Colombia has a big problem in coffee supply due to diseconomies of scale (increasing average cost per ton of production). These diseconomies of scale come from the International Coffee Agreement broke down in 1989 that put the end to quotas and subsides which favored to Colombia; cocaine production and internally war conflict that bring internally displaced people that let less farmers for growing coffee; and old crops and old technology for growing coffee that pull up the average cost per ton. Government spends lot of resources to increase coffee supply, for example through government program called Stability Agreements for Coffee 2010-2015 where the spending was US$4.6 million at least in 2011and lot of credits through public banks and private banks, for instance Finagro, a government body, gave 11.057 credits evaluated in US$20.2 million at least in 2011. These public resources are welcome but they must be well target, it means Colombia must bring economies of scale to coffee supply to be competitive trough Free Trade Agreements. The other way around Colombia will carry on with a decreasing supply and missing world market. Colombia has to work hard in learning about coffee production through research and development, reducing displaced people that reached 102.9 thousands people in 2011 and through Land Law (Ley de Tierras) that gave almost million of hectares to displaced people between 2011 and 2012, this land has to come with agro-projects as coffee production. This weekly note shows these three facts that bring diseconomies of scale to coffee market, these facts are where privates and government should work on to recover the competitiveness. However a point in favor to this market is an inelastic demand of coffee evaluated in 0.16, fact that suppliers have to exploit.
Author: Humberto Bernal,
Economist,
e-mail: zhumber@gmail.com
It can be download @ PDF
Colombia has showed difficulties in her coffee market in the last 20 years as figure 1 shows. Since 1991 Colombia reduced is volume of production due to three facts: The end of quotas and subsides in 1989 through International Coffee Agreement broke down; cocaine production and war conflict that brings internally displaced persons; and old crops and old technology to produce coffee. The end of quotas and subsides brought lower prices letting lower incomes to International Trading Firms and lower incomes to farmers. Nowadays (2011) Colombia has 58 International Trading Firms where Federación Nacional de Cafeteros shared with 21.9% of total volume exported in 2011; Louis Dreyfus Commodities Colombia Ltda shared with 10.9%; and Racafe y Cia shared with 9.6%. The first 10 International Trading Firms shared 81.8% of total volume exported in 2011. These firms do business with BB Coffee Company, Starbucks Coffee, Coca-Cola and many others. There were 553.5 thousands of farmers who grew coffee in Colombia in 2010-2011, this volume of people has not showed huge changes since 1991, therefore this sector is important to keep working farmers. By 2011 this volume of coffee farmers shared with 15.6% of total farmers employed in Colombia and 2.6% of total workers in Colombia. The end of this international agreement hurt in deep coffee’s supply chain but brought competition and fair prices around World. Colombians has to fit in these new environment through better technologies and fair charges from International trading Firms.
Colombia has showed difficulties in her coffee market in the last 20 years as figure 1 shows. Since 1991 Colombia reduced is volume of production due to three facts: The end of quotas and subsides in 1989 through International Coffee Agreement broke down; cocaine production and war conflict that brings internally displaced persons; and old crops and old technology to produce coffee. The end of quotas and subsides brought lower prices letting lower incomes to International Trading Firms and lower incomes to farmers. Nowadays (2011) Colombia has 58 International Trading Firms where Federación Nacional de Cafeteros shared with 21.9% of total volume exported in 2011; Louis Dreyfus Commodities Colombia Ltda shared with 10.9%; and Racafe y Cia shared with 9.6%. The first 10 International Trading Firms shared 81.8% of total volume exported in 2011. These firms do business with BB Coffee Company, Starbucks Coffee, Coca-Cola and many others. There were 553.5 thousands of farmers who grew coffee in Colombia in 2010-2011, this volume of people has not showed huge changes since 1991, therefore this sector is important to keep working farmers. By 2011 this volume of coffee farmers shared with 15.6% of total farmers employed in Colombia and 2.6% of total workers in Colombia. The end of this international agreement hurt in deep coffee’s supply chain but brought competition and fair prices around World. Colombians has to fit in these new environment through better technologies and fair charges from International trading Firms.
Figure 1. Coffee production 1960-2010
(thousand of tons)
Source: National Bureau of Statistics (Agronet) and FAO.
