It's Wednesday and I have comments on a few items today. I haven't been able…
According to the International Coffee Organization (ICO), the price of coffee has risen for 17 consecutive months and the sector is being hit with sequential shocks, the latest being the Ukrainian conflict, which is having impacts on both the demand and supply sides. I was talking with a friend over the weekend just gone and they were complaining that a cup of coffee had risen to $A7 or thereabouts, which was really squeezing people’s incomes. As a disclaimer, I have never had a cup of coffee in my life – just the aroma is enough to turn my stomach. But I was thinking about coffee over the last few weeks for another reason. I am currently doing some research on Timor Leste in anticipation of a change in the Presidency. The first round of the elections were held last weekend and it looks like Ramos-Horta will win the second round run-off in April. One of the things I am working on is a plan to diversify the nation’s exports as the inevitable decline in oil revenue starts to impact. I am also in developing models of fair trade that allow for sustainable agriculture (that is, not cash crop mania that wrecks subsistence farming and ends in farmers being locked up in international debt) but also allow the nation to diversify their export portfolio. Fairness and sustainability are good ideals to have. There is an opportunity here for a nation such as Australia to reform its ways and break out of the dog-eat-dog ‘free trade’ mantra and actually start doing some good in our region. That is what this blog post is about.
What follows is not yet definitive. Rather it is a set of notes that help me understand the situation and start the process of mapping out a blueprint for sustainable development – sector by sector.
Global coffee trends
In the latter part of 2021 into 2022, coffee exports from South America (Brazil, Columbia) plunged – down 16.1 per cent between October 2021 and January 2022.
Further production falls are expected.
Global shortages are expected relative to demand.
This ABC article (September 20, 2021) – A coffee shortage is coming, and it could last three years, importers warn – foreshadowed the problem:
limate change-related weather events have affected key coffee-producing regions and global supply chain issues are hurting importers.
Drought and severe frost are estimated to have destroyed about 20 per cent of Brazil’s coffee plants.
Brazil is the world’s largest coffee producer and accounts for about half of the world’s supply.
Brazil has cut its production by 25 per cent.
It is clear that the world is in another wave of escalating coffee prices as is evidence by the next graph, which shows the ICO Composite Indicator Price from January 1990 to March 2022.
The ICO indicator price system began in 1965 and is a summary measure based on four separate price groups:
– Colombian mild arabicas.
– Other mild arabicas.
– Brazilian and other natural arabicas.
The ICO say that “The current composite indicator price is calculated by taking a weighted average of the indicator prices for the four separate groups, weighted according to their relative shares in international trade.”
According to the latest ICO – Monthly Coffee Market Report – February 2022 – the global coffee price in futures market has fallen as a result of the Ukrainian conflict.
But the ICO Composite Indicator Price continued to rise (+3.2 per cent) in February 2022 (“17 consecutive months of increase”).
Together, Russia and Ukraine accounted for 3.8 per cent of global consumption of coffee.
On the supply-side, Russia is a significant supplier of ammonia, which is a fertiliser ingredient, which will likely push up input costs for coffee growers.
Further, on-going disruptions to shipping sees “several containers of Honduran coffee stranded in international waters”.
So, on-going chaos is expected.
Diversifying exports in Timor Leste
Timor-Leste has what is referred to as a ‘narrow export basket’, which just means that a significant proportion of its exports are dominated by few commodities.
Oil and gas exports account for over 75 per cent of the nation’s total exports.
The WTO – Fact Sheet – provides more detail.
The following graphic summarises the 2019 shares of exports by commodity groups.
Fuels and Mining Products – 75.6 per cent
Coffee – 16.6 per cent
Other – low
Timor-Leste also mainly trades locally – Singapore, South Korea, China, Indonesia, India and Japan.
Its overwhelming reliance on oil and gas is finite.
At present, with the escalation of energy prices, Timor-Leste is benefitting but the medium-term projections are not good.
The Petroleum Fund that the nation has built up since independence is massive but the additional oil revenue is declining as the fields run dry.
I have written extensively about this problem and you can consult the relevant blog posts – HERE.
Clearly, the Petroleum Fund will not last for ever.
But that should not be used as a further argument for austerity and a smaller drawdown from the Petroleum Fund. The reality is that the global uncertainty makes it more imperative for Timor to fast track its human capital and physical infrastructure development.
