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Dealing with the Coffee Crisis in Central America: Impacts And Dealing with the Coffee Crisis in Central America: Impacts and Strategies By Panos Varangis, Paul Siegel, Daniele Giovannucci, and Bryan Lewin World Bank Policy Research Working Paper 2993, March 2003 The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org. ii ABSTRACT Current coffee prices are at record lows and below costs of production for many producers in Central America. Moreover, the coffee crisis is structural in nature with changes in supply and demand that do not indicate a quick recovery of prices. Thus, coffee producers in Central America are facing new challenges – as are coffee laborers, coffee exporters and other linked to the coffee sector. And, coffee plays a major economic role in Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. The coffee crisis is actually part of a broader rural crisis caused by weather shocks (e.g., Hurricane Mitch, droughts), low international agricultural commodity prices, and the global recession. These challenges call for new strategies for the Central American countries, the centerpiece of which must be the broad-based sustainable development of their rural economies. The paper deals with the impacts and strategies to deal with the crisis in coffee. It includes an analysis of the international coffee situation and country specific analyses, and explores options and constraints for increased competitiveness and diversification, and includes chapters dedicated to social, environmental and institutional dimensions of the crisis. The paper concludes that there are specific coffee based solutions that can be pursued. Some are already being applied, but more can be done in a more systematic way. Also, there is a role for safety nets to deal with short term impacts of the crisis. Longer term solutions are to be found in increased competitiveness and diversification in the context of broad-based sustainable rural economic development. iii TABLE OF CONTENTS ABSTRACT................................................................................................................................... ii ACKNOWLEDGEMENTS ......................................................................................................... v I. INTRODUCTION ..................................................................................................................... 1 II. THE NATURE AND MAGNITUDE OF THE COFFEE CRISIS...................................... 3 A. Structural Changes in the World Coffee Market ................................................................... 3 B. Changes in demand ................................................................................................................ 4 C. Changes in quality.................................................................................................................. 4 III. COFFEE IN CENTRAL AMERICA IN VIEW OF THE RECENT CRISIS.................. 6 Table 1.1: Key Characteristics of Coffee Production in Central America (1999/2000)............ 6 A. The macroeconomic impact of the coffee crisis. ................................................................... 6 Table 1. 2. Decline in Coffee Export Revenues, 1999/00-2000/01............................................ 7 B. The impact of the crisis on production and export volumes .................................................. 7 Table 1.3: Coffee Production and Export Volumes in Central America ................................... 8 C. The impact of the coffee crisis on employment. .................................................................... 8 Table 1.4: Estimated Employment in Coffee Production in Central America ........................... 8 Table 1.5. Decline in Employment in the Central American Coffee Sector, 2000-2002 ........... 9 Table 1.6: Coffee Production by Producer Size....................................................................... 10 D. Environmental Problems Arising from the Current Coffee Crisis....................................... 10 E. The competitive position of Central American coffees in view of the crisis ....................... 11 Table 1.7: Changes in Coffee Yields ....................................................................................... 11 Table 1.8: Costs of Production................................................................................................. 12 Table 1.9: Share of Coffee Classified as High and Strictly High Grown................................ 13 Table 1.10: Exports and Potential Capacity for Specialty Coffee Markets .............................. 14 IV. RESPONSES TO THE CRISIS .......................................................................................... 17 V. STRATEGIES FOR INCREASING COMPETITIVENESS AND DIVERSIFICATION: GENERAL ISSUES ............................................................................. 20 A. Increased Competitiveness– Outlining the Options ............................................................. 22 B. Diversification-Outlining the Options.................................................................................. 22 VI. STRATEGIES FOR INCREASED COMPETITIVENESS............................................. 24 A. Improving Quality, Value Added and Marketing for Coffee............................................... 24 A.1 Improving Quality.......................................................................................................... 25 A.2 Increasing Value-added................................................................................................. 26 A.3 Promotional Strategies for Coffee................................................................................. 28 E-trade, auctions, and the “Cup of Excellence” competition.................................................... 28 Market Information Systems..................................................................................................... 29 Agro-tourism and Eco-tourism. ................................................................................................ 30 Increasing domestic promotion and consumption. ................................................................... 30 iv Producer oriented promotion. ................................................................................................... 31 A 4. Managing price risk and volatility................................................................................ 32 B. Parameters for Successful Development of Coffee Initiatives in Central America............. 34 Market Orientation.................................................................................................................... 34 Organizational Development. ................................................................................................... 35 Environmental Awareness. ....................................................................................................... 35 C. Central American Supply in Relation to the Differentiated Markets................................... 35 Costa Rica.................................................................................................................................... 35 VII. DIVERSIFICATION STRATEGIES ............................................................................... 38 A. Elements of a Diversification Strategy ................................................................................ 38 B. Agricultural Diversification in Central America.................................................................. 39 C. Opportunities and Constraints to Diversification................................................................. 41 D. Some Possible Government-backed Initiatives for Diversification..................................... 42 VIII. THE SOCIAL IMPACT OF THE COFFEE CRISIS ................................................... 46 A. Overview of Employment in the Coffee Sector................................................................... 46 Table 8.1: Typology of Producers in Central America............................................................. 47 Table 8.2: Estimated Employment in Coffee Production in Central America ......................... 48 B. Impacts of the Coffee Crisis in Central America ................................................................. 48 Table 8.3: Estimates of Losses of Employment and Wages in Coffee Production by Country for 2001..................................................................................................................................... 50 C. Safety Nets - The Institutional Response ............................................................................. 51 IX. ENVIRONMENTAL CONSIDERATIONS ...................................................................... 54 A. Coffee Economics and Environmental Issues...................................................................... 54 Table 9.2: Coffee Area (in thousands of hectares) and Level of Technology......................... 57
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