Report Highlights: 

FAS Quito forecasts Ecuador’s coffee production in marketing year (MY) 2014/15 (April/March) at 415,000 (60-kg) bags, up 10,000 bags (or 2.5 percent) compared to MY 2013/14. Our MY 2014/15 forecast is subject to no major production disruptions induced by an El Niño event commencing in the third quarter of 2014. With the coffee leaf rust outbreak abating, we see exports in MY 2014/15 at 1.4 million bags, up by 100,000 bags (or almost 8 percent) compared to MY 2013/14. The government may be about to set a minimum price of $33 above international coffee prices per 100-pound (~45.3 kilogram) sack to entice expanded production.

Executive Summary: 

FAS Quito forecasts Ecuador’s total coffee production in marketing year (MY) 2014/15 (April/March) at 415,000 bags (60-kilograms per bag) on a Green Bean Equivalent (GBE) basis. This represents an increase of 10,000 bags (or 2.5 percent) compared to our MY 2013/14 estimate of 405,000 bags. Coffee production however dropped 28 percent in MY 2013/14 due to the outbreak of coffee leaf rust disease in MY 2012/13. Our MY 2014/15 forecast is subject to no major production disruptions induced by an El Niño event commencing in the third quarter of 2014. 

We forecast Ecuador’s total domestic coffee consumption in MY 2014/15 at 267,000 bags GBE, up by 2,000 bags or less than one percent compared to our MY 2013/14 estimate. The slight uptick in consumption is due to natural population and economic growth combined with a growing specialty coffee drinking culture. 

From the trade perspective, FAS Quito forecasts exports in MY 2014/15 at 1.4 million bags, up by 100,000 bags or almost 8 percent compared to the MY 2013/14 estimate of 1.3 million bags. While Ecuador exported a record high of nearly 1.7 million bags in MY 2012/13, the sharp drop in MY 2013/14 exports is attributable to the coffee leaf rust outbreak during the previous marketing year. Soluble coffee accounts for 77 percent of coffee exports. Total coffee imports in MY 2014/15 are forecast at 1.2 million bags, up 55,000 bags or nearly 5 percent compared to the MY 2013/14 estimate of 1.1 million bags 

On the policy front, we find that the Ministry of Agriculture is implementing the $70 million “Reactivation of Ecuador’s Coffee Cultivation” project. The Ministry seeks to renovate 135,000 hectares of old coffee lands. Low international prices, and coffee leaf rust, cut deeply into 2013 farmer incomes; many producers are questioning the profitability of the sector. We hear that the government is considering setting a minimum price of $33 above international coffee prices per 100-pound (~45.3 kilogram) sack to entice expanded production. 

Coffee, Green

Production: 

FAS Quito forecasts Ecuador’s coffee production in marketing year (MY) 2014/15 (April/March) at 415,000 bags (60-kilograms per bag) on a Green Bean Equivalent (GBE) basis, up by 10,000 bags or increasing 2.5 percent compared to our MY 2013/14 estimate. We estimate coffee production in MY 2013/14 coming in at 405,000 bags GBE, or down 28 percent compared to MY 2012/13. We attribute the production drop in MY 2013/14 to the previous marketing year’s outbreak of the fungus Hemileia vastatrix that causes coffee leaf rust disease. More profitable Coffea arabica trees are more prone to infection than are c. robusta trees. 

With the coffee leaf rust outbreak in the main production areas easing somewhat in MY 2013/14, we expect a slight recovery in area harvested in MY 2014/15. Total area harvested should grow by some 4,000 hectares or increase 3 percent to about 123,000 hectares. At FAS Quito, we estimate that MY 2013/14 will see some 119,000 hectares harvested. For both MY 2013/14 and MY 2014/15 total area planted should remain constant at about 199,000 hectares; intercropping is common, reportedly occurring on about 60 percent of the total planted area.

About 53 percent of coffee production occurs in the coastal provinces; Manabí alone accounts for 35 percent of total production. The Amazon and the Sierra (mountain) areas account for 25 and 22 percent of the Ecuador’s coffee production. Robusta coffee is mainly planted in the Amazon, while Arabica coffee is cultivated mostly along the coastal provinces. 

