Coffee prices have plunged.

Coffee on the ropes

The coffee crisis is compounding the effects of the devastating drought in Central America and foreshadows a harsh restructuring of the sector

For years, coffee has been the mainstay of much of the rural population in Central America. Every season, from October to April, hundreds of thousands of day laborers earn their daily bread working on the coffee plantations.

This year will be very different. Plummeting coffee prices on the international market are forcing growers to leave the beans on the trees because prices are lower than the cost of production. Jobless coffee pickers are wandering around in a daze, with no other options and no money in their pockets to feed their families.

“This is not a temporary crisis, this is a structural crisis,” says Juan Carlos Martínez, senior economist for Regional Operations Department 2 in the IDB. “The situation stems from a combination of factors. For one, coffee production was introduced in Vietnam, which is now the second largest producer in the world. Moreover, over the past 10 years, coffee consumption has dropped by half, stocks have increased considerably, and average coffee quality has declined.”

The crisis has been building for some time. Until 10 years ago, the Association of Coffee Producing Countries (ACPC) regulated coffee production worldwide by establishing quotas. After the agreement broke up, the market was regulated by government intervention in the form of domestic policies on pricing and production. In many cases, however, these practices had an adverse impact on small producers, who represent the majority in the sector.

“To address the crisis, the market constraints have now been eliminated, but measures need to be taken to restructure the sector in the short and long terms,” explains Martínez. “The first step is to mitigate the impact of the crisis on the poor. Governments will have to seek alternative sources of employment and income for the thousands of workers who are in the streets. In some cases, small loans are being granted per unit produced so that the growers can meet their most pressing obligations.”

In the medium and long terms, other options will have to be devised. According to the experts, these may include transition of the coffee sector to lower volume production of higher-quality beans, crop diversification, and the promotion of coffee consumption.

“Incentive systems will have to be set up for each of these options,” says Martínez. “The IDB is conducting a study of the crisis. In October, a meeting was held with the Central American governments at the IDB in Washington D.C., to discuss the matter.”

During the coffee boom, certain parts of Central America were able to reduce the poverty level to as little as 5 percent of the population. Now there is fear that the current situation will have the opposite effect. Last summer’s drought only compounded the coffee problem. According to Emilio Alarcón, representative of the United Nations Food and Agriculture Organization (FAO) at the meeting, the situation is critical, since the loss of income for the coffee pickers will leave many of them unable to afford food.