Internally displaced people in Colombia was 121,335 at least in 1999 and 102,956 at least in 2011. The total internally displaced people are 3.9 millions at least until 2011. These displacement is due to internal war conflict. Colombia is on the top violent countries around the world with a homicide rate of 31 per 100,000 inhabitants in 2011, 305 kidnappings in 2011 and 84 attacks against crude oil pipelines in 2011. Cocaine production showed a decline trend since Plan Colombia started in 1996 (USA money transfers to reduce cocaine production) this plan transferred huge resources in 1999 and 2000 with a total of US$1.2 billon in these both years and total of US$7.2 billion between 1996 and 2012. Cocaine production used 63,762 hectares to grow cocaine in 2011. Unfortunately these statistics push down the coffee production, for instance from displaced people approximately 60.0% come from main regions where coffee is grown. Antioquia is one of the main regions that produces coffee as figure 2 shows, she shared with 15.0% of total land taken for coffee production in 2010, however this region faced 22,615 displaced people in 2010 and 18,612 in 2011 and there is an important land that is taken to grow cocaine, as figure 2 shows, Antioquia shared with 8.7% of total land taken for cocaine production in 2010. Antioquia is not the only one that faces this problem, other regions which were the most important in coffee production in 80’s face same situation. For instance, Cauca shared 7.4% of total land taken for coffee production but shared 9.6% of total land taken for cocaine production. Nariño, Norte de Santander, Cundinamarca and Valle del Cauca are regions in similar situation. Regions that are in the margin with strong probability to face coffee production problem are Huila with at least 3,125 displaced people in 2011, Tolima with 4,431 displaced people and Caldas with 114 displaced people.
Figure 2. Land for growing cocaine and coffee in Colombia by main coffee regions in 2010
(% of total land taken to grow cocaine and coffee)
Total land for growing coffee in 2010: 744,161 hectares.
Source: National Bureau of Statistics (Agronet) Coca survey 2011 United Nations.
This coffee problem is a national problem due to displaced people who migrate from legal activities as coffee production to illegal activities as cocaine production, moreover due to Law of Free Marker (the end of International Agreement highlighted above), Free Trade Agreements signed recently and Europe crisis (mainly in Spain due to colombians relatives’ money transfer) facts that will bring more unemployment to Colombia from coffee market. The main coffee regions which can bring unemployment are Antioquia that showed a unemployment rate of 10.4% in 2011, Caldas with 11.8%, Cauca with 11.3%, Huila with 7.9%, Quindio with 17.7%, Risaralda with 14.8% and Tolima with 17.2%.
Diseconomies of scale are those economic activities that face exponential cost as volume of production is increased, in other words the average cost (average cost per unit of production, in this case per ton of coffee) is increasing. Unfortunately this type of technologies bring high market price and it is difficult to be competitive in international markets. Coffee production in Colombia faces this technology of diseconomies of scale as table 1 shows. This table was build with information from 20 regions from Colombia that grow coffee. It shows that the technological coefficients from land and employees (red numbers) sum 1.0 or less under statistical hypothesis. It means, if more labor or/and land are added to increase production, the coffee activity will face a higher cost per thousand of ton of coffee produced, therefore coffee market is not competitive in international market. Moreover, this table shows that land taken for cocaine production push down or decline coffee production in 0.035% if land for cocaine production increase in 1.0%. This results are statistically significants.
Table 1. Diseconomies of scale for 20 regions which grow coffee in Colombia 2007 to 2010
(Model type: Panel Random Effects. Data in natural logarithms)
Technology for production
Ln [Volume]
|
Model with cocaine
|
|
Ln [Land in hectares]
|
0.892****
(0.080)
|
0.839****
(0.081)
|
Ln [Number of employees]
|
0.168***
(0.085)
|
0.215***
(0.084)
|
Ln [Land used in cocaine in hectares]
|
-0.035***
(0.016)
|
|
Constant
|
-0.608*
(0.375)
|
-0.356*
(0.373)
|
R2
|
0.97
|
0.97
|
Observations
|
79
|
79
|
**** P-value < 0.01; ***P-value < 0.05. (...) standard deviation.
Source: Own calculations. Stata 12.1.
