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  • 1. C a e ges and perspective of the Challenges a d pe spect e o t e Central American coffee sector Bernard Kilian and Lawrence Pratt INCAE/CIMS, INCAE/CIMS Costa Rica Presentation at SCAA Symposium, Atlanta, USA April 15 – 16th, 2009
  • 2. Structure • Price development in the coffee industry p y • Challenges of Central American coffee production – Prices – Costs – Climate change? • Additi Additional production costs l d ti t • Conclusions
  • 3. Prices paid to growers (Arabicas): nominal terms 200 150 Brazil US$ cents/lb 100 Colombia 50 Costa Rica 0 Guatemala 1978 1982 1986 1990 1994 1998 2002 2006 Source: ICO, 2008
  • 4. Prices paid to growers (Arabicas): real terms Producer prices index 2000=100 250 200 Brazil nts/lb 150 Colombia US$ cen 100 Costa Rica Guatemala 50 0 1978 1982 1986 1990 1994 1998 2002 2006 Source: CIMS with data from ICO and OECD, 2008
  • 5. • What is the future of Costa Rican coffee industry? • What is the future of coffee in Central America? A i ?
  • 6. Productivity development of coffee in Central America
  • 7. Productivity development of coffee in Central America
  • 8. Productivity development of coffee in Central America
  • 9. Challenges for Coffee industry • Price • Costs • Cli t Change Climate Ch
  • 10. Coffee prices at NY BOT
  • 11. Coffee prices at NY BOT 2007 - 2009
  • 12. International labor efficiency 50 in ff i coffee production d ti 38 - 47 40 30 20 12 9.4 9.8 10 4.3 - 9.5 3-8 1.3 3.9 - 4.8 0.8 08 0 Labor costs Labor efficiency Labor input costs $/day $ days/100lb $/100lb $ Brazil Vietnam Guatemala Source: Technoserve 2003
  • 13. Increase of production costs between 2006 and 2008 70% 60% 50% 40% Fertilizer Costs 30% Labor Costs L b C t 20% 10% 0% Costa Rica Guatemala El Salvador Nicaragua Honduras Source: Baltodano 2008
  • 14. What are the coffee production costs in Costa Rica? (2005/2006) Farm Gate $/qq Labor L b 21 Inputs 20.3 Harvesting + g transportation 26 Indirect costs 19.6 Farm Gate Sub-Total Sub Total 88 Milling Wet + Dry mill y 10.9 Mill profit 9.2 Milling Sub-Total 20.1 Total production costs 1 Quintal 108.1 Source: Icafé
  • 15. Coffee production costs of a sample of Costa Rican coffee farmers - 2008 180 160 140 120 Cos in $/qq q 100 sts 80 60 40 20 0 0 20 40 60 80 100 Percentile
  • 16. Economic information available for other crops
  • 17. Relationship between Production Costs and Yi ld C d Yield 180 80 160 70 140 60 120 50 Costs in $/qq yield in $/qq 100 40 Costs ($/qq) i 80 Yield (qq/ha) 30 60 20 40 20 10 0 0 0 20 40 60 80 100
  • 18. Relation between Net Income and Production costs 180 5000 160 4000 140 ome in $/ha a 120 3000 Costs in $/qq 100 2000 Costs ($/qq) s Net Inco 80 Net Income ($/ha) 60 1000 40 0 20 0 -1000 0 20 40 60 80 100
  • 19. Effects of a further increase of labor costs 250 200 Cos in $/qq 150 Costs sts +10% 100 +20% +50% 50 0 0 20 40 60 80 100 Percentile
  • 20. Effects of a further increase of labor costs 250 200 Cos in $/qq 150 Costs sts +10% 100 +20% +50% 50 0 0 20 40 60 80 100 Percentile
  • 21. Economic impact of further price increase f l b i for labor 250 200 Costs in $/qq 150 Costs ($/qq) 100 +50% 50 Farmgate price ($/qq) 0 0 20 40 60 80 100 Percentile
  • 22. What about Costa Rican’s production cost i comparison to i neighbors? in i its i hb ? 250 200 150 Costa Ri ($/qq) C t Rica ($/ ) 100 Guatemala ($/qq) 50 0 0 20 40 60 80 100 Percentile
  • 23. Understanding Coffee Economics – Precision Agriculture
  • 24. Distribution of coffee production according the altitude
  • 25. What is not included in “costs”? Investments and Improvements • P i of land Price f l d • Capital investment for improvements • Quality upgrades • Certification – Cert, +…. – Related environmental and social improvements • Irrigation (now or in the future)
  • 26. Land Land investment: Changing or expanding the harvest g g p g area Costa Rica: The current cost of 1 Ha of “clean” land in Dota clean is $13 000. -Assuming payment in one year this is the equivalent of Assuming year, US$433 qq, (or US$4,33 per pound.) -Assuming amortized over 10 years, this is US$43,3/qq or US$0,43 US$0 43 $/lb
  • 27. Certification Certifications investment: Cost varies since it depends of many factors but factors, approximately: -RA certification: $600-700/10 Ha farm -Fairtrade: $1800 per cooperative < 50 members F it d ti b -Organic: $30/ha assuming 50 ha farm But that is only for the audit for certification • envirnomental improvements to comply? • social improvements to comply? • additional recordkeeping
  • 28. Certification Value of Certification • Preference • Price Premium
  • 29. 2006 Sales and Certified Global 3500 3000 2500 ags 2000 ,000 ba 1500 1000 500 Certified 0 Sold As Utz Certified Fair Trade Rainforest Organic SBUX Source: Giovannucci, CIMS, Transfair Utz, R.A.
