# **II. Recent World Trends in Coffee and Cocoa Prices, Production, and Exports**

International coffee and cocoa markets have been characterized by extreme volatility over the past few years. Price volatility is associated with income risks for individual farmers and affects the risk-adjusted returns in the sectors. This section presents an overview of recent trends in world markets. Both sectors are experiencing a “crisis”, although there are significant differences in their respective causes and the extent to which structural or temporary changes are occurring.

# **A. Recent Coffee Prices, Production and Exports**<sup>**20**</sup>

During 2000 and 2001, worldwide oversupply caused coffee prices to drop to their lowest levels in 30 years, between US$ 50-55 per hundredweight (about US$ 2250-2500/MT), representing a hundred-year inflation-adjusted low. Coffee prices have fallen below the cost of production for many producers, causing economic and social hardships. The international “coffee crisis,” has had particularly strong negative impacts on Central American and Caribbean countries,<sup>21</sup> who primarily produce Arabica coffee.<sup>22</sup> These problems were highlighted at a joint IADB-World Bank-USAID workshop held in early April 2002 in Antigua, Guatemala. Representatives of the Dominican Republic coffee sector attended this workshop<sup>23</sup> .

Coffee prices fluctuate dramatically between years (see Figure II.1). Coffee prices were high in the mid 1990s, and created optimism among producers and governments. This optimism resulted in expanded plantings and productivity-enhancing investments. Since reaching a relative peak in 1997 there has been a steady price decline as production and exports expanded. Short-term price projections are not encouraging (FAO, 2003, ICO, 2003). With demand growing relatively slowly and global production at high levels and expanding, most analysts predict that any coffee price recovery is likely to be slow. This situation threatens the longer-term profitability and sustainability of coffee production in Central America and the Caribbean.

The decline in international coffee prices has been affected by structural changes in supply and demand, and changes in issues related to coffee quality and niche markets. Since 1995, the world coffee market has experienced a steady increase in world production and export levels – notably increases in production of Robusta coffees by Brazil and Viet Nam. Thus, the current crisis in prices does not appear to be a cyclical phenomenon, but a direct consequence of the new structure of the market. Apart from over-supply, there have also been structural changes in demand (Ponte, 2002).

The major structural changes in the demand for coffee include: a) aggregate demand in the major importing countries is increasing a slow rate (especially relative to increases in supply), b) roasters are increasingly able to increase the absorption of lower quality Robusta coffees by

> 20 This section is drawn mostly from the recent World Bank publication: “Dealing with the Coffee Crisis in Central America: Impacts and Strategies” (Varangis, Siegel, Giovannuci, Lewin, 2003).

> 21 A recent report by Economic Comisión for Latin American Countries called: Ce _ntroamerica:  El impacto de la caida de los precios del café_ highlights the extent of the crisis. (ECLAC, 2002).

> 22 Arabica and Robusta are types of coffee beans, the former being grown mostly in Central and South America and the latter in Africa, Asia, and Brazil.  Arabica is considered a higher quality coffee.

> 23 Workshop proceedings can be found at: www.iadb.org/regions/re2/coffeeworkshop/

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