Brazil coffee oversupply to hit PNG/Vanuatu

Global production to exceed demand in 2014

As global supply exceeds demand for coffee for a fourth straight year, small world producers like Papua New Guinea and to lesser extent Vanuatu will feel the pinch of exports dwindling in 2014 in the US$70 billion world market.

The latest twist and turn on the world coffee scene will have a devastating blow on PNG—which though a small player by global standard —has nearly 2.5 million workers employed in the industry at home from roadside stallholders to large corporations relying on rich export revenue.

At the start of 2014, the world coffee futures fell, capping the longest run of annual declines in two decades, on fears of a global glut because of oversupply from the world’s largest producer, Brazil.

Unlike some industry world markets like petroleum fuel, where leading producers form a cartel and restrict supplies to stimulate product price and maintain high returns with limited sales over prolonged periods of time, coffee producing nations have been too busy competing with each other.

Ideal weather late in 2014 in Brazil’s Sao Paulo and Parana states—the two mega coffee producing regions—have helped yield bumper crops raising hopes that the nation’s available exports will hit 49.2 million bags, surpassing the previous estimate of 47.5 million.

“Global production is set to exceed demand for the fourth straight season, pushing inventories to a five-year high,” noted the United States Department of Agriculture early January.

Coffee integral to PNG

After peaking in 1998, when coffee was responsible for 38% of the country’s non-mineral, both production and sales have steadily shrunk in PNG.

The United Nations Conference on Trade and Development (UNCTAD) estimates that after palm oil, coffee is PNG’s second largest export. It is the highest foreign exchange earner for the country, with majority of farms scattered in the Western Highland province.

With the product classified as organic, production in the former Australian colony started in 1926 with Jamaican Blue Mountain coffee.

To-date, the washed mild Arabica highland coffee dominates exports, accounting for 95%. While Arabica is generally turned into espresso, cappuccino and latte in the European Union markets of Germany, France, Italy and Switzerland as well as by American coffee giant, Starbucks, PNG’s robusta brand is of poorer quality and often processed into cheaper instant coffee.

Over the years of soaring and falling export earnings, the coffee industry in PNG thrived in the 1970s as a result of continued frosty weather in Brazil. In between 1995 to 1998, coffee production accounted for 42 percent of total agricultural earnings for PNG.

Agriculture officials in the country estimate that 87,000 hectares is under coffee farming, especially in the Highlands, where upwards of 70 percent of the population are directly dependent on the industry.

PNG’s exports peaked at 1.18 million bags but over the last two years, the numbers fell sharply to around 650,000 bags.

The World Bank in one of its reviews noted that fundamental changes in the world coffee market—hovering around US$70 billion every year—will have major implications for the future of the PNG industry.

While the world market has blossomed from US$30 billion to US$70 billion, the growers’ share of profits have fallen from 40 percent to a mere 10 percent. The over-supply of cheap Robusta coffee from Vietnam and medium-quality Arabica coffee from Brazil has instigated a permanent shift in demand.

“If PNG’s coffee industry is to remain viable in the longer term, it must produce more, better quality coffee. This can be done through a number of mechanisms including grower groups where members are committed to producing higher grade coffee,” the World Bank noted.

The Peter O’Neill government has set an optimistic target of 90,000 tonnes by 2016 —a far cry from 2013 sales of US$140 million in coffee revenue.

Coffee in PNG has over the years surpassed cocoa exports, which last year raked in US$60 million.

PNG’s main markets are Germany, 40%, Australia, 20%, the US 20%, and Japan 9%.

Prices drop 54% since 2010

Global output of coffee, including the robusta variety that accounts for 42% of supply, will surpass demand by 6.04 million bags this year, compared with a surplus of 11.06 million in the previous season.

The USDA predicts that world stocks will reach 36.33 million bags—with each bag weighing 60 kg—the highest since the 2008-09 season.

The good news out of rising world supply is falling costs of large coffee chain outlets like Starbucks in Europe, US, Asia and Australia, and Green Mountain Coffee Roasters. Last year, the price shrank by 23 percent, pointing to a total 54 percent drop since 2010.

Tanna Coffee has world prospects

Fertile soil and favourable unique climate prompted Australian investors to flock to Vanuatu’s Tanna Island for coffee planting in 2011, though estimates of only around 100,000 plants are being picked weekly as of last year.

However, local agriculture officials expect that by 2016, new farming techniques will yield enormous results on the island—inducing production of up to 170 tons per week.

Though the plateau of Tanna Island is only 400 metres above sea— similar to parts of Fiji and that of Townsville in Australia, trade winds and cool nights allow for thriving coffee growing conditions with the assistance of shade from other plants.

“Tanna Coffee can export two or three times more coffee without any problem to foreign markets. It’s ready on the supply side,” said World Trade Organisation Director, Pascal Lamy.

“This is where we (WTO) can help Vanuatu to focus on building more capacity to supply and to produce.”

On a visit to Tanna last year, Lamy suggested that with Vanuatu joining WTO, the country had opened doors to a wide global scene.

“There is potential to grow its exports and benefit from the rules gained on its export market which are fair, transparent and predictable.”

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