Overview
Coffee is one of the world's biggest export commodities, the top agricultural export for a dozen countries and one of the world's ten largest legal agricultural exports by value. (Source: FAO Statistics Division.) According to John Talbot of the University of the West Indies, "Coffee is the second most valuable commodity exported by developing countries, a distant second to crude oil," but well ahead of third place sugar and other agricultural, forestry and mining outputs.
"The number of people who depend on coffee for all or most of their living is in excess of 75 million," according to Ric Rhinehart, executive director of the Special Coffee Association of America (SPAA). According to Rhinehart's estimates, coffee is a $90 billion a year industry. His explanation of this figure provides valuable insights into the commodity. In 2008, Rhinehart states, approximately 18 billion pounds of green coffee beans were sold for $22 billion, at an average of $1.24/lb.
"Here is a place where the math gets interesting," according to Rhinehart. "All that coffee gets roasted, reducing its weight to around 14 billion pounds. Of that, roughly 70% is sold for home consumption at about $4.50/lb, yielding about $45 billion." The other 30% is brewed and sold at higher prices for another $45 billion, approximately. Combining sales of roasted coffee with brewed sales produces the $90 billion annual estimate.
Others, including Antony Wild, the author of Black Gold, have suggested that the people and dollars involved in the coffee industry are far in excess of Rhinehart's estimates.
Panama Coffee
It is my privilege to live in Boquete, "the Napa Valley of coffee" according to gentleman farmer John Collins of Finca Lerida. Boquete is located in the province of Chiriqui in the Republic of Panama. Here, roughly 100 plantations of varying size grow many coffee varieties along rainforest mountainsides. The comparison to Napa Valley is apt; Boquete's coffee plantations are at least as picturesque as Napa's vineyards. Here coffee is cupped daily and analyzed for its bouquet. Because of the high altitudes, the beans are very dense and uniform, mild with a medium body, good aroma and high acidity. These estate coffees are considered among the best in the world, and they consistently place in the top ranks at international cupping contests. Boquete coffees begin at $10/lb in the U.S. and often command much higher prices.
Finca Lerida's coffee was recently ranked first among 119 coffees from 15 countries at the cupping pavilion during the Boston SPAA annual meeting. Adjectives overheard at such events are similar to those used at a wine tasting: nutty, fruity, floral hints, smoky, full-bodied, delicate, clean finish, pepper aromas, tangy, spicy, earthy fragrance, hints of caramel. Finca Lerida was established in 1922 by Tollef Monniche, the man who invented and patented the Sifon that is used worldwide in the wet process. The Collins family purchased Finca Lerida in 1958, and the latest generation continues a long tradition of innovation at Finca Lerida. It was fascinating to learn about this industry in the Collins family's new café in the midst of so much coffee history.
There are no Starbucks in Boquete. Here grows some of the world's best coffees, yet a pound of fresh roasted beans retails locally for less than the price of a mocha grande in the U.S. While touring the processing facility of Dra. Maria Ruiz, I learned an excellent local story involving Boquete's Café Ruiz,. The tour guide shares a story about a negotiation between Sr. Ruiz and a buyer from "a well known coffee chain." The buyer asked, "Before I buy this coffee, I would like to know how much you pay your indigenous workers." Sr. Ruiz responded, "Of course, but before I sell you my coffee, I would like to know how much you charge for a double mocha grande in NYC?" As the story goes, the deal was consummated with no further questions.
Premium Boquete coffees are produced on large family-owned farms near the border with Costa Rica. Many growing regions are clustered around the Baru volcano: Boquete (the best known), Paso Ancho, Volcan, Piedra de Candela and Renacimiento. The optimum growing elevation is roughly a mile high, not higher than 6000 feet, not lower than 4000 feet. Quality varies according to microclimates, volcanic soil composition and annual climate conditions. Others observe more common names for growing regions, which correlate with the communities where they are grown: El Salto, Jaramillo, Palmira Arriba, Alto Quiel.
Most Panama specialty coffees are derivatives of the caturra variety and the hybrid catuai. These cultivars are less traditional than gourmet coffees from Ethiopia, whose coffees come from much older cultivars, but they are more traditional than hybrids with robusta in their makeup. Both Finca Lerida and Café Ruiz are planted with Arabica coffees in volcanic soils maintained for ideal balance to produce the best quality coffee. Cherries are delicately hand picked at full maturity by indigenous Ngobe-Bugle workers who leave unripe cherries for future pickings. Harvests occur over many months as the cherries do not all mature at once.
Economics of Coffee in Boquete
On most fincas, indigenous workers are paid $2 per "lata" and provided housing. Lata is local lingo for your standard 5-gallon bucket, which holds 30 pounds of cherries. Some fincas pay more or less, and many provide food as well as housing for workers on their farms. A family might pick 10 latas in a day; women and children pick alongside the men. Everybody helps with the harvest, which is an exciting time in coffee country. Outside the harvest season, Ngobe-Bugle men are paid daily for their work maintaining the crop.
