After the Colombian Coffee Strike: What is $444 Million Really Worth?

Photo by the Colombian Coffee Growers Federation

by Michael Sheridan

Michael Sheridan has worked on coffee for Catholic Relief Services since 2004. He currently directs the Borderlands Coffee Project in Colombia and Ecuador and advises other CRS coffee projects in Latin America and the Caribbean. He is based in Quito and publishes perspectives from the intersection of coffee and international development for the CRS Coffeelands Blog.

Two weeks ago, Colombia’s government and disgruntled coffee growers reached agreement to end a strike in the coffeelands that was brief but messy, including clashes between coffee growers and Colombian security forces, expressions of solidarity by actors ranging from FARC guerrillas to an ex-president, official allegations of external agitation, and blockades of major highways that led to economic losses, price hikes on food and gas, and the deaths of at least three people whose ambulances were caught up in the blockades.

Headlines proclaiming the end of the strike focused on the government’s commitment of a staggering $444 million in estimated price supports for coffee growers for 2013.  The subsidy issues was a leading storyline, but it hardly the only one.

TERMS OF THE AGREEMENT

Subsidies

The big issue in the negotiations was price supports for coffee growers.  The question was never whether the government would extend subsidies to coffee growers, but how much it would commit.  Colombia had already been providing subsidies to farmers for more than five months by the time the strike was launched as part of its Apoyo al Ingreso del Caficultor initiative.

By October 2012, it was clear that low prices in the coffee market and a strong peso in the currency market were combining to squeeze coffee growers.  In response, the government implemented a subsidy equivalent to $0.04 per pound, increasing that subsidy gradually as prices continued to fall and the Colombian peso continued to rally.  In November, it jumped to $0.12 per pound.  And in March, following the first week of the strike, the government increased the amount to $0.19/pound for farmers with more than 20 hectares and $0.23/pound for smaller-scale farmers.  A week later, the two sides agreed to a subsidy equivalent to $0.29 per pound at today’s exchange rates, with farmers receiving the same amount regardless of their landholdings.  The government has re-branded the subsidy program Protección al Ingreso de los Caficultores.

Creative Commons photo by CIAT

The subsidy applies only as long as local market prices remain within a specific range.  If local prices fall below $0.97 per pound, the subsidy increases from $0.29 to $0.33.  And the subsidy is discontinued if the the local market reaches $1.12 per pound/$1.41 with the federal subsidy.

Credit

In addition to the subsidies, the government announced in February that Banco Agrario, a public bank that holds 90 percent of all loans to coffee growers in Colombia, would forgive interest and capital payments for coffee growers for 2013.  It also announced $9.3 million in new outlays to subsidize the renovation of 110,000 hectares of coffee in 2013.

Inputs

The government earmarked $19.4 million for the purchase and application of fertilizers.

Institutional Reform

One element of the strike that was largely overlooked in media coverage was the creation of the Comisión para el Estudio de la Política y la Institucionalidad Cafetera, an independent, high-level commission  convened by the presidency and led by a former finance minister to conduct a comprehensive review of the country’s coffee policy and institutions.

President Juan Manuel Santos has been calling for more than a year for reengineering of Colombia’s powerful National Coffee Growers Federation to improve its competitiveness, and some of the country’s coffee growers echoed that call as their situation grew more precarious in recent months.  It hopes to conclude the study and issue recommendations by the end of 2013.

Colombia convened a similar commission more than a decade ago to propose institutional responses to the coffee price crisis.

WHAT’S RUST GOT TO DO WITH IT?

Unfavorable conditions in commodity and currency markets may have been the sparks that ignited Colombia’s coffee strike, but it was a sustained decline in production due to coffee leaf rust the created the fire hazard.  Nearly five years after coffee leaf rust first began affecting Colombia’s coffee production, farmers are still vulnerable because of it.

Since 2008, Colombia’s production has declined steadily thanks to a combination of losses to coffee leaf rust and a massive campaign of renovation with the rust-resistant Castillo hybrid that has taken a significant chunk of the country’s coffee production offline.  At the national level, Colombia registered its lowest volume of coffee exports in 30 years in 2012. At the farm level, productivity has declined and the cost of production is up, making the current price levels untenable.  Coverage of the strike reported that the cost to produce a pound of coffee in Colombia ranges between $1.10-$1.41, and the price of a pound of coffee between $1.01-1.05.  With higher rates of productivity, farmers can achieve efficiencies that push down the per-pound cost of production, meaning they have more coffee to bring to market and need less per pound to break even.

But Colombia’s production data are only just now beginning to show that production is back on the rise.  Until production returns to pre-2008 levels, coffee growers — especially smallholder farmers like the ones we work with in Nariño — will be uniquely vulnerable.  Any decline in coffee prices or losses to pests, diseases or weather events will put the tenuous profitability of their farms at risk.

WHAT’S NEXT?

Colombia’s authorities have made clear that the $444 million the country has committed to subsidize coffee farmers represents an extraordinary measure undertaken under exceptional circumstances.  Ag Minister Juan Camilo Restrepo said it was without precedent “in the history of coffee.”  Finance Minister Mauricio Cárdenas underscored that funds are only being earmarked for 2013, and that the government considers this a stop-gap measure designed to buy time until the country can get back to its pre-2008 production level.  The message to Colombia’s coffee sector seems to be that the country can’t afford another bailout of this magnitude and may not have the political will to do so even if it could.  And that the coffee sector must right its own ship, and soon.

That starts with finishing the country’s recovery from coffee leaf rust.

It may also mean reforms to the institutions charged with advancing and protecting the interests of Colombia’s 560,000 coffee growers.  While the country’s Congress issued a statement saying that the striking coffee growers did not propose any more effective way of investing public funds to support the coffee sector, President Santos made clear when he convened the commission that will explore this issue that reforms are on the table.