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  • QA 234
    Question:
    Will increased production in Colombia affect prices negatively?
    Background:
    We understand that Colombia aims to produce 14 or more mln bags of coffee by 2014. Could this bring about that same collapse in prices as happened at the start of the decade (2001/02)?
    Asked by:
    Exporter - Nicaragua
    Answer:

    The market will welcome increased output from Colombian or any other producer of good quality coffee. Whether prices generally would be affected is difficult to say but differentials for mild arabicas might ease as a result. To explain… *

    1. Colombian production has been around 11 to 12 million bags for many years but fell sharply in 2008/09 to around 9 million bags. Interestingly, whereas New York C Contract prices as such did not react to this, the more or less traditional differential or premium for Colombian coffee over the New York C rose from 2 to 3 cts/lb at the start of 2008 to a peak of about 90 cts/lb in May 2009, falling back again to about 40 to 50 cts/lb currently - end 2009. Replacement buying increased the demand for other mild arabicas (to be used as substitutes) and so the differentials for these coffees rose as well although not to the same extent.

    2. The immediate consequence of such an unexpected price jump for a single origin, in this case 100% Colombian coffee, inevitably leads roasters to re-examine the status of single origin brands. If they maintain production they simply have to pay the going price but if this cost becomes too high then some, if not many, may well reposition such brands as a 'Colombian type' coffee. This then leaves them free to match the taste requirements through the blending of different origins, relieving them of having to rely on just the one origin. This, of course, applies to nearly all single-origin coffees - not just to Colombia. The issue here is that once industry and consumers get used to such a 'XYZ type' product, it may be difficult to regain the single origin status once production returns to normal. If so, and if the suggested increases in production do materialize, then Colombia might have to make price concessions that, in turn, could affect the differentials for other mild arabicas.

    3. Much depends on the development of supply and demand generally, and the availability within certain quality groups. In terms of global availability International Coffee Organization forecasts range from tight conditions to even shortfalls - it is not for us to comment on these but there are two aspects worthy of attention.

    • If the demand for better quality coffee, including specialty coffee, continues to grow then the additional Colombian output will be absorbed by that demand. This would support the differentials for other mild arabicas.
    • On the other hand, if for whatever reason increased Colombian output depresses the differentials for mild arabicas then over time there is a risk of decreasing supply from other mild arabica producing countries. Unless of course global prices generally were to rise, in real terms that is.

    4. The market requires diversity of supply but over time the share of the seven largest producers has grown to around three quarters of all exports, leaving the remaining 38 coffee producing countries to share the rest. This dependency on so few major producers continues to this date and, coupled with the risk of future supply shocks that cannot be foreseen (for example due to extreme weather events), one has to conclude that it is not healthy. It will likely continue the push towards ever more flexibility on the part of mainstream and large specialty roasters alike (80 to 90% of all offtake?) by marketing blends rather than single origin brands.

    * The Coffee Guide does not normally engage in price discussions or forecasts but this question is linked to the availability and diversity of green coffee supplies in general which is why this answer has been published. For more on differentials see topic 01.04.03 of the Coffee Guide.

    Posted 17 December 2009

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