COFFEE CONCERN:An Uncertain Future

Robério Oliveira Silva took up his post as the executive director of the International Coffee Organization (ICO) on November 1, 2011. After graduating in economics from the Federal University of Minas Gerais in Brazil, Silva got into – the field of commodities, particularly coffee. Silva’s rich profile in both the public and the private sectors entails many high-level posts, including director of the Coffee Department in the Brazilian Ministry of Agriculture, Livestock & Food Supply; commodities secretary at the Brazilian Ministry of Development, Industry and Foreign Trade; executive secretary of the Brazilian Chamber of Foreign Trade (CAMEX) and secretary general of the Brazilian Federation of Coffee Exporters (BFCE). Fluent in English and Spanish, Silva has vast international experience in Europe, dealing with leading consumer goods industries. He is also known for skills in consensus building among international players with diverging interests with a view to formulating and executing action plans. During his two-day stay in Addis Abeba, with the purpose of attending the Second International Ethiopian Coffee Conference, which was held at the Sheraton Addis, Silva sits with BINYAM ALEMAYEHU, EDITOR-IN-CHIEF, to discuss the future of global coffee prices and what coffee exporting countries need to do to withstand price volatility.

FORTUNE: The international market has continued to witness a sustained downward trend in coffee prices for nearly two and a half years now. If we look at figures from July 2012 with the ICO composite price indicator, there was a recorded 33pc drop in August 2013. Thus, a kilogramme of coffee traded at 2.6 dollars, as opposed to the 3.6 dollars a year ago. A major reason why developing countries are unable to benefit from trade is their lack of capacity to produce and market. Will this change any time soon?

Roberio Silva: We have a continued growth in the traditional markets at a rate of one percent a year. In emerging countries, we have a rise in demand of about three to five percent a year.

We are seeing this drop in prices against an expectation of a certain surplus in production. It is just the expectation that makes the market come to this level.

But I do not believe this situation will continue for long. That is because we have a structural question.

There is a continued growth in demand. You have demand, which is a constant in the market. We do not see this trend sustaining in the coffee market for too long.

In the past, coffee growers were often isolated in remote regions and had little access to market information on the value of their product. Some unethical buyers might offer only very low prices, taking advantage of farmers’ lack of information.

Today, however, coffee producing countries, in many cases, have a keener understanding of how to negotiate with foreign distributors in order to get the best price for each pound. In addition, the growing demand for very high quality coffee has led to a tremendous increase in the number of buyers travelling to more remote regions to ensure the supply they require.

The capacity problems facing these countries cannot be solved immediately, of course. We need to install transparency in business dealings.

Regulations require a great amount of record keeping to ensure that individual farmers have access to all information pertaining to the cooperative’s sales and farming practices. This will enable them to make more informed business and agricultural decisions.

Q: Do the developing countries have any mechanism to compensate for their losses in the market?

No, unfortunately not. These are the nations that make up the surplus consumed by the developed nations, but they suffer the most.

These countries are exporting greater volumes of coffee. In the case of Ethiopia, for instance, we had an increased volume compared to last year, but a decreased revenue.

We should rather pin our hopes on the fact that prices will recover at a certain point. In two years time, we expect to see a very different market situation.

Q: But what will bring that different situation closer?

What will cause it is the realisation that there is not much coffee in the world. Lack of supply will come to the minds of the industry.

I am not denying the fact that the world has enough coffee. We have a production of about 145 million bags for 2013/14 against a consumption of 142 million bags. So there is a surplus of three million bags only.

This surplus is bound to continue in the next year. But every year we need four million bags more. The high global priority once given to attaining reasonable and stable prices should be restored.

Q: Even if intermediaries are important in agricultural trade, their margin seems to reduce the benefits trickling down to farmers or producers. What fits best to this equation?

What fits best is what I call farmer aggregation. More and more the farmers have to get together in cooperatives.

They also have to count on the support of governments. More needs to be done in terms of forming associations in order to avoid middlemen. That way the situation could gradually change.

Q: But farmers are one layer down from the cooperatives. Instead of farmers, it is the cooperatives that benefit.

But I would say it should not be that. Forming associations and cooperatives is a necessity.

They are essential if the farmer is to get benefit. Eventually, the farmer will get the benefit.

I can take the case of my country, Brazil. The farmers organised themselves in co-ops. Thus, now they are getting the benefits of aggregation.

Q: There is a new trend of establishing commodity exchanges as a means of price discovery. Yet there still remain gaps between floor prices and international prices. Can exchanges have a crucial role in the whole matrix?

What is necessary is to develop the exchange better. There are obviously price discovery mechanisms that are different from country to country. It is important that the exchange gets the approval of all participants in the market, in order to arrive at the correct price discovery mechanism.

The Ethiopian Commodity Exchange (ECX), for instance, has evolved well. The price variation is a challenge, but with the ECX providing a formal stage where actors can buy and sell commodities, the mechanism for dealing with the challenge will emerge.

Q: Tariff and non-tariff barriers continue to hinder effective international coffee trade. What ought to be done to change this situation?

This is a major problem faced by coffee producing countries. There is this question of tariff escalation in the developed world.

This is something that could be worked through international negotiations under the World Trade Organisation (WTO). That is something that the developed nations try to do. This is something that should be done by the negotiators in Geneva.

Q: But the developing countries have less leverage in multilateral negotiation frameworks.

Negotiation skills gradually develop. They are crucial. We are talking about the diplomatic skills for which Ethiopia is known.

This is going to be reflected in the negotiations in Geneva, Switzerland. We do not have any doubts about this. I am sure that the developing countries will be united around agendas they share. That gives them better space and more leverage.

Q: Developing countries also face problems in accessing finance. Those countries with open financial systems can better access trade finance. What mechanisms could be used to compensate for the disadvantage on that side?

Trade financing is indeed a challenge. We recommend the opening up of the economy. These countries could then negotiate in the international arena, be willing to make some service offers and help the economy become more competitive.

At conferences like this, they show to other countries what opportunities lay in their markets to do businesses. I think it is important.

Q: Ethiopia’s export revenue from coffee has fallen by 10.4pc to 746.4 million dollars last year. This is despite the volume of export increasing by 17.7pc. What can Ethiopian policymakers get out of this conference?

This conference has, first of all, contributed to sharing knowledge on the situation of the countries and the international arena. With this knowledge, countries could improve the conditions to negotiate better for their coffee. This is going to happen when you get together in the international arena.

It points to the fact that we should give attention to quantity, in order to elevate the foreign currency gained from coffee. The conference has discussed the global coffee condition, benefits and problems observed in the production process of Ethiopian coffee, as well as ways to increase income gained from the sector. It created a chance for Ethiopian exporters to network for increased access to the international market.

Additionally, Ethiopia will gain visibility in its bid to host the Fourth World Coffee Conference in 2015, for which it has already applied.

Q: The Ethiopian Coffee Exporters Association (ECEA) pushed for your attendance, knowing well that your presence as the top official of the ICO will lend credibility to the budding conference, helping it to attract foreign participants.

Indeed. And it is a pleasure on my part to use my position to help the Association get more credibility in its worthwhile cause.

It is indeed a pride on my part to help these people who have toiled for their cause. In fact, this will just be my first trip. I hope to come back, not for just credibility, but to enhance their visibility as well.

Published on November 10, 2013 [ Vol 14 ,No 706]



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