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Fishing, cocoa offer solutions to 'dangerously low' coffee profits

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Fishing and cocoa industries could help the coffee sector resolve the problem of "dangerously low" profits for farmers, seen as threatening the industry's potential to meet continued growth in demand.

Softness in coffee prices, which have spent most of the last 18 months below the 10-year average of some 140 cents a pound as measured by an International Coffee Organization index, has heightened "concerns about the economic viability of coffee production", the organisation said.

Indeed, taking account of inflation, coffee prices started this year only 2.8% higher than at the turn of the century, the ICO said in research presented to its annual forum, warning over the squeeze this has placed on growers facing stronger rises in costs of inputs such as labour, fertilizers and machinery.

Research into four countries showed that farmers in Colombia achieved "low operating profits… in most seasons", while those in Costa Rica and El Salvador had suffered for consecutive years of losses, although Brazilian growers enjoyed "consistently positive" results.

The margin pressure was "putting the livelihoods of coffee producers at risk", the ICO told the forum, where delegates warned that "coffee farmers face dangerously low profits", and restated forecasts of coffee demand rising to some 200m by 2030, from 152m bags last year.

Cocoa model

Indeed, Edgar Cordero, senior advisor on global strategy at the Colombian coffee growers' federation, Fedecafe, said that bean producers contrasted the $15bn that farmers receive from selling coffee with the $200bn value of the world retail market, according to ICO data for 2014.

Annual growth in coffee output costs, per hectare, in selected countries, 2006-15

Brazil: 8.49%

Costa Rica: 5.88%

Colombia: 5.54%

El Salvador: 2.76%

Average coffee price growth, per year: 1.45%

Coffee price growth measured by ICO composite indicator

The way to resolve the issue could be to turn to the model of the cocoa industry, where processors stump a voluntary levy, aimed at supporting growers, on what he said was the equivalent of 75% of global demand, and paid on prices up to a threshold level.

"It is a sustainability premium that goes back to the producer," which in the cocoa industry too are often poor smallholder growers.

Cocoa processors including Barry Callebaut, Cargill, Lindt Sprungli and Olam International have schemes in place to support "sustainable" production.

Fishing for help

The fishing industry could also provide a model for supporting farmers, and the introduction of transferable production quotas, which many jurisdictions have used as a method to control trawler catches and protect fish stocks.

Such a system guards against overproduction, and offers a mechanism for compensation for those wishing to quit the industry, by selling their allowance.

"You could have quotas, much like in fishing, which a boat owner can use to fish, or sell on to another competitor," Mr Cordero said.

Meanwhile, Rodrigo Correa da Costa, director commodities at SG Americas Securities, flagged the potential for selling coffee "like craft beer", with specialist shops selling beans from specific producers, and potentially securing exclusive supply deals.

While this would imply a sector charging more, "perhaps $7" for a cup, "consumer marketing is telling us more and more they are willing to accept that", as long as the coffee is of high quality, he said.

Clearing house

The forum also heard from a number of speakers of the desire for long-term contracts between coffee roasters and producers, aimed at providing growers with stable income, and priced at a level which offered a decent livelihood.

The problem with this model was the potential dent to competitive advantage from roasters paying extra for their coffee – and the risk of producers pulling out of the deal, and selling coffee elsewhere, if prices soared above the contract level.

One solution to this might be a clearing house, "owned by a number of people", which would oversee physical deals, said Nicolas Tamari, the chief executive of Swiss-based coffee trader Sucafina, underlining the need to improve growers' finances.

"I paid $4-5 for an express on my way here. For an East African coffee grower, in somewhere like Burundi, $5 would pay for a grower's medical insurance for a whole year."

By Mike Verdin

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