FEATURE ICO report
THREAT OF A
different kind THE WORLD’S COFFEE SUPPLY HAS BEEN THREATENED BY CLIMATE CHANGE AND LOW PRICES, BUT HOW WILL THE MARKET REACT TO THE SPREAD OF COVID-19 AND THE DECLINE IN COMMERCIAL ACTIVITY? THE INTERNATIONAL COFFEE ORGANIZATION FINDS OUT.
T
he economic sustainability of the coffee sector has been the focus of debate among a large group of coffee stakeholders in the last two years. In September 2018, it was widely called into question when international coffee prices fell to their lowest level since October 2006. Prices have remained subdued, averaging 102.21 US cents per pound since September 2018, 28 per cent lower than the average of the previous 10 years. In response to this prolonged period of low prices, the International Coffee Organization (ICO) has been examining the economic sustainability of the sector through economic analysis to assess the key determinants of low prices and volatility, publishing a new economic flagship publication of the ICO, “Growing for Prosperity: Economic viability as the catalyst for a sustainable coffee sector”. This work was guided by an unprecedented consultation process. It mobilised all coffee public and private stakeholders, NGOs, academia, and development partners that lead to the historic industry-led London Declaration and the call by the ICO Member governments to establish a Coffee Public-Private Task Force with one of the goals to take concrete actions on price levels and volatility. In this context of low prices already threatening the long-term economic health of the coffee industry, the COVID-19 (coronavirus) pandemic provides an additional challenge to the industry, bringing an even greater sense of urgency to the issue of economic sustainability for the sector, from farmers to consumers. By the end of January 2020 when the World Health Organization stated that the coronavirus pandemic was a public health emergency of international concern, much of the harvest for the 201920 crop for October-September producers was nearing completion. Global output in 2019-20 is estimated 1 per cent lower at around 168.9 million 60-kilogram bags, as a result of lower prices as well as Brazil being in the off-year of its biennial Arabica cycle rather than any impact from the coronavirus. Given the more limited supply this year, short-term deficits in the international market are helping to prop up washed Arabica prices, but this may be a temporary phenomenon.
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G C R | M AY /J U N E 2 0 2 0
In the March 2020 interim report of its economic outlook, the Organisation for Economic Co-operation and Development (OECD) adjusted its global growth forecast downwards to 2.4 per cent for 2020 in its baseline scenario. However, it was noted that the situation was rapidly evolving and the potential for a more significant downturn increased as the virus spreads. Coffee farmers around the world were already in a vulnerable situation as some producers were operating at a loss compared to the prevailing low prices. Given their lack of ability to access price risk management tools, such as hedging in the futures market, smallholders are heavily exposed to fluctuating prices. Several producing countries had already observed the negative impact low prices have had not just on future coffee production, but also on broader socio-economic indicators such as income and food security. Given the economic vulnerability already faced by producers because of this prolonged period of low prices, the ICO analysed the longterm relationship between ICO indicator prices and global economic growth using a quantitative
