Required Report - public distribution

**Date:** 5/15/2006

**GAIN Report Number:** MX6040

MX5000

**Mexico**

**Coffee**

**Annual**

**2005**

**Approved by:**

![](media/image1.wmf)Suzanne E. Heinen

U.S. Embassy Mexico City

**Prepared by:**

Gabriel Hernandez

**Report Highlights:**

Despite the fact that hurricane Stan damaged 130,000 hectares of coffee
plantings in MY 2005/06, beneficial weather, ample residual humidity,
and attractive prices are expected to lead to an increase in Mexican
coffee production for the 2006/07 marketing year. As a result of
expanded production and higher international prices, Mexican coffee
exports are also expected to increase to 3.3 million 60-kilogram bags.

Includes PSD Changes: Yes

Includes Trade Matrix: Yes

Annual Report

Mexico \[MX1\]

\[MX\]

Table of Contents

[SECTION I. STATISTICAL TABLES 3](#section-i.-statistical-tables)

[PS&D, Coffee 3](#psd-coffee)

[Trade Matrix 3](#trade-matrix)

[SECTION II. NARRATIVE ON SUPPLY AND DEMAND, POLICY & MARKETING
4](#section-ii.-narrative-on-supply-and-demand-policy-marketing)

[Production 4](#production)

[Yields 5](#yields)

[Consumption 5](#consumption)

[Stocks 5](#stocks)

[Trade 6](#trade)

[Marketing 6](#marketing)

[Policy 6](#policy)

