Low coffee prices and spiralling debts have resulted in coffee producers leaving their farms, emigrating to other countries, and more. But how widespread are these debts? What causes them? And why are they so hard to get out of?
Lee este artículo en español Las Deudas de Los Caficultores Aumentan y Esto Causa Problemas
Leaves of a coffee tree infected with coffee leaf rust. Credit: Ana Valencia
How Much of a Problem Is Debt?
It’s hard to quantify how many coffee producers are in debt, or by how much. We lack data. Yet what we do have is a wide range of evidence showing that the coffee price crisis has left producers earning less for their coffee than it costs to produce, and a substantial number of producers telling us that they have unmanageable levels of debt.
In 2013, before the international coffee price crashed, the SCAA (now the SCA) stated that 63–80% of coffee producers in Central America experienced food insecurity, or the inability to feed their family throughout the year. A 2017 study, conducted by Fairtrade International and also dating to before the crash, showed that the majority of Fairtrade farmers in Africa and Asia do not earn enough to live on.
Read more in Why Are Coffee Producers Going Hungry?
In one sense, the fact that coffee producers are in debt is obvious: paying for the day-to-day living costs of the producer and their family requires going into the red. Yet it’s more complex than this.
Debt can be positive: it can enable investment and growth. A producer who is financially resilient and goes into a well-planned and manageable debt to expand their business – perhaps by buying new infrastructure, land, or trees of a different variety – can then profit off that.
Yet some producers go into debt to cover the running costs of their business, or end up neglecting basic maintenance to pay their debts. This is a harmful and unmanageable form of debt.
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Unripe coffee cherries and leaves infected by coffee leaf rust. Credit: Ana Valencia
When Debt Leads to Greater Debt
With unmanageable debt, the money that goes toward repaying it is needed for investment on the coffee farm or even to pay for the living costs of the producer’s family.
For example, in-debt producers are often unable to buy enough fertilizer, which can create a vicious cycle. Since the coffee plants are weaker, their yield the following year will likely be decreased. In turn, the producer will receive less income and feel an even tighter financial squeeze.
When faced with rapidly accruing interest and growing debts just to finance essential operations, producers may feel the need to sell parts of their farm. Yet this can do more harm than good. With less land, the cost per unit of coffee may be higher, resulting in reduced profit margins and even less spare money.
This can hit families hard, causing them to not only deprive the business of essential investment but to also be unable to meet their basic needs, such as food, heating, health care, and education.
Coffee drying on raised beds. Credit: Henry Wilson
Why Debt Is Commonplace
Low coffee prices are undeniably a factor in producer debt, yet other elements also contribute to this trend.
Fluctuating Coffee Prices
The inability to know future coffee prices is separate to the issue of low coffee prices, and creates its own challenges. While farms can plan ahead, fluctuating prices can quickly and unpredictably turn a healthy debt into an unmanageable one.
Sensible borrowing always involves a financial buffer in case of reduced cash flow or unexpected costs. However, loans are often long term and the current coffee price has dropped dramatically beyond what producers might have considered reasonable, five or ten years ago, to plan for.
Use our guide: How to Determine Your Production Cost
Access to a Higher-Paying Market
The specialty coffee market, while often linked to the commodity price, includes bonuses for quality that can make coffee production more profitable. Producing higher-quality coffee requires a greater investment, so an already in-debt producer may struggle to transition from commodity to specialty. Yet for those already producing specialty, or with financial leeway, this can be an attractive option.
However, it’s not always easy to access the specialty market, even when a producer is already farming specialty coffee. There are limited opportunities to meet buyers without the disposable income required to go to international trade shows. Once there, or once the buyer is on the farm or viewing the website, there are further issues to contend with: a limited knowledge of the going price for specialty green beans, language barriers and cultural differences, and the age-old issue of supply and demand. There are more producers than there are buyers.
As a result, producers may be forced to accept a low price for their coffee for fear of not being able to sell it all – despite their increased costs from targeting higher-paying buyers.
Coffee leaves infected with coffee leaf rust. Credit: Henry Wilson
Late Payments From Buyers
Many buyers only pay for coffee on receipt, or even several months later. When producers are struggling with cash flow, delays in receiving payment can turn a difficult financial situation into an unmanageable one.
Risks of Coffee Production
Coffee production is always risky. Unexpected weather conditions that can lower a crop’s value are becoming more frequent, while climate change goes hand in hand with increased risk from pests and diseases. Producers who took out loans 10 years ago may now see their available income after loan repayments decreasing year on year, beyond what was foreseeable.
Read our guide: How Coffee Producers Can Adapt to Climate Change
Unripe coffee cherry affected by coffee borer. Credit: Julio Guevara
Reliance on One Income
Farmers that have multiple sources of income can better manage their cash flow and invest in equipment such as fertilizer without taking out loans. As a seasonal product, coffee usually brings in income only once or twice a year. This can make managing cash flow challenging. When there are unexpected expenses nine months after payday, often there isn’t the spare money to pay for it.
For this reason, income diversification can be an important step to financial stability – but it also requires resources and the ability to make an initial investment. For producers already struggling to cover basic costs, the idea of farming another crop can seem impossible.
The types of loans on offer can also cause problems. The low price for coffee and gloomy future prospects mean that producers can struggle to prove to banks that they are financially resilient enough to take out a loan.
Producers who are unable to access bank loans may have no other choice but to turn to third-party or private lenders, with the hope that market conditions will improve. Yet interest rates from unethical private lenders can exceed 20% per year. These are often attractively described as 1.5% or 2% per month. Yet 2% charged monthly will add up to nearly 27% over the year.
Once in debt with such a high interest rate, it is almost impossible to escape it.
Coffee tree at a farm in Honduras. Credit: Perfect Daily Grind
Discussions around the coffee price crisis often focus on a simple comparison of prices and the cost of production. This may then be compared to the local cost of living. Yet coffee farm profitability is more complex than this. Cash flow, credit and credit ratings, savings, the cost of access to resources, income diversification, farm size, and more affect a producer’s financial resilience. We cannot ignore the impact of debt when discussing this.
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Written by Sunghee Tark. Feature photo credit: Ana Valencia
Perfect Daily Grind
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