Coastal areas experienced unusually wet weather in MY 2012/13; creating optimal conditions for coffee leaf rust. Along with the presence of free water, Hemileia vastatrix requires temperatures of between 10 and 35 degree Celsius; the loss of moisture after (spore) germination commences will however inhibit the infection process. Under extreme conditions the disease will kill a tree. However what often occurs is that the loss in foliage diminishes the plant’s ability to photosynthesize and store energy for fruit production, resulting in vastly lower yields. 

Coffee is largely hand-picked in Ecuador; the use of fertilizer and modern irrigation systems are also limited. Traditional cultivation accounts for 80 percent of the crop; yields seldom surpass 300 kilograms (or five, 60-kg bags) per hectare. Plantations utilizing modern methods see yields of 700 kilograms (~12, 60-kg bags) per hectare. Coffee leaf rust pushed yields down 30-40 percent; MY2013/14 yields are reportedly as low as 210 kilograms per hectare. 

Ecuador’s coffee production for over a decade has been falling. FAS Quito sees little sign of Ecuador returning at this juncture to the early 2000’s production levels. Despite government and foreign assistance, the sector is plagued by the lack of new varieties (i.e., cultivars derived by selective breeding or natural selection). Half of the country’s plantations are now in need of new varieties, but international price volatility is discouraging farmers’ from investing in new coffee trees. We anticipate that with farmers struggling with low coffee prices, many will likely take a wait-and-see approach on prices improving before committing to any major new investments.

The Ministry of Agriculture in 2014 has been directed to expand production as part of the government’s rural economic development push. Fungicides to combat coffee leaf rust are being provided. We expect these efforts to help keep the outbreak at bay, but recognize that coffee leaf rust is present often wherever specialty coffee is cultivated. 

Despite local production drops, coffee wholesale prices still tumbled in calendar year (CY) 2013 compared to CY 2012. We attribute the fall in Ecuadorian wholesale prices to world leader Brazil’s 2013 bumper harvest (third largest ever recorded) of over 53 million bags; which further drove down prices during a period of global surplus. Ecuador’s coffee production and consumption are relatively small; local prices vary in tandem with international price fluctuations. 

The price of a 60-kg bag of Ecuadorian Arabica coffee has slipped from $305 in 2010 to $135 in 2013; representing a compound annual growth rate (CAGR) of negative 24 percent. Robusta coffee also slipped from an average of $128 per 60-kg bag in 2012 to a low of $96 per bag in 2013. At FAS Quito, we however anticipate prices to improve somewhat in 2014 due to this year’s severe drought in Brazil. Brazilian farmers have also being scaling back coffee production in recent years in favor of other more profitable export crops (i.e., soybeans).

Our MY 2014/15 forecast is subject to no major production disruptions induced by an El Niño event commencing in the third quarter of 2014. An El Niño is an episodic warming of the eastern tropical Pacific Ocean. Since March 6, 2014, an El Niño watch has been in place. Reportedly there is now a 50 percent chance of an El Niño of any variety (i.e., weak, moderate or strong) occurring in 2014; normally there is a 33 percent chance of one occurring. 

The World Meteorological Organization forecasted earlier in January 2014 that outside of a small possibility of a weak and brief La Niña development in the second quarter of 2014, conditions will likely remain neutral (evidencing neither the presence of El Niño or La Niña conditions). It nonetheless indicates the possibility of a weak El Niño developing in the third quarter of 2014; driving up water temperatures during the southern hemisphere winter (May-July). The World Meteorological Organization clarifies that model forecasts tend to have reduced skill when forecasting through the March-May period. 

Ecuador’s coffee production could potentially be disrupted by an El Niño event. Accompanying (increased) rainfall could impair efforts to control coffee leaf rust and potentially affect production and yields. 

Consumption:

FAS Quito forecasts Ecuador’s total domestic coffee consumption in MY 2014/15 at about 267,000 bags GBE, up by some 2,000 bags or less than 1 percent compared to our MY 2013/14 estimate of 265,000 bags. 

At FAS Quito, we are observing a slight increase in domestic consumption. We attribute the uptick to the combination of natural population growth of 1.37 percent (Central Intelligence Agency – CIA, 2014 estimate) combined with economic expansion. FAS Quito estimates per capita consumption of coffee at around 1.0 kilogram per person; Ecuador has a population of approximately 15.6 million (CIA, July 2014 estimate). The International Coffee Organization previously estimated Ecuador’s domestic consumption in 2011 at 0.61 kilograms per person. 