# SECTION I. STATISTICAL TABLES 

## 

## PS&D, Coffee

+------------------+-------+-------+-------+-------+-------+-------+
| **PSD Table**    |       |       |       |       |       |       |
+------------------+-------+-------+-------+-------+-------+-------+
| Country          | M     |       |       |       |       |       |
|                  | exico |       |       |       |       |       |
+------------------+-------+-------+-------+-------+-------+-------+
| Commodity        | Co    |       | (1000 |       |       |       |
|                  | ffee, |       | H     |       |       |       |
|                  | Green |       | A)(MI |       |       |       |
|                  |       |       | LLION |       |       |       |
|                  |       |       | T     |       |       |       |
|                  |       |       | REES) |       |       |       |
|                  |       |       | (1000 |       |       |       |
|                  |       |       | 60 KG |       |       |       |
|                  |       |       | BAGS) |       |       |       |
+------------------+-------+-------+-------+-------+-------+-------+
|                  | 2005  |       | 2006  |       | 2007  |       |
|                  | Re    |       | Est   |       | For   |       |
|                  | vised |       | imate |       | ecast |       |
+------------------+-------+-------+-------+-------+-------+-------+
|                  | USDA  | Post  | USDA  | Post  | USDA  | Post  |
|                  | Off   | Est   | Off   | Est   | Off   | Est   |
|                  | icial | imate | icial | imate | icial | imate |
|                  | \[    |       | \[    |       | \[    |       |
|                  | Old\] | \[    | Old\] | \[    | Old\] | \[    |
|                  |       | New\] |       | New\] |       | New\] |
+------------------+-------+-------+-------+-------+-------+-------+
| Market Year      | 10    |       | 10    |       | 10    |       |
| Begin            | /2004 |       | /2005 |       | /2006 |       |
+------------------+-------+-------+-------+-------+-------+-------+
| Area Planted     | 730   | 730   | 730   | 685   | 0     | 700   |
+------------------+-------+-------+-------+-------+-------+-------+
| Area Harvested   | 600   | 600   | 600   | 600   | 0     | 600   |
+------------------+-------+-------+-------+-------+-------+-------+
| Bearing Trees    | 700   | 700   | 700   | 700   | 0     | 700   |
+------------------+-------+-------+-------+-------+-------+-------+
| Non-Bearing      | 180   | 180   | 180   | 180   | 0     | 180   |
| Trees            |       |       |       |       |       |       |
+------------------+-------+-------+-------+-------+-------+-------+
| TOTAL Tree       | 880   | 880   | 880   | 880   | 0     | 880   |
| Population       |       |       |       |       |       |       |
+------------------+-------+-------+-------+-------+-------+-------+
| Beginning Stocks | 0     | 0     | 0     | 566   | 0     | 700   |
+------------------+-------+-------+-------+-------+-------+-------+
| Arabica          | 3850  | 3800  | 4050  | 3800  | 0     | 4000  |
| Production       |       |       |       |       |       |       |
+------------------+-------+-------+-------+-------+-------+-------+
| Robusta          | 130   | 100   | 150   | 200   | 0     | 200   |
| Production       |       |       |       |       |       |       |
+------------------+-------+-------+-------+-------+-------+-------+
| Other Production | 0     | 0     | 0     | 0     | 0     | 0     |
+------------------+-------+-------+-------+-------+-------+-------+
| TOTAL Production | 3980  | 3900  | 4200  | 4000  | 0     | 4200  |
+------------------+-------+-------+-------+-------+-------+-------+
| Bean Imports     | 132   | 145   | 130   | 168   | 0     | 140   |
+------------------+-------+-------+-------+-------+-------+-------+
| Roast & Ground   | 15    | 28    | 10    | 89    | 0     | 50    |
| Imports          |       |       |       |       |       |       |
+------------------+-------+-------+-------+-------+-------+-------+
| Soluble Imports  | 0     | 0     | 0     | 0     | 0     | 0     |
+------------------+-------+-------+-------+-------+-------+-------+
| TOTAL Imports    | 147   | 173   | 140   | 257   | 0     | 190   |
+------------------+-------+-------+-------+-------+-------+-------+
| TOTAL SUPPLY     | 4127  | 4073  | 4340  | 4823  | 0     | 5090  |
+------------------+-------+-------+-------+-------+-------+-------+
| Bean Exports     | 2977  | 1907  | 3140  | 2400  | 0     | 3300  |
+------------------+-------+-------+-------+-------+-------+-------+
| Roast & Ground   | 20    | 20    | 20    | 20    | 0     | 20    |
| Exports          |       |       |       |       |       |       |
+------------------+-------+-------+-------+-------+-------+-------+
| Soluble Exports  | 180   | 180   | 180   | 180   | 0     | 180   |
+------------------+-------+-------+-------+-------+-------+-------+
| TOTAL Exports    | 3177  | 2107  | 3340  | 2600  | 0     | 3500  |
+------------------+-------+-------+-------+-------+-------+-------+
| Rst,Ground Dom.  | 500   | 950   | 550   | 1000  | 0     | 956   |
| Consum           |       |       |       |       |       |       |
+------------------+-------+-------+-------+-------+-------+-------+
| Soluble Dom.     | 450   | 450   | 450   | 523   | 0     | 400   |
| Consum.          |       |       |       |       |       |       |
+------------------+-------+-------+-------+-------+-------+-------+
| TOTAL Dom.       | 950   | 1400  | 1000  | 1523  | 0     | 1356  |
| Consumption      |       |       |       |       |       |       |
+------------------+-------+-------+-------+-------+-------+-------+
| Ending Stocks    | 0     | 566   | 0     | 700   | 0     | 234   |
+------------------+-------+-------+-------+-------+-------+-------+
| TOTAL            | 4127  | 4073  | 4340  | 4823  | 0     | 5090  |
| DISTRIBUTION     |       |       |       |       |       |       |
+------------------+-------+-------+-------+-------+-------+-------+

## Trade Matrix 

  --------------------- -------------- -------------------- --------------
  **COFFEE**                           UNITS: Metric Tons   

  **Exports to:**                      **Imports from:**    

  Destination           **CY 2005**    Origin               **CY 2005**

  U.S.                  58,426         U.S.                 1,123

  Japan                 5,842          Brazil               248

  Other not listed      29,920         Other not listed     389

  Grand Total           94,188         Grand Total          1,760
  --------------------- -------------- -------------------- --------------

Source: Global Trade Information Services, Inc. World Trade Atlas,

Mexico Edition, January, 2006.

Note: figures are in green bean equivalent - GBE

# 

#  

# SECTION II. NARRATIVE ON SUPPLY AND DEMAND, POLICY & MARKETING

## Production

Mexican coffee production for MY 2006/07 (Oct-Sept) is forecast at 4.2
million 60-kilogram bags, an increase of 5.0 percent over last year's
production. This increase assumes that good weather and ample residual
humidity in production areas will prevail. The decrease in world coffee
production and inventories, and the expectation that international
prices will increase, should drive an increase in Mexican coffee
production over at least the short term.

