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March 26, 2009

Financial crisis hits coffee processors

by Macrines Nyapendi

Stung by the falling prices, coffee farmers and exporters are in a dilemma over the spills of the economic grind. Coffee prices took a quick and nasty turn when the markets collapsed and credit froze up late last year to stand at $1,700 per tonne from $2,400.

Traders are finding it hard to access credit to buy supplies. The prices have fallen to between 20% and 40% in just seven months. Market sources say that importers in the western countries are purchasing cautiously. The developed countries account for 58% of world consumption while producing countries account for 26%. In most growing countries, local coffee prices have fallen by almost 50%.

In its March report, the International Coffee Organisations (ICO) confirms that cutbacks in coffee purchases have occurred due to widespread unemployment and economic instability. It says disruption of credit facilities may have a negative impact on the coffee industry.

"The need to develop and implement financial mechanisms to help smallholders cope with increased risk and volatility is inevitable as prices keep contracting during the harvest seasons," states the report.

Unfavourable exchange rate policies have deterred some producing countries from reaping the full benefits of the recovery in coffee prices since 2004.

Countries like Uganda with flexible exchange rates, price falls in the international market have been partially compensated by exchange rate movements. Traders usually take advantage of the farmers by transmitting the burden of price reduction to them.

In countries whose currencies are more directly linked to the US dollar, the impact of recent price reductions on the terminal markets was directly transmitted to growers.

In recent years coffee export revenues recovered from the lows experienced between 2000 and 2004 when the prices touched their lowest levels in nearly 40 years. Global coffee trade is estimated to be worth $90b, however, less than $10b goes back to the poor farmers in developing countries.

Joseph Nkandu, the executive director of National Union of Coffee Agribusinesses and Farm Enterprises (NUCAFE) said the financial crisis is a blessing in disguise for the framers who toil and are never rewarded for their hard work.

"The financial crisis has at last forced roasters and others in the specialty market to taste the bitter side of coffee. Maybe they will understand that the growers of the world's second most valuable commodity after oil are mistreated," Nkandu said. He added that the farmers have been blessed by the strengthening US dollar that has compensated some of the losses and widened their profit margin.

The ICO warned that countries that solely depend on coffee as a major foreign exchange earner will suffer the same consequences as those that have diversified economies because all commodity prices have slumped.

Uganda ranks fourth in countries that are dependant on coffee as a major foreign exchange earner at 17%; the other countries are Burundi (52%), Ethiopia (31%), Honduras (23%), Nicaragua (17%) and Guatemala (12%).

Coffee provides livelihood to over 22million people globally. David Kiwanuka, the head of quality and communications at the Uganda Coffee Development Authority said that Uganda has over 1.2million households depending on coffee. Coffee consumption has been steadily growing at a rate of 2% per annum increasing from 104.6 million bags in 2000 to128 million bags in 2008.

Demand by type of coffee is also changing considerably. The market share for Robusta coffee in world trade has grown from 54% in 1990 to 63% in 2008 while washed Arabica dropped from 46% to 37% in the same period. Nevertheless, early evidence suggests that the current situation should not have a significant impact on coffee consumption. With regard to production, effects are likely to differ considerably among countries.

In the financial year 2007/08 Uganda exported over2, 704,236 million bags of 60kilogrammes fetching $18337887m.

The coffee sector is just recovering from the Coffee Wilt Disease (CDW) that destroyed over 50% of the total coffee tree population in the country.

Uganda was the first coffee producing country to come with an approach where a brand occupying shelf space in the consuming countries is owned by the origin. The unique feature in this is that the farmers who supply the coffee have a stake in the brand.

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