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  • QA 161
    Question:
    Will significant price rises trigger increased production? If so, will that come from already established producers or will new producers enter the market as well?
    Background:
    We are told that if coffee prices rise significantly then production will rise as well. But where will this increased production come from, i.e. will it be from traditional production areas or, should we expect new producers to enter the market?
    Asked by:
    Researcher - Kenya
    Answer:

    Significant price rises have in the past always triggered increased production and we believe this will also be the case in future. In fact, the Executive Director of the International Coffee Organizations (ICO - www.ico.org) has recently (July 2007) warned against exactly this possibility.

    Past experience shows that whenever growers believe that prices justify the investment they will improve productivity. Through application of higher inputs; through better crop protection regimes and harvesting techniques; as well as denser plantings, the latter often coupled with the introduction of new high-yielding varieties. This ensures that established growers harvest more but, for many further potential is limited.

    Of course times have changed and new factors have come into play. For example, Brazil now consumes over 16 million bags of coffee a year, meaning that a substantial part of its huge production is no longer available for export. On the other hand, Vietnam hardly featured in the 1980's but the country produced almost exactly that same amount of close to 16 million bags in 2006/07.

    In our view Asia offers most scope for new production in that huge potential remains untapped. Vietnam has shown that a methodical approach to coffee growing can yield impressive results, certainly in terms of tonnage. There are countries with comparable but as yet unrealised potential in the region: Cambodia, Malaysia, Myanmar, Thailand and, of course, China…. To note though that new plantings present a different dilemma in that new coffee trees take three to four years to start generating sizeable crops. During this time the price outlook could change again…

    To answer your question more directly, even though the Coffee Guide is not in the business of forecasting events in the coffee world…

    • A sustained period of reasonable prices will revitalise existing producers and some will expand. In fact, whereas no doubt the bulk of recent increases in production have been as a result of new areas coming into production, taken globally we wonder if actual increases in acreage alone can account for all the growth that has brought world production to present levels. Indeed, as new areas have come into production so old areas have gone out of production and it is possible therefore (but we cannot be sure) that the impact of improved productivity has been as important as that of new plantings.
    • If prices were to rise substantially then new producers will appear, quite likely in Asia. The danger is of course that this will generate a new boom and bust scenario, something coffee has been known for.
    • Furthermore, some of these new producers are likely to be low-cost. As such they will compete strongly, possibly leading to further loss of market share by some producing countries, especially those with smaller and less well organised coffee industries.

    In this respect it is worth mentioning that already, between them, Brazil, Colombia and Vietnam now account for well over half of world coffee exports, leaving the remaining 45% or so be shared by a further 47 coffee exporting countries. Quite a few of these are in actual fact fairly marginal in terms of additional production potential. Some are more or less at the limit of the area they can afford to plant to coffee, whereas in others climate change coupled with population pressure may even be starting to marginalize certain areas now under coffee.


    Posted 15 August 2007

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