Due to geographical and climatological conditions, Mexico is ideally
suited for coffee production. About 97 percent of the coffee produced in
Mexico is of the *arabica* variety, and 3 percent is of the *robusta*
variety. Production of *robusta*, which is characterized by lower
production costs and high yields relative to *arabica*, has been stable
due to greater demand from coffee processing companies. Although
*robusta* production is growing, it appears unlikely that its share of
Mexican production will increase significantly, as *arabica* beans are
of higher quality and more preferred in international markets.

A number of factors have combined to reduce production since the
1999/2000 marketing year. These factors include:

1.  Low international prices,

2.  A lack of appropriate domestic infrastructure,

3.  Inefficient marketing and distribution channels.

However, the leaders from the Mexican coffee industry indicate that they
are confident that the sector is on the upswing in light of higher
international prices. Coffee industry leaders, along with Secretariat of
Agriculture, Livestock, Rural Development, Fisheries and Foodstuffs
(SAGARPA), have recently collaborated to consolidate several coffee
related associations into a new umbrella group, the National Coffee
System (NCS). The NCS will act as the official legal representative for
coffee growers, processors, and shippers. Industry leaders are hopeful
that this new organization will enable Mexico to better access key
international markets.

The MY2005/06 production estimate was revised downward due to the
effects of hurricane Stan in coffee producing regions. Heavy rainfall
led to a drop in green coffee production, damaged crucial
infrastructure, and led to landslides that damaged considerable amounts
of productive land. This hurricane damage was compounded by the fact
that low international prices have been causing farmers to abandon their
land for the past several years. The States of Chiapas, Veracruz,
Puebla, and Oaxaca account for nearly 90 percent of the Mexico's coffee
production. In October 2005, hurricane Stan damaged 130,000 hectares
devoted to coffee production in these main producing states. In the
State of Chiapas, the country's main organic coffee producing area, four
production regions were severely affected; Fraylesca, Sierra, Soconusco,
and Istmo-Costa. The federal and state government responded to this
disaster by working together to develop grant and loan programs to aid
in the redevelopment of these farms. Despite the damage to these states,
it is expected that the unaffected, or slightly affected, coffee
producing regions will increase production, and make up for most of the
losses related to Hurricane Stan. The MY 2004/05 production estimate
reflects the latest official data.

International coffee prices in MY 2006/07 are expected to rebound due to
a tightening of world supplies. Because of low prices over the past
several years many coffee farmers were forced out of business, as they
were not been able to cover their costs of production for conventional
coffee. However, the low prices also fueled a migration towards the
production of organic and specialty coffee, which often command higher
prices. Unofficially, the production of organic coffee in Mexico
accounts for approximately 250,000 60 kilogram bags. Farmers in the
state of Chiapas produce nearly 80,000 60 kg. bags. Organic production
practices are more profitable because they limit the use of chemicals,
fertilizers, and pesticides. Currently, Mexico is the world's main
organic coffee producer.

The cost of production of a "quintal" (60 kilograms of green bean
coffee) for MY 2005/06 was around U.S. \$75.00 - \$80.00, and is
expected to remain the same in MY 2006/07.

**[Crop Area]{.smallcaps}**

MY 2006/07 planted area is expected to increase by 2 percent from the
previous year due the development of new coffee nurseries, reforestation
programs, and timely delivery of government financial support.
Reportedly, in MY 2005/06, area planted decreased approximately 6
percent from the previous year due to the damage caused by hurricane
Stan in main producer states. Although unofficial estimates indicate
that hurricane Stan damaged 130,000 hectares, most of this land was only
slightly damaged. Figures for MY 2004/05 remain unchanged to reflect
recent official data.

Despite adverse weather in recent seasons, harvested area in MY2006/07
is expected to be consistent with previous estimates due to the
harvesting of non-affected younger/mature trees that, in MY2005/06, were
located out of Stan's range. Over the next few years, however, planted
and harvested area is expected to increase due the development of new
coffee nurseries and younger trees coming into bearing.

## Yields

## 

Yields continue to vary widely in Mexico due to variations in crop care
and weather. MY 2006/07 yields are expected to improve slightly over MY
2005/06, assuming good weather and expected improvements in cultural
practices. Yield figures for MY 2005/06 and 2004/05 were revised
slightly downward due to adverse weather conditions, and to reflect
recent official data.

