Emerging Markets / June 1, 2016

Despite a dip in output, Colombia’s arabica market offers attractive investment opportunities

Changes in weather patterns and a drop in global exchange rates have resulted in a shaky start to the year for Colombia’s arabica crop. The total yield for 2015  is estimated at around 13 million sacks compared to 14.2 million during the same period year previous.

Arabica is at a current price level of USD/kg3.400, down from USD/kg3.616 one year ago, according to data released on Y charts.

Colombia remains the world’s third highest producer of the arabica bean, just behind global leaders Brazil and Vietnam.

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Currently the country’s most popular crop for export, arabica has been hit by a decline in global currencies, notably the rise of the dollar against the Colombian peso cutting the total value of such a precious world commodity.

During 2015, coffee grew by some  4% in volume terms due to  various factors. These included a marked increase in disposable income, in addition to new product developments – such as the Nescafé Dolce Gusto and Nespresso pods by Nestlé de Colombia – in addition to promotional campaigns to increase domestic consumption (the Toma Café Program). Retail value also expanded by 8% in current terms in 2015 as average unit prices rose by 4%, according to figures from the latest Euromonitor sector report.

Output in Colombia, the second-largest producer of arabica beans, has actually been growing for a number of years, reaping the rewards of the regeneration programme.” According to a recent report from ABN Amro in Agrimoney. It’s good news too for the arabica bean, as total exports in the first half of coffee year from 2015 to 2016 are estimated up by 1.6% to 55.5 million bags, showing that the coffee market continues to be well supplied, according to the ICO.

Coffee contributed around 54.1 percent to Colombia’s agricultural GDP, according to a 2015 Dane report. Despite rice leading the sector, according to the Agricultural Society of Colombia (SAC), coffee remains a key export crop and bartering tool during the ongoing peace process. As the global coffee market faces increased competition from newer producers, Indonesia and Kenya, amongst others, this is a crop that remains central to the Colombia’s agricultural success.

Irrigation, or rather lack of it, remains a central issue for Colombia’s coffee growers. A mere 2% of the country’s crops have access to a proper irrigation system. Irrigation was first implemented during the 1990s, with a scheme set up in the Finca, Para Ver, in the Azúcar Buena region on Colombia’s Caribbean coast. However, initial set up costs and the irregular nature of plantation landscapes meant that the scheme failed to roll out across the rest of the country. While small-scale growers rely on the introduction of fruit trees to provide shade and protection for their yearly crop, organic initiatives alone have not been enough to prevent the production of a lower quality yield.

Extreme weather fronts and soaring temperatures have hit Colombia, and most of Latin America, as a direct result of the El Niño climate phenomenon. According to estimates, the extreme weather has damaged 700,000 of the country’s 950,000 hectares of coffee crops.  Prices of Colombian kitchen staples have also seen a marked increase, as a slow down in production and the poor weather has seen pork, chicken and egg prices soar in national supermarkets. Soaring temperatures have hit small-holdings hard, producing a less than satisfactory crop for the export market, with the country’s coffee triangle (Eje Cafetero), south of Tolima, and the Cauca departments amongst the growing regions worst hit.

But growers are much better prepared to take on sister weather front, La Niña. While Colombia’s growers found themselves unprepared for extreme weather conditions in 2010 and 2011, this year head of the Colombian Coffee Growers Federation, Roberto Vélez, commented that the sector “is better prepared to take on the La Niña phenomenon,”

Changes in the workforce have also been linked to a reduction in 2015 yields. The US Department of Agriculture (USDA) bureau commented that the “shortage of agricultural labour and a higher minimum wage have increased production costs for medium and large scale producers,”

“Less farmworkers in the field detrimentally impacts production and control of insect pests, such as the coffee cherry borer,” with infestation levels of the beetle reaching a reported 10% in central growing regions.” The bureau added in its latest report, according to Agrimoney.

Colombia’s Fedecafe blamed a 5% drop in Colombian coffee exports last month on the El Niño weather system, despite a rise in production, on an accumulation in warehouses of lower-quality beans.

With such a variety of factors providing risks for investors in the coffee market, growers and investors alike are considering more heat resistant products to provide new growing potential. Haiti is a prime example of changing in growing patterns. In 2011, mango generated USD$11 million of income for the island. Unlike coffee, vagaries in climate do not threaten mango production. Coffee exports, declined from USD$7 to USD$1 million between 2000 and 2010, as  drastic changes in temperature and rainfall patterns will cause a general reduction in the areas suitable for cultivating coffee in Haiti. Island producers are also considering cocoa, sorghum, or yam as alternatives for a growing export market.

This is also the case in Peru, as the Sierra Exportadora program, in the District Municipality of Tambogrande has announced that it will invest more than 600,000 soles in the mango chain in the region of Piura, Fresh Plaza reports. The goal of the investment is to promote and improve the competitiveness of the fruit’s production chain and to obtain certification by Global GAP good agricultural practices.

Sierra Exportadora’s branch in Piura stated that they had prioritized the mango production chain so as to make it more sustainable. Peru’s San Lorenzo valley, currently has some 1,600.5 hectares devoted to the production of Kent, Keith, and Haden mangoes.

“The idea is to make a significant investment to enable optimal results in terms of productivity through heavy purchasing investments,” Piura stated.

Coconut also provides an attractive alternative to coffee. Brazil, Mexico and El Salvador remain key region exporters of coconut and coconut water for US markets.  The sector has also witnessed exponential growth, whilst valued at USD$450 million in 2011, the sector could be valued at an estimated USD$750 million in 2020. El Salvador’s Tropic Foods, is a key competitor in the US and Canadian markets, to which 95% of its exports are sent. To meet demand from these markets, the company produces an estimated 10,000 coconuts weekly.  

With such a variety of heat resistant products now providing alternatives for investors, could coffee be on the way out?

Despite providing a relatively high risk investment, coffee exports in 2015-16 overall are expected to hit a 22-year high of 12.3m bags – a rise of nearly 200,000 bags year on year, and 70,000 bags above the estimate that the USDA had factored in. Coffee certainly remains a worthy competitor for investors, with higher returns forecast despite the challenges that the market is currently facing.

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