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It was a dip that caught everyone off-guard. "We were taken by surprise," says Marvin Rodrigues, managing director of J Rodrigues Coffee, discussing the rapid slide in international coffee prices, which hit a year's low in February. Rodrigues is a third-generation coffee cultivator and he and his family now cultivate 600 acres of coffee in plantations in Karnataka, the biggest coffee-producing state in India. Like others in the state, harvesting on Rodrigues's plantation was completed in February and March, which was when the prices fell, and he ended up selling part of his robusta crop at prices 30 per cent lower than the previous year.
Reports of agrarian distress have been coming in from different parts of the country, the bulk of it caused by unseasonal rain and hail. According to ministry of agriculture data released last month, 189.8 lakh hectares have been affected by rain and hailstorm. But unlike the crops affected by the vagaries of the weather in India, the crash in the prices of coffee was caused by global factors.
Three months ago, coffee prices hit their lowest level in a year when prices fell to 128.75 cents a pound from a high of 180 cents a pound in October and November last year. Prices were pushed down primarily by the weakening of the Brazilian real, increasing coffee exports from the biggest coffee producer, and mild rains that increased the prospect of a larger crop than expected. Hedge funds, too, began taking bearish positions, driving down prices.
"The markets fell soon after the harvest and those who chose to hold on to their crop are getting a much lower realisation," says K Kurian, chairman of the Karnataka Planters Association. The dip in prices, he emphasises, was not based on the actual physicals of the crop because global demand continues to be strong, but the influence of the funds on the movement of the commodity's prices.
The demand for coffee has, in fact, been growing steadily, particularly in emerging markets like Brazil, which is now the second largest consumer and supplier of coffee - production for 2015-16 is estimated to be between 44.1 million bags and 46.6 million bags (a bag weighs 60 kg), while domestic consumption is 21 million bags, according to Conab, Brazil's official commodities bureau. India's output is a small fraction, in comparison, at 331,000 tonnes for 2014-15. (1 tonne is equal to 1,000 kg), according to estimates of the Indian Coffee Board. While the slide in prices has had an impact, it has not reached a crisis stage, says a Coffee Board official, who requested not to be named.
Rising costs
Kurien, while confirming this, says coffee cultivators in India are also battling rising input costs in the form of an increase in wages for workers, which went up to Rs 248 a day from Rs 228 last month. Wages are raised every three years according to tripartite agreements hammered out among the workers' unions, the management and the wage advisory board. Large estates typically employ at least 100 workers throughout the year, the number going up during harvesting through employment of migrant labour. Plantations also have to mandatorily provide accommodation and medical benefits to estate workers, according to the Plantation Labour Act.
Some 97 per cent of India's coffee cultivators have smaller landholdings of less than 20 acres, and most of them sell by bags in the open market, while the larger coffee planters export most of their produce. When the coffee was harvested, prices stood at Rs 7,000 per bag for robusta parchment and Rs 11,000 for arabica, which dipped to Rs 5,900 and Rs 9,800, respectively, says Kurien. "Those who held on to their produce hoping for better realisation have lost out," he adds.
Indian exports of coffee have also fallen by 6 per cent between January and May to 130,528 tonnes, with arabica exports declining by 40 per cent, as Business Standard reported earlier. Exporters are now hopeful that the fall in the rupee against the dollar might help shore up exports. Coffee Exporters' Association President Ramesh Rajah told Business Standard that though the rupee deprecation might not make a big impact, exporters were hopeful of a recovery "provided the rupee maintains the same level or falls further."
There is also a small minority of coffee planters, who grow and export specialty coffee, and who say they are unaffected by the swing in prices, like Nishant Gurjar. "Fluctuations don't really play a significant role for me because my coffee is already pre-sold," he says, comparing his crop to luxury cars, the demand for which is less impacted by a recession than passenger cars. Gurjar grows his coffee over 250 acres and the bulk of his crop is robusta, and not arabica, which is considered the higher grade and fetches better prices in the market. "I did a SWOT analysis of my estate years ago and took the decision to shift to high quality robusta and mine is among the finest in the world," he says.
Gurjar is hardly the only Indian coffee planter to focus on robusta, even though arabica fetches better prices in the market. This is a trend that has been firming up over the years, to the extent that while it used to be 70 per cent arabica and 30 per cent robusta a couple of decades ago, that position is now being reversed, says the Coffee Board official.
There are a range of factors for this switch: even though arabica might fetch a premium in the markets, it is also more susceptible to attacks by pests, particularly the white stem borer, which attacks and destroys the stem of the coffee plant. The yield per acre in India is also less and the realisation from the sale of arabica makes it unviable for smaller cultivators, says Kurien. With robusta, on the other hand, one can still recover the costs, he says. As the name suggests, the robusta plant is indeed more robust and less prone to destruction by pests and it is gaining recognition in markets abroad. "Robusta used to be a bad word earlier but those in the trade are now acknowledging India's robusta as being among the finest," says Rodrigues, who grows robusta on 60 per cent of his estate and is increasing it. He says when they began cultivation, it used to be two-thirds arabica and the rest robusta.
The global picture
This is also an issue internationally, for which global warming is cited as a major reason. An article in The Guardian in March in fact warned of a "coffee catastrophe" taking shape, with rising temperatures and changing rainfall patterns threatening the growth of the arabica plant. Quoting a study by the International Center for Tropical Agriculture, it warns that Brazil alone can expect arabica production to drop by 25 per cent by 2050 - around 70 per cent of coffee produced globally is arabica.
Other issues hobbling coffee cultivation in India, like many others, is paucity of skilled labour and its escalating cost. The United Planters Association of South India has made representations to the government to help develop strains of arabica that are resistant to the white stem borer and leaf rust and robusta strains which are high yielding and drought-tolerant, which ripen uniformly.
Cultivators are wary of predicting how prices could move in the days to come, even though the fundamentals remain strong. The April report of the International Coffee Organization noted that "prices remained low in April 2015 despite a slight increase over March, as consumer stocks remain relatively well supplied." It adds that recent reports suggest the damage to the Brazilian crop may also not be as severe as expected, which could again bring down prices. All eyes will now be on Brazil.