## 

## Consumption

MY 2006/07 domestic coffee consumption is forecast to drop from the
previous year's revised estimate. This decrease in domestic consumption
is primarily driven by the expectation that higher international prices
will drive increased exports, increase prices in Mexico, and dampen
consumer demand. Nonetheless, this figure is still well above historic
levels. Consumption estimates for MY 2005/06 and MY 2004/05 were revised
significantly upward due to limited exports and affordable prices. Other
factors that contributed to an increase in domestic consumption were:

1.  Strong demand from consumers with mid- to high income levels for
    fashionable value-added coffee from chain stores; and

2.  Rapid growth in internet cafes, which combine cybernetic and
    restaurant services, intended for the low-medium income high school
    and university aged populations.

## Stocks

MY 2006/07 ending stocks are forecast to decrease considerably from the
previous year's revised estimate, mainly due to increased exports.
Despite the lack public and private sector official statistics,
unofficial ending stocks figures for MY 2005/06 and 2004/05 were revised
upward to reflect the increase in stocks as a result of weaker
international prices and reduced exports.

Authorities from the National Coffee System (NCS) stated that in the
past Mexico has not had a reliable system to register final stock
numbers at the end of each coffee season. However, starting in September
2006, the end of this marketing year, NCS will be implementing an
accurate data gathering system in order to comply with International
Coffee Organization (ICO) regulations. Current stock estimates reflect
information obtained from industry sources.

## 

## Trade

MY 2006/07 coffee exports are forecast to be up 35 percent from the
previous year. This increase is being driven by higher international
prices, caused by a tightening in world supplies. Approximately 90
percent of Mexican coffee is exported as green coffee beans, and the
United States continues to be the main international market for Mexican
coffee. For MY 2005/06 and MY 2004/05, exports are revised downward from
the previous estimate, due to reduced domestic production and relatively
low international prices.

For MY 2006/07, import levels are forecast to be down relative to the
previous year's revised figure. This reduction is due to increased
domestic production and high prices on the international market. The
import estimate for MY 2005/06 was revised upward, driven by lower than
expected production, and an increase in domestic demand for specialty
and gourmet coffees. The MY 2004/05 import estimate was also revised
upward to reflect the latest official data.

## Marketing

Historically, Mexico's coffee blends have not garnered top prices in
foreign markets due to the use of inappropriate processing techniques,
such as mixing coffee grains from different altitudes and maturity
stages, and mishandling grains during the wet milling process. Through
the continued enforcement of SAGARPA's "Productive Development and
Quality Improvement of Mexican Coffee" program, coffee producers are
being taught appropriate processing and marketing techniques. This
should enable them to produce a higher-quality coffee and to create new
coffee brands.

The Mexican coffee industry has funded an international campaign to
promote the consumption of Mexican coffees under the "Café de Mexico"
seal. This seal is used to assure the consumer of the identity,
pureness, and quality of Mexican coffee, with the objective of branding
Mexican coffee as a high quality product.

Currently, coffee authorities in the State of Chiapas are working to
implement a fair trade system by establishing direct relationships
between small producer organizations and the final consumers. The key to
this trade scheme is to establish, and enforce, a minimum price for
coffee in order to guarantee that the industry is selling at sustainable
prices.

## Policy

Following the 2005 abolition of the Mexican Coffee Council (CMC by its
acronym in Spanish), SAGARPA and coffee industry leaders established the
National Coffee System (NCS). This system is designed to incorporate all
sectors of the coffee production chain under one entity. The motivation
for this was to allow domestic coffee producers to become more
competitive and responsive to changes in domestic and international
markets through improved communication and investments in domestic
infrastructure.

Senators from the Mexican Congress are in the process of approving the
proposed "Sustainable and Integral Development Coffee Law" that, if
passed, will allow for the establishment of a new National Coffee
Council. The National Coffee Council will be an autonomous and
decentralized public body that will advise SAGARPA on policies and
programs, especially those targeting the production, commercialization,
and consumption of coffee. It will also contribute to the implementation
of a coffee price stabilization fund, the establishment of a reference
price, and the establishment of funds to promote Mexican coffee.
Currently, this law is on hold while Congress is on recess, but it is
expected that it will be voted upon in the next ordinary session of
Congress, to be held September-December 2006.