  • 30. Coffee prices along trade channels in the USA 12 10 8 Price in $/lb $ 6 4 2 0 Farmer Exporter Toaster Consumer Conventional Organic Fairtrade Source: CIMS 2004 and ICO 2004 30
  • 31. To get “X” US$ to the farmer, we will be asking customers to p y g pay….. 6,5 Fairtrade 13,2 13 2 10,0 10 0 Farmer/ Toaster Organic 23,1 Farmer/ Consumer 7,5 Conventional 15,0 0 5 10 15 20 25 Price Ratios
  • 32. Water Wastewater treatment (aguas mieles) -Example: Guatemala-- $14 600 for 162 ha producing 4400 qq green coffee - US$3,32/qq (0,03 per lb) -Example: Colombia-- $515 for 3 Ha producing 90 qq Example: Colombia 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
  • 33. Costa Rica: Coffee farm costs distribution (harvest 2006-2007) 2006 2007)
  • 34. Financing coffee farm costs Annual costs distribution harvest 2006-2007 25% Planting and renovation 20% Pruning Desuckering 15% Pest management Shadow management 10% Weeding g Pesticides 5% Fertilization Harvesting 0% Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Harvest Harvest Harvest Harvest 1 2 3 4 Source: CIMS based on ICAFE data
  • 35. Social Social investment: Social charges for 1 permanent worker in 2008 is approximately $1515 Quality of life investements for permanent and temporary workers? Yield investment The renovation cost (almácigo)of 1 Ha of coffee farm in Costa Rica is $980 (US$32,67/qq)
  • 36. Financing costs: different scenarios 200 7 180 6 160 140 5 US cents/lb 120 US$/Ha 4 100 3 S$ U 80 60 2 40 1 20 0 0 5% 8% 10% 15% 30% Interest rates US$/ Ha US$/qq Source: CIMS, 2008
  • 37. Production costs rise: Oil and fertilizers are closely related C rude oil, natural gas, and nitrogen-based fertilizer prices m ove together P roducer P rice Indexes, 1992=100 300 250 200 N atural gas 150 Nitrogen fertilizer 100 50 Crude oil 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 S ource: P roducer P rice Indexes, U .S . D epartm e nt of Labor, B ureau of Lab or S tatistics. Source: USDA Agricultural p j g projections, 2008 ,
  • 38. Investments (annual) *Land 0,43 **Social charges 0,05 Irrigation 0,05 Financing (15% interest) 0,03 ***Yield (almácigo) 0,02 ****Warehouse 0,02 0 02 *****Certification (Organic) 0,01 ******Waste water 0,01 0,00 0,10 0,20 0,30 0,40 0,50 US$/lb *Amortization during 10 years Amortization **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 Source: CIMS 2008 S CIMS,
  • 39. Key Findings • There is no “magic number” on costs or price • Evidence of an unsustainable future –EEconomic i – Social – Environmental • Dramatic under-investment (by default) • Key step has to be on-farm income
  • 40. Three “Frontiers” • Price issues - important b t not determinant important, but • Cost issues and Productivity – Productivity • Value Chain – Price premium (consumer backward) is extremely inefficient in passing benefit.