Colombia coffee sector has lost World market since 1945. Since this year government has given subsides to coffee sector to be competitive in a competitive World market as many local newspapers pointed; therefore, it is not a current issue. Of course, Colombia has supplied important volumes of coffee to the World; for instance, when Brazil faced bad weather between 1976 and 1980. However, this loss of market is because the number of countries that produce coffee went from 9 in 1914 to 79 in 2012; moreover, the types of coffee increased, there is not one type of Robusta and Arabica, there are more than 37 types of coffee where Colombia produces few types. In addition, the breakdown of Coffee Pact in 1989 increased the World competition in the coffee market. Many private and government researches point the high internal logistic costs (internal transport, storage and international trade management), the high inputs costs, the internal war and the increase of coca crops as the causes of coffee market lost, and they have partially the reason. If coffee farmers face a better political environment and low inputs prices, so they can be more competitive. However, the main cause of Colombia lost share in World coffee market is the competition and lack of suppling many varieties of coffees. To solve this issue, farmers and international trade firms in Colombia have to work on: 1. Farmers have improve their technology to reach economies of scale; it means new types of coffee (beans that let getting economies of scale), so it is a work between local researchers and farmers supported by government. 2. Colombia has to supply many varieties of coffee beans; it means, farmers and government have to invest in research and development to get new and better varieties of beans in new regions in Colombia. 3. Finally, government has to promote a Coffee Traders Association where they can reach lower logistic cost, and government has to regulate the farmers’ coffee price through a price band or minimum price which can be setting under a mathematical formula.
Author: Humberto Bernal,
Economist,
e-mail: zhumber@gmail.com
Twitter: Humberto_Bernal
Colombia is an important supplier of coffee around the World; she started to produce an important volumes of coffee since second half of 1850; for producing coffee in Colombia, there were important capital invested from locals and foreigners such as germans. However, Colombian coffee sector has shown critical economic indicators related with its competitiveness in this global economy; there are many private and government researches that point this issue; they highlight the internal logistic costs as a cause of this critical environment in coffee sector; moreover, they point the climate change as a cause of low productivity. There are others that point the internal war conflict and the increase of coca crops as a causes of this issue also. Of course, they have partially the reason, but the main cause of this loss of competitiveness is the diseconomies of scale of coffee production in a monopolistic competition market. This note shows how Colombia has lost coffee market because diseconomies of scale and hard global competition.
The the breakdown of Coffee Pact in 1989 increased the competence in coffee market around the World, and Colombia was not ready to face it. Before 1991, Colombia faced an increasing trend in her coffee production, she went from 42 thousand of tonnes in 1915 to 971 thousand of tonnes in 1991; after this year, the coffee production showed a decline to reach 468.5 thousand of tonnes in 2012 as figure 1 shows. This dynamic can be explained by the end of Coffee Pact in 1989; this end let international coffee market follows the free market path, and increases the competence through many countries. There were periods when Colombia increased her production because weather changes in other countries; it let her taking advantages such as Brazilian coffee crisis between 1976-1980.
Figure 1. Coffee production in Colombia 1915-2012
(thousands of metric tonnes)
Source: 1915-1929: Colombian Central Bank Document 116 of 1999; 1930-1955: International Historical Statistics Palgrave; 1956-2012: Federación Nacional de Cafeteros Colombia.
The competition in coffee market is hard, so Colombia has lost global share in this product. The main countries that produced coffee between 1823 and 1914 where Indonesia, India and Brazil and 6 more included Colombia, so the market was concentrated. Between 1915 and 1945 Colombia won an important share; she reached 19.3% of total coffee World production!!! as figure 2 shows; by that year the total number of countries that produced coffee were 22; El Salvador and Guatemala began to take an important share in coffee production also. Since 1946, Colombia began to loss share because the number of countries that produce this commodity increased, so this number reached 78 countries in 1980; the main traditional coffee suppliers were Brazil, Colombia and Indonesia, and the new main coffee suppliers were Cote d Ivoire, Mexico, Ethiopia, Uganda, Philippines and so. Therefore, there were new countries form Latin America and Africa that decided to supply many varieties of coffee between 1945 and 1980. Nowadays, Colombia shares with 5.5% of total World coffee production; this low share can be explained by more important suppliers such as Viet Nam, Peru and Honduras; the total number of countries that produce important volumes of coffee were 79 in 2011. Therefore, Colombia has lost an important coffee share because competition.