We find that Ecuadorians are traditionally consumers of soluble (instant or powder) coffee more than they are of roasted and or ground coffee. Nonetheless consumption patterns are changing as the country’s coffee drinking culture takes root. The market counts with the presence of homegrown specialty coffee outlets such as Café Vélez, Coffee Tree, and Sweet & Coffee, as well as with Colombia’s Juan Valdez. The soluble coffee market is dominated by El Café (part of the Noboa Group of companies), which counts with over 50 percent market share. 

Trade: 

FAS Quito forecasts Ecuador’s exports of coffee in MY 2014/15 at roughly 1.4 million bags, up by some 100,000 bags or almost 8 percent compared to our MY 2013/14 estimate of 1.3 million bags. Ecuador exported a record high of nearly 1.7 million bags in MY 2012/13. We attribute the sharp drop in exports in MY 2013/14 to problems associated with the outbreak of coffee leaf rust. At FAS Quito, we estimate that some 161,000 bags of Arabica coffee where exported in MY 2013/14. Soluble coffee exports however account for 77 percent of Ecuador’s coffee exports in CY 2013; Arabica and Robusta represent 12 and 11 percent of overall coffee exports.

FAS Quito forecasts Ecuador’s total coffee imports in MY 2014/15 at over 1.2 million bags, up some 55,000 bags or nearly 5 percent compared to our MY 2013/14 estimate of about 1.1 million bags. Imports of soluble coffee increased in MY 2012/13 due to the outbreak of coffee leaf rust. Ecuador’s statistics nonetheless fail to report data for coffee beans temporarily imported for processing into soluble coffee and subsequent re-export. 

Ecuador’s Robusta coffee farmers are receiving better than expected prices for their crop within the Andean region despite a drop in international coffee prices. At FAS Quito, we attribute higher than expected prices for (Ecuadorian) Robusta beans due to the Colombian soluble coffee industry’s import demand. Colombia’s soluble coffee industry reportedly has had some problems sourcing Robusta beans locally. With consumers willing to pay premium prices for Colombian branded coffee, Colombia’s soluble coffee industry is out competing Ecuador’s own industry for access to Ecuadorian Robusta beans. 

Ecuador’s soluble coffee industry, unable to match the often higher prices paid by Colombia, is forced to import more affordably priced Vietnam-origin beans. These enter as temporary imports, are processed and then re-exported as spray and freeze-dried coffee products to European markets. Ecuador exported over $114 million alone to Poland and Germany in coffee products classified under Harmonized Tariff System – HS Code 2101.11 (i.e., coffee extracts, essences, and concentrates) in CY 2013. 

Seeking to fill European demand, the Noboa Group is expanding its processing capacity. Ecuador’s soluble coffee industry produces substantial quantities of spray-dried, freeze-dried (lyophilized) and agglomerated coffee for domestic use and export. FAS Quito understands that local industry has a processing capacity of 1.3 million bags per annum. Exports to Ecuador of soluble coffee and essence from Colombia and Peru, as members of the Andean Community of Nations, are accorded preferential import tariff treatment; the absence of which would limit the viability of Ecuador’s soluble coffee industry. Colombian and Peruvian imports are often necessary for filling Ecuadorian processing volume commitments and servicing export markets. 

Policy: 

Ecuador’s constitution (adopted in 2008) establishes that only public agencies can benefit from fees and special contributions set forth by public law. Since 2010, Ecuador’s Foreign Commerce Committee is the sole entity responsible for authorizing coffee imports. At FAS Quito, we anticipate that in 2014 the Ministry of Agriculture will assume full control over coffee policies and technical assistance programs. 

The Ministry of Agriculture is already implementing a $70 million “Reactivation of Ecuador’s Coffee Cultivation” project. The Ministry’s plan seeks to renovate some 135,000 hectares of old coffee lands. Sources indicate that CY 2013’s low international coffee prices, along with the coffee leaf rust outbreak, have cut into farmers’ income and their willingness to cultivate coffee. 

While the government does not officially set minimum prices for coffee, this may change in the near future. At FAS Quito, we hear that the government is considering setting a minimum price of $33 above international coffee prices per 100-pound (~45.3 kilogram) sack. This premium is to be paid directly to the farmer by Ecuador’s soluble coffee industry. Sources also inform that the government will require that the country’s soluble coffee industry make domestic purchases before it will authorize foreign (Robusta coffee bean) imports. Sources claim that should this measure be implemented, it could cripple Ecuador’s soluble coffee exports of $191 million