This Week in Coffee, Edition 3

Coffee seedlings growing in a hillside ‘almacigo’

Pride

Monday I picked coffee. The men working on the house on the property I was picking on were eager to see how much I picked in my 4 hours of work. I didn’t even clear 2 cajuelas. For anyone who’s worked as a coffee picker, the only measurement that matters is cajuelas. How many cajuelas one can pick in a day is a big source of pride and bragging rights. No one lies because everyone can tell. It’s like talking to runners about their best mile time. Everyone has their PR’s. But in this case PR corresponds to money earned. Imagine getting paid more if you bettered your mile splits in all those charity 5ks.

Heritage

Tuesday I picked coffee on a different farm. The man who planted the 4 hectares of coffee on this farm had to sell his property years ago. Coffee and other crops weren’t paying him enough to support his family. He sold his land to a German, who then sold it to another foreigner. He asked the current owner if he could work for him and has since returned to the land that was originally his as a farm manager. The coffee he’s picking comes from trees he planted 25 years ago, when he owned the property.  Nearly every year since he’s pruned and cared for the plants one by one. The harvest is his legacy; the coffee cherries fruits of a lifetime of labor. His heritage goes for roughly $120 a fanega at the nearest beneficio.

Industry

“Louis Dreyfus Commodities is the 3rd largest green coffee merchandiser worldwide, [with its current head offices in The Netherlands].

LDCommodities ranks amongst the largest green coffee merchandisers worldwide with annual traded volume of 8.5 million 60-kgs bags.”

Louis Dreyfun Commodities group Long-Term Growth Statement:

“Today agribusiness enjoys positive long-term prospects, driven by:

  • the increase in world population to 9 billion by 2050
  • increased urbanization leading to new consumption behaviors: per capita consumption of agricultural products will increase

Trade in agricultural products will increase, as the imbalance between regions of supply and regions of demand is expected to widen. Latin America and South-East Asia are major exporters, with demand mainly from Asia and, in the longer-term, Africa.

LDCommodities’ strategic geographic coverage allows it to fully benefit from international trade:

  • Origination and processing activities in major producing countries
  • Efficient network of marketing and distribution in key importing countries”

Risk

On Wednesday the local beneficio (coffee “mill” or “processing plant” for those of you who are just joining us) was paying farmers 68,000 colones a fanega (a volumetric unit that translates to roughly 240 kilos of coffee cherries). Farmers can hand in their daily harvest at that daily cash price, but they also have the option of taking an “advance” of 40,000 colones per fanega and waiting to get the rest of their payment later.

Growing coffee means tossing the dice to nature; selling harvested coffee to the beneficio means gambling with the international market. If farmers take the advance, they have to wait until the beneficio has moved processed coffee until they’re paid the difference. Beneficios are legally obligated to pay out the difference of this final sale price at least by the end of the coffee fiscal year, September 30. If farmers take the advance, then they risk that the final sale price will slide below whatever the daily “full payout” cash price is around the time of harvest. If they take the daily cash price, they risk that the market price will rise significantly by the time of final liquidation and they’ll then miss out on the difference.

The advance price covers just enough to pay pickers and maybe buy a little fertilizer. Who knows if the difference of the final sale price- or the daily cash price- will generate enough income to sustain the family and the farm for an entire year.

How does Louis Dreyfus Commodities manage risk?

“As LDCommodities expands, it enters new geographical markets and sources from and supplies to new counterparties; every day, the Group is confronted with a diverse array of risks. The Group’s comprehensive approach to risk management is an invaluable component and a competitive advantage in ensuring success today and into the future.

Managing risk requires rigor, the ability to adapt rapidly to change and total integration within our strategic and operational executive instances.

Market risk categories include exposure to volatility, prices, time, geographies, quality and inter- and intra-commodity spreads.

To reduce price risk resulting from market fluctuations, the Group uses a range of instruments including exchange-traded futures and options contracts. Where there are clear opportunities due to temporary market imbalances, LDCommodities may retain some limited flat price risk.”

Uncertainty

Friday I met with a 31 year old farmer. He’s a farmer in the sense that he’s spent his life working his family’s land growing coffee. But by current employment he’s a construction worker who helps gringos build their sprawling dream homes. Coffee wasn’t earning his father a living, so his dad went to work as a high school teacher. He went to work in construction. His two sisters also got salaried jobs.

Growing coffee is a full time job if ever there was one, but the pay comes only during the harvest months. For all the work farmers put in during the year, if harvest time is accompanied by excessively heavy rain, a large percentage of the ripe fruit can get knocked off the tree. When farming coffee you just never know what’s coming. This uncertainty translates into an uncertainty of whether or not there will be enough money for food, basic home maintenance and school supplies. This farmer told me that farming coffee has never been a stable source of income. But for all the hard work, he still loves it. He said he would hands down farm coffee as his only “full time” job if there were any chance that it would be profitable enough to support his family.

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