A factor in favour of coffee market is its elastic of supply and its inelastic of demand. The first case, it means as price increase, then coffee supply will increase more than price does in percentage terms. The elasticity of supply for coffee in Colombia is estimated in 2.32, it means as price increases in 1.0%, then coffee supply will increase in 2.32%. Moreover, there are other factors that pull up coffee supply as exchange rate does, in this case as exchange rate increases (colombia currency devaluation) in 1.0% coffee supply will increase in 0.22%. Finally, crude oil price pushes coffee supply down, in this case as crude oil price (WTI) increases in 1.0%, then coffee supply will face a reduction of 0.93% as table 2 shows.
A inelastic demand means as price increases, then people do not decline their demand too much. Coffee demand elasticity in Colombia is estimated in 0.16 as table 2 shows. This elasticity can be read as price increases in 1.0% coffee demand will face a decline in 0.16%, this decline is tiny and it is wanted by suppliers due to external shocks which pull up coffee price, it will not push down coffee demand in huge volume that takes suppliers out of market. There are other factors that increase coffee demand, for instance if World GDP increases in 1.0%, then colombian coffee demand will increase in 1.19%. Local coffee price will reduce coffee demand in 0.24% as it increases in 1.0%. The variable called Dummy 1976 shows the effectiveness of decisions from suppliers and government to improve local coffee productivity in 1976, this decisions started in 1970 and they showed results since 1976 to 1990, nowadays the problem pops up again.
A inelastic demand means as price increases, then people do not decline their demand too much. Coffee demand elasticity in Colombia is estimated in 0.16 as table 2 shows. This elasticity can be read as price increases in 1.0% coffee demand will face a decline in 0.16%, this decline is tiny and it is wanted by suppliers due to external shocks which pull up coffee price, it will not push down coffee demand in huge volume that takes suppliers out of market. There are other factors that increase coffee demand, for instance if World GDP increases in 1.0%, then colombian coffee demand will increase in 1.19%. Local coffee price will reduce coffee demand in 0.24% as it increases in 1.0%. The variable called Dummy 1976 shows the effectiveness of decisions from suppliers and government to improve local coffee productivity in 1976, this decisions started in 1970 and they showed results since 1976 to 1990, nowadays the problem pops up again.
Table 2. Elasticities of supply and demand for coffee in Colombia 1961-2010
(model type 3SLS. Data in in natural logarithms)
Supply Ln [Volume]
|
Demand Ln [Volume]
|
|||
Ln [Price]
|
2.32****
(0.089)
|
Ln [Price]
|
-0.16***
(0.089)
|
|
Ln [Crude oil price WTI]
|
-0.93****
(0.206)
|
Ln [Local price]
|
-0.24****
(0.024)
|
|
Ln [Exchange rate]
|
0.22***
(0.093)
|
Ln [GDP World]
|
1.19****
(0.048)
|
|
Dummy 1976
|
0.62****
(0.141)
|
|||
R2
|
0.99
|
0.99
|
||
Observations
|
50
|
50
|
||
**** P-value < 0.01; ***P-value < 0.05. (...) standard deviation.
Source: Own calculations. Stata 12.1.
Under conservative expectation of World GDP growth of 0.7%, crude oil price of US$85 per barrel, a local exchange rate appreciation (less local currency per dollar) of 5.4% and coffee local price increase of 3.1%, then expected coffee supply and demand curves are showed in figure 3. The inelastic of demand and elasticity of supply are highlighted in this figure (more vertical and more horizontal curves respectively), these curves are drawn under statistical significance and they come from table 2. These expectations let making forecasts on coffee volume and its price, therefore Colombia is expected to produce 10,993 thousand sacks of 60kg per year between 2012 and 2014 (659.6 thousands of tons) and the expected international coffee price is US$1.62 per pound. Under this statistical data, the volume forecasted can be reached by local coffee market. Nevertheless, Colombia does not show economies of scale in coffee supply as it was pointed out above. The global trend is lower prices as times goes forward and higher volume also, it means economies of scale in coffee supply in other countries, Colombia has to work hard to reach this scale of economies throughout government and private programs as Acuerdo para la Prosperidad Cafetera 2010-2015 (government program called Stability Agreements for Coffee).
Figure 3. Expected supply and demand curves for coffee in Colombia 2012-2014
(data in natural logarithms)
Source: Own calculations. Stata 12.1.
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