The Hindu Business Line : Coffee producers told to recognise structural changes

THE crisis facing the global coffee sector, particularly producing countries, in the form of price collapse resulting from persistent demand-supply mismatch of the last four to five years is unlikely to be resolved anytime soon. This is until producers understand the characteristics and the nature of structural changes in coffee market and their Governments are more agile in creating favourable business environments to allow them to successfully adapt to the new demands of the marketplace, according to World Bank.

In a report `Coffee markets: New paradigms in global supply and demand,' authors Mr Bryan Lewin, Mr Daniele Giovannucci and Mr Panos Varangis point out that apart from oversupply, there are two types of paradigm shifts underlying the current situation.

The first is the structural change in the nature of supply, particularly the increases in both quantity and quality of Brazilian and Vietnamese coffees; and the other, structural changes in demand, comprising increasing demand for high-end differentiated products, new technology allowing greater flexibility in blending, and geographic-generational shifts in the appeal of different types of coffee products.

Failure to take cognizance of these changes and take remedial measures has meant that a sizeable number of the 20-25 million families — mostly small farmers — in more than 50 developing countries that produce and sell coffee are facing considerable financial and social challenges.

A dramatic decline in the price of coffee to 100-year lows in real terms has left small producers impoverished and defeated. Some of the recommendations made by the World Bank experts include:

In the current situation of liberalized markets and decreasing state support for agriculture, it will become increasingly incumbent upon producer and trade organisations to provide necessary services.

Fostering the necessary research, extension, risk management, diversification, and marketing will all require dedicated long-term programmes to strengthen and train such organisations.

As agriculture increasingly takes on industrial characteristic, these organisations will also need to establish closer relationships and direct linkages with buyers and roasters to respond to market demand and form integrated value chains that help to assure the sustainability of each member.

The authors believe, while long-term historic cycles suggest that an eventual broad alignment of supply and demand would trigger a price recovery, it may not signal an end to the problems of producers because the economic causes of these cycles suggest they are likely to repeat themselves regardless of the actual level at which demand and supply would converge.

"Price recovery then, given the inherently cyclical nature of current coffee market, is likely to be only temporary, while other issues of social, environmental and economic sustainability will remain," the authors said. They added that structural changes in the ability to manage and finance supplies and the reduction of high weather-related risk also lowers the likely frequency with which prices might return to the previously reached highs.

Talking to Business Line, Mr Panos Varangis, lead Economist in the Agriculture and Rural Development of World Bank, said that Governments needs to focus on rural development that will increase competitiveness and reduce dependency on a few primary commodities by broadening the range of products produced by the agriculture sector, improving production and marketing system, and supporting the creation of non-farm activities.

Interestingly, the report says, many countries perceive the commodity trading system to be increasingly onerous and partly responsible for the loss of market value. The dominant trading paradigm of the coffee industry is of pricing set according to the New York or London exchanges.

However, a growing group of producers and coffee firms are pursuing strategies that are independent of commodity pricing and the exchanges. Many of these alternatives include some differentiation of the coffee, usually by either quality or cultivation process.