Figure 2. Colombian coffee as a share of World coffee 1915 - 2012
(%)
Source: Colombian Central Bank Document 116 of 1999; International Historical Statistics Palgrave; Federación Nacional de Cafeteros Colombia FAO.
The internal logistic costs for coffee in Colombia has not faced an important change in the last years. Logistic costs means the transport cost from farms to port, storage, administrative costs because international traders firms have to afford it to sell the coffee abroad. One can calculate this internal logistic cost through the difference between coffee FOB price and coffee farmer price in Colombia; this difference is shown in figure 3. As one can see, the average is US$1.22 per pound at 2012 prices between 1915 and 2012. Unfortunately in the last 10 years Colombia shows an increase in these logistic costs, but they are under the average cost. Therefore, there is low effort to make logistic costs competitive; to make this logistic cost competitive, government has to promote a new Coffee Traders Association and regulate the international traders firms through minimum price paid to farmers. There are approximately 80 trade firms that make this job and Federación Nacional de Cafeteros shares with 29% of the coffee traded.
Figure 3. Difference between external price and internal price for Coffee in Colombia 1915 - 2012
(US$ per pound, prices chained of 2012 )
Source: Colombian Central Bank Document 116 of 1999; Federación Nacional de Cafeteros.
Nowadays, there are 79 countries that supply coffee and many types of coffees (types of Arabica and Robusta), so the market is working under Monopolistic Competition Market. Because this increase in the number of suppliers and local diseconomies of scale, Colombia has lost market; it means a lower demand, and it is more elastic on price as figure 4 shows; the black arrow and blue arrow show this lost. Moreover, because of internal war conflict, cocaine production and lack of organization in coffee trades firms, the average cost per tonne of coffee increased as red arrow shows in figure 4; this last effect is low (marginal).
Figure 4. Monopolistic competition in Coffee market
(Colombia case under diseconomies of scale)
P: Demand Price. MC: Marginal cost. AC: Average Cost. MI: Marginal Income. E: equilibrium.
Source: Own.
Achieving economies of scale and product variety (coffee variety) are the main objectives to work on to recover the lost market. If one takes the yearly coffee market information since 1915 to 2011 and fit them into an econometric monopolistic competition model, the results are those shown in table 1. For instance, it is a clear evidence that competition reduce External Price FOB and local farmers income in about 3.7% and 3.5% as competition index increases in 1.0% (blue results in table 1). Moreover, an increase of 1.0% in crude oil price lets an increase of coffee’s marginal cost in 0.2% (green result in table 1). The most important result is the increase of Marginal Cost in 0.2% as the volume of production increases in 1.0% (red result table 1); it means diseconomies of scale. On the other hand, under economies of scale, this red value should be zero or negative.
Table 1. Monopolistic competition in Coffee market in Colombia 1915-2011
(Model under 3SLS)
Variables
|
Impact
|
External Price:
|
|
Coffee volume demanded
|
-4.0%
|
USA GDP per capita
|
3.3%
|
Competition index
|
-3.7%
|
Marginal Cost:
|
|
Coffee volume supplied
|
0.2%
|
Crude oil price
|
0.2%
|
Exchange rate
|
-0.2%
|
Marginal Income:
|
|
Coffee volume in equilibrium
|
-4.0%
|
USA GDP per capita
|
3.2%
|
Competition index
|
-3.5%
|
Observations
|
97
|
Results are statistical significative at 0.05 significance level.
Source: Own calculations Stata 12.1. Under Three-Stages Least Squares.
In conclusion, Colombia has faced hard coffee competition since 1945, so she has lost huge World market. The local logistic costs for coffee do not show an important changes in the last 10 years, but these costs can be lower if there are government incentives to set a Coffee Traders Association that work on achieving it. Colombia supply few varieties of Arabica coffees, so it narrows her World market; to solve this issue, Colombians coffee farmers and researchers have to work hard to get new varieties of coffee beens that show economies of scale; they can be grown in other regions in Colombia (it can be an alternative for demobilized guerrillas and displaced people). The price for farmers (internal price) has to be regulated through formula that points the minimum price charged or a price band for farmers. The future of Colombian coffee depends on investing in research and development that let getting economies of scale through new varieties of coffee beans.
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