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ANALYSIS: International Coffee Organization loses key member - might others follow?

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Covid-19 has facilitated many crises, including in the coffee world. One upheaval, which probably will reverberate yet wider, is Guatemala’s decision to leave the International Coffee Organization (ICO).

 

As the world went into lockdown and cafes and restaurants were forced to shut, more people brewed their coffee at home, using instant (soluble) coffee, usually made from robusta beans.

 

In 2018, out-of-home coffee consumption was about a quarter of total global coffee consumption; sales of coffee consumed in this way grew by 3.8% a year during 2016-18; and 1.6m tonnes of coffee was used that way - mostly in Europe and north America.

 

Guatemala is, in global terms, a small but important producer of fine, highly-prized arabica coffee.

 

In May, the US Department of Agriculture reported that for the October 2019-September 2020 marketing year Guatemala probably produced 3.67m 60-kilo bags, of which all but 250,000 bags will be exported, mainly to the US, Japan and Canada.

 

The USDA’s forecast for the 2020-21 year is that the country’s production will drop marginally, to 3.65m bags, with 3.41m bags available to export.

 

Coffee tiff

 

According to a Guatemalan government statement, the ICO "has not helped to adequately address the international pricing crisis faced by producer countries."

 

International prices have fallen so low, the statement went on, that in many cases they do not even cover the costs of production, instead "generating losses that have severely affected living conditions for producer families".

 

That is no doubt true. The USDA pointed out in its May 2020 report that many small farmers in Guatemala (96.8% of producers) "produce at a loss, with production costs between $190-230" per 60-kg bag, while international prices in the 2019 marketing year were as much as $60 per bag lower than that.

 

Ricardo Arenas, head Anacafe, Guatemala’s coffee association, said the ICO had "lost its way" and needs to be "restructured."

 

Honduras, another key central American producer of high-grade arabicas, is also unhappy with low prices. A board member of the Honduran national coffee institute, IHCAFE, reportedly said that in the "price crisis that has hit us so deeply over several year, the ICO has been blind, deaf and dumb."

 

But the ICO, unlike Opec (the Organisation of Petroleum Exporting Countries, which tries to control crude oil supply) has no power to control the supply of its 44 coffee producing member-states.

 

The International Coffee Agreement (ICA), which had since 1962 established and agreed coffee export quotas in an effort to stabilise prices, collapsed in 1989, largely because Brazil refused to reduce its quota.

 

The executive director of the ICO, Jose Sette, started his career with Brazil’s Coffee Institute, the government regulator of the Brazilian coffee sector.

 

No easy way out

 

Periodic droughts, migrant labour shortages, low prices - central America’s arabica coffee producers are under the cudgel right now. Honduran coffee exports in June were down almost a third compared to the same month last year.

 

Mr Sette has pointed out that for the past four years coffee prices have been 30% lower than the average of the last 10 years. Back in 2011 the front month arabica future in New York briefly threatened to breach $3 per pound, almost three times today’s level.

 

It’s not clear what can be done to help prices to rise to profitable levels for specialist producers like Guatemala or Honduras.

 

Export restriction schemes are not in favour in our (currently) free-market world. Rock-bottom prices - if they persist much longer - will eventually squeeze the life out of gourmet coffee origins.

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