COVID-19 related restrictions have impacted the world’s coffee production and exportation efforts. Despite this, Brazil 2020’s harvest is set to reach a historical high of 66.7 million bags. Though inventories were almost depleted during 2020’s off-season first quarter and bad weather hampered production in this time, future contracts for the commodity market haven’t significantly altered, and commodity export revenues have increased by 20% compared to this time last year.
Being a strong market player with years of experience means Brazil has several advantages which have helped it weather the worst of the pandemic’s impact. However, it remains to be seen if the lasting repercussions of the Coronavirus could change this – as while the commodity market is stable, the specialty coffee market is less so.
For Brazil to remain globally competitive after this period of economic instability, it will need to maintain high production levels, keep its production chain cohesive, and recognise the changes sweeping the international coffee industry. Here’s how the country has been impacted by COVID-19, and what the future might bring.
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The Current State of Brazilian Coffee Production
Before COVID-19 disrupted the world’s coffee supply chain, there were already concerns that international supply wouldn’t be able to meet the predicted demand, and in many countries, past season reserves were already being used to keep up with consumption. Producers who had a harvesting season in 2020’s first quarter faced workforce-related challenges due to COVID-19, such as reduced worker mobility and fewer workers, as well as heightened production costs and sanitary demands.
According to industry professionals, Brazil has been spared the worst of the virus’ impact. André Gomes Peres is an international broker for ACS Cafe Group and tells me that it’s business as usual for the country’s shipping and logistics industry. “So far, future contracts already executed are not at risk in terms of liquidity and delivery”. Thiago Borba represents 3Brothers, an Australian company that imports Brazilian specialty coffee. He says, “the main port we work with – Santos – has not stopped even for a day, since the beginning of the pandemic”.
Brazil’s environmental laws are already amongst the strictest in the world, with producers needing to maintain sustainability standards to comply with third-party certifications. Being used to complying with these demands has helped producers adapt to COVID-19 guidelines. Tiago Barinas runs Barinas Specialty Coffee Farm in Minas Gerais. He explains to me that existing rules inform everything from what workers wear to how they take breaks. “If one of my employees wants to have lunch under a coffee tree, I need to educate him that this is not possible, only in the cafeteria, otherwise I can be arrested”.
On land, the government has taken measures to curb the spread of the virus and keep production on track. They’ve instructed the farmers to wait until the fruits are properly ripened to harvest it, to reduce the number of harvesting trips required by workers. This move also ensures that the best crops are harvested, to provide buyers with consistent levels of quality.
Other safety initiatives to prevent the spread of the virus involve local municipalities inspecting coffee farms for non-compliance, which includes sharing tools and PPEs, not measuring temperatures or isolating symptomatic workers, and not providing workers with cleaners and disinfectants. Should any worker fall ill, they are monitored until recovery. He says, “I had an employee who got the flu and was quarantined for 14 days, every day the National Health Service team called him”.
Despite harvesting progressing slower and extra precautions being taken, there haven’t been reports of labour shortages so far. Other factors are also helping keep the country’s production on track. Here are some of the ones giving Brazil a competitive advantage.
Brazil’s Technology Advantage
Unlike many producing counties, many Brazilian producers have integrated advanced technology and equipment into their production to amplify outputs and reduce costs. While manual picking is favoured by smaller producers and those with farms in mountainous regions, many larger producers participating in international markets use full mechanisation, as relying on manual labour is costly and time-consuming.
In Brazil labour laws are strict, costing producers an average of 60% of what they’re already paying as a salary in taxes. One mechanical harvester can also harvest a hectare of coffee in four hours’ time – something that would require a day of labour from 30 workers.
As many of the country’s larger producers are located in areas conducive to mechanisation, the entire production process can be mechanised from beginning to end. This gives them a natural advantage against labour shortages due to closed borders and restricted movement.
Brazil’s Training Advantage
In Brazil, constant training is prioritised in order for producers to keep their coffee quality and production levels high, so that they can better meet the needs of the international market. Antonio Guerra is Chief General of the National Coffee Research Consortium Center, a branch of the state-owned Brazilian Agricultural Research Corporation (Empraba). He tells me that Brazil’s high levels of technology adoption and production rates are thanks to extensive training.