This month, processors in Boquete are paying farmers $6.25–$7.25 per lata. This means small growers are netting roughly $5 per lata, which becomes 4–5 lbs. of coffee after processing. In other words, $1.25 per pound is the high end of a typical farmer's yield. This margin will not cover upkeep and taxes unless economies of scale are obtained through vertical integration from farming to processing, roasting and retailing. Given that gourmet coffee retails in the U.S. for 10 times the amount earned by the grower, the question arises: who is making money in coffee?
One local farmer, expatriate and blogger, Lee Zeltzer, extends an interesting invitation to consumers up north. "When you buy a pound of gourmet coffee, think not only of the pickers who are often labeled as underpaid, but also small growers who subsidize your morning cup of java." Zeltzer rationalizes his crop by noting that his coffee is great ground cover, so he doesn't have mudslides. You can hear the grin in this statement.
With indigenous workers earning subsistence wages and small growers struggling to break even, 90% of coffee revenues are concentrated in the hands of medium-to-large grower/processors, wholesalers, roasters, and retailers. Here investments can be expected to bring an acceptable rate of return.
Local Varieties
A recent visit to Boquete's 600-plus acre Finca Lerida estate led to a discussion with proprietor Collins about varieties, processing techniques and economies of scale. Collins figures he needs to process four times more coffee than he grows on the 100 acres he has planted in order to obtain a healthy scale for his operation. He processes for many growers, as is the practice at Café Ruiz. For Collins, the economics obtain the desired balance by roasting approximately 160,000 pounds annually. Collins is also seeking balance with the varieties he has planted: geisha, criollo, pacamara, caturra, catuai, mocha, java and borbon. Collins is installing state-of-the-art processing systems utilizing Brazilian technology; he also runs an eco lodge and birding tours on the 500 acres of rainforest that envelop his farmland.
Tradeoffs common in the coffee growing regions of Boquete involve conservation and sustainability. Collins, for example, does not plan to plant more acreage. Every harvest removes nutrients from the soil—nutrients that must be replenished. Erosion and chemicals can lead to other problems. Many unplanted hillsides are too steep for farming, and other areas compete with a building boom fueled by expatriate retirees from Europe, North America and neighboring Costa Rica. Purchasing new land for coffee is one barrier to entry in Boquete. The local building boom is driving land prices to levels common in the U.S.
Organic Coffee
Some expatriate farmers are taking a novel approach. Rich Lipner of El Salto's Finca Dos Jefes is one of a dozen organic growers in the area. Lipner's farm is 100% chemical free. He grows many of the same varieties as Collins. They both prepare their own soils with organic inputs to replace the phosphorous, calcium and potassium removed from the soil by their thriving trees. Lipner, however, practices lunar farming and he uses the natural dry processing method (with the skin on), which ensures more of the sugars from the cherry are retained by the bean. Therefore "Cafés de la Luna" are naturally sweet. Finca Dos Jefes also offers unique tours where guests learn to roast, taste coffee roasted several ways, and then roast a pound to their own specifications to take home.
Upside Potential
The concept of a "Napa Valley of Coffee;" daily cuppings, tastings and tours; and experimentation with varieties and processing methods continue to drive the quality of coffee in Boquete to new heights. One example of success is Café Geisha, pioneered at the Peterson family's Hacienda La Esmeralda. The Geisha variety has traveled to and from Africa and Costa Rica and is now widely planted in Boquete to meet an extraordinary demand. The success of this varietal at Hacienda La Esmeralda has inspired some to suggest Boquete is to coffee as Bordeaux is to wine. One pound can fetch more than $125 at specialty coffee auctions.
Just as Napa Valley has competition from wine regions in Oregon and Washington, Chile and Argentina, Boquete growers expect increasing competition in coffee from areas such as Guatemala, Mexico and growing regions across South America, such as Boliva, Brazil and Peru. Land prices across Latin America are more favorable than Panama's highlands. Shade-grown coffees from Costa Rica and Mexico fetch very attractive prices given lower labor costs there. Guatemala has superb fruit coffees such as the Huehuetanango from San Juan Pixcaya; Honduras and El Salvador are also contenders.
In conclusion, coffee is a commodity with agricultural investment potential for medium-to-large scale operations. For smaller operators, innovation and vertical integration are essential and return on investment can be modest, outside of the potential quality-of-life benefits derived from living on a coffee plantation. While worldwide demand for coffee continues to grow, the next coffee hot spot waits somewhere in Latin America.
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About the Author:
Stephen Kaczor is a Seattle-based writer, entrepreneur, and consultant. He is a partner at International Market Resources, a Latin American trade consultancy, and the founder of Changes In Latitude, a travel company. The focus of Stephen's consulting is strategic market development, research & management. In addition to consulting and writing, he is passionate about Latin American culture, travel, and sustainable agriculture. www.alternativelatininvestor.com
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