warned.

Sucden warned of a "perfect storm" headed for unprofitable coffee producers, as the raising dollar increases the cost of inputs.

Despite a rise in coffee prices, farmers in regions such as Costa Rica and El Salvador are running at a loss, which will drive a long term concentration of production in lower cost areas of production.

"Costa Rica saw the cost of production increase by 58% to approximately $3,617 a hectare between 2006-07 and 2011-12.

"Farmers have put up with negative profits since 2012 with revenues not sufficient enough to cover increasing production costs," Sucden said.

"Some farmers have started to produce more economically viable products, such as cocoa, with only the more resilient producers able to prevail, resulting in an overall loss of production."

Dollar effect

And the stronger dollar is not delivering the benefits to producers which might be expected.

Sucden noted that "while the strength in the greenback has improved the prospects of exports, growers have seen an increase in costs, which are rising at a faster rate as imports of fertilizers and pesticides become more expensive".

"These rising costs make coffee production in these loss making areas unsustainable."

Weather risk

Sucden warned of the prospect of greater consolidation in the industry, with more production concentrated in fewer areas.

"Persistently low prices may cause production to intensify in areas with advanced systems and favourable cost structure.

This concentration of production would leave supply more dependent on fewer sources, leaving more room for

 "If production is concentrated to these profitable areas we suspect weather events, disease and pests may have a greater impact on global production," Sucden analyst Geordie Wilkes told Agrimoney. "This may lead to increased price volatility."

"Concentration also carries sustainability risks, notably soil degradation, which could see yields in these regions drop over the long run," he said.


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