Part of the success of these initiatives is that producers are receptive to training and trying new innovations, and that education is viewed as necessary for all producers. André says that most producers understand the relationship between investing in quality and enjoying a profit. Education initiatives by Empraba have already positively impacted local production, with Brazilian annual production having increased by 30% since the organisation was founded.
As André says, “The ‘new leadership’ of coffee farmers is made up of producers who’ve already participated in numerous seminars, international courses and many have traveled abroad”.
Besides being schooled on techniques to maintain productivity, producers are also educated on the business side of production, equipping them to close future sales contracts and forecast future costs. This has come in handy during the pandemic, as it has helped producers to prepare for expected costs, helping them minimise its impact on their finances and operations.
Brazil’s Bargaining Advantage
High production volumes and stable production flow rates give Brazil additional bargaining power when it comes to negotiating with buyers, ensuring they’re better placed to build beneficial relationships, negotiate contracts, and apply for credit in the commodity and specialty sectors.
Brazilian traders are experienced in negotiating future sales at micro and macro scale, says André. He adds that as a result, defaults rarely occur, and both parties benefit from guaranteed prices, supply volume, and assured quality demands. Producers who can’t negotiate for the new crop year with a hedge can access funds from the government-supported Coffee Economy Defense Fund (Funcafé). Due to COVID-19 disruptions, the fund made a larger amount made available to producers.
Unlike in other producing countries, local producers haven’t been dealing with benchmark prices on Futures that fall short of their production costs during the COVID-19 pandemic. According to André, the bulk of the overall market’s previously closed contracts are being executed, without significant cancellation or renegotiation rates.
Apart from sales of specialty coffee graded from 85 and up, there haven’t been contract disruptions. André says, “The big roasters, like Illy and Starbucks buy gourmet or fine coffee [graded at] around 80 points, and pay a fair market price for quality. This niche is not being affected”. Barinas adds that these kinds of sales account for 80% of his production. He explains that the sales of very high quality expensive coffees are being more impacted.
Challenges For The Future
Better bargaining skills, high levels of technology adoption, and ongoing education in best practices have all helped Brazil continue its commodity production and keep up with sales demands. However, this might not last in the future.
For example, while the country’s internal commodity coffee consumption rates (the highest in the world) have been stable, this could change as the country’s purchasing power is impacted due to political instability. This has placed the Brazilian Real under depreciation pressure and while at first coffee sales benefited from the US dollar appreciation, the fact that most agricultural inputs are imported could hamper this benefit in the future.
Specialty coffee production is also being impacted. Post-pandemic global demand has plummeted, with sales in the USA and Europe down 40% as of April. Some businesses like 3Brothers have managed to renegotiate their receivables and postpone deliveries, but many of their clients have had to close shop. Borba says, “Our customers are roasters that, in most cases, supply only to their chain of coffee shops and therefore we feel a direct impact. Some had to close their doors and reduce production up to by 80%, causing a ripple effect”.
Barinas believes this will continue into the rest of 2020. He says that many traders he works with are already reporting difficulties, with clients asking for payment delays and contract postponements.
Buyer warehouses are already filled with specialty coffee from the 19/20 harvest, and importers can´t risk overstocking something that might not sell. As a result, these specialty coffees might . be sold at massively reduced prices directly into the commodity market. This is already happening in producing countries that had their harvesting season earlier in 2020. It could trigger a fundamental change in how specialty coffee is sold, as while members of the Brazilian Association of Specialty Coffees experienced an average drop of 76.25% in product sales, they also experienced a 49% growth in online sales.
André believes that Brazil will retain its buyer confidence, thanks to its well developed logistical system and supply chain. Antonio agrees, and believes that saying that the local coffee industry’s pillars will enable the country to “return to its normality soon, and even maintain the eight million jobs it generates in the sector”.
While the advantages listed above bode well for commodity sales and general coffee production, it’s worth noting that the specialty market hasn’t fared so well – and that anything from political instability to exchange rate fluctuations could impact the country’s overall success rate. This demonstrates that while Brazil’s overall coffee production might be more successful than its peers, its specialty coffee production is still as vulnerable as the rest of the world’s.
Enjoyed this? Then Read How to Roast Brazilian Specialty Coffee
Photo credits: Isabelle Mani SanMax, Cafezal Specialty Coffee, CQT Coffees, RP Consulting Brazil, Embrapa
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