Currently, with Timor’s dollarised monetary regime, the massive Petroleum Fund is the only viable financial resource available to government to address the crucial issues of unemployment reduction, skill development, food security, and infrastructure development.
While introducing its own currency is the medium-term goal and a strategy has to be mapped out to define that transitional path, we must recognise that a significant amount of work can be done now, within the context of the dollarised monetary system and the vast Petroleum Fund resources, to prepare the nation for that transition and provide major short-term gains in material prosperity and environmental sustainability.
One aspect of that work now is to diversity if non-oil exports.
There are several parts to a sustainable development plan for a nation such as Timor-Leste, as an alternative to the sort of car crash plan that the likes of the World Bank and the IMF offer.
Those institutions typically want to reduce the size of the agricultural sector and shift it into cash crops for exports. This strategy not only floods the world with produce and depresses prices but also undermines the subsistence nature of farming in poorer nations.
So the farmers end up in worse debt predicaments and the local citizens lose food security.
However, criticising that strategy doesn’t mean that food exports are to be eschewed.
It just means that nations have to be smarter in the way they build export markets.
Advanced nations can also help.
While there is a narrative emerging that ‘globalism’ is dead and nations will look to becoming more self-sufficient given Covid, Russia, China etc, there is still a lot of ‘free trade’ talk going on.
At present, Australia is negotiating a ‘free trade’ agreement with India, despite the latter nation being sympathetic to Russia.
You can be sure that any such agreement will be laced with neoliberalism and will aid corporations over people.
Australia is also a poor world citizen when it comes to foreign aid.
Despite promising to meet agreed global targets on direct aid as a proportion of GDP, the Australian government has refused to honour that promise.
It even now counts the expenditure it outlays to keep legitimate refugees in off-short concentration camps as foreign aid, such is the morality deficit among our political class.
I wrote about that shame in this blog post among others – Australia’s Overseas Aid cuts reveal a nation that has lost its spirit (May 15, 2017).
Our inability to stick to our agreements with the UN and others places our nation in the toxic category unfortunately.
Just last night, the UN secretary general said that Australia was one of the G20 holdouts in terms of climate action. Another example of how this nation has lost its way.
The Australian government responded to that criticism by claiming that the UN chief “António Guterres …. [was] … a member of the UN ‘chattering classes'” (Source).
All these elements can be brought together to assist the development of the coffee industry in Timor-Leste, which has some very unique features.
The – Coffee industry of Timor Leste – is the largest non-oil export sector, although tiny by world standards.
It is a relatively large employer and source of investment funds.
But it produces the largest supply of ‘organically’ grown coffee globally and its output is considered to be of the highest quality as a result of the volcanic soils available.
A significant portion of the sector is organised along cooperative lines.
The – Cooperativa Café Timor – for example, was formed after the nation gained its freedom from Indonesia in 1999.
The Cooperative was formed in 1994 and now has 28,000 planter members supporting 44,000 families – “It is divided into 16 cooperatives and 493 producer groups.”
It trades under a Fairtrade certification, which provides stronger income security for the farmers.
The Coop provides free health care (general medical, dental and maternal and child health services), business development and other benefits to members.
However, the sector still faces massive problems – largely due to a lack of working capital and poor infrastructure (transport etc).
So with world coffee prices rising, Australian consumers complaining, and Australia in need of doing something right as a global citizen, and its desire to enter trade agreements with other nations, here is the plan.
Australia enters a fair trade agreement with Timor-Leste to invest without ownership in improving the capital available to Timor’s coffee cooperatives.
We also agree to purchase a substantial proportion of our coffee needs from Timor-Leste up to their supply capacity which we would be helping to expand.
The purchase price would be under ‘fair trade’ rules, which would help the farmers increase their incomes and material standards of living.
There are several other benefits to this plan.
First, we could reduce the price of coffee to Australian consumers (is that a benefit?)
Second, by purchasing imports closer to home we reduce the carbon footprint of our coffee consumption, which would allow us legitimately to say we are trying to change our ways with respect to global warming.
Third, we improve our shocking foreign aid/GDP performance while genuinely improving the standards of living for one of our nearest neighbour.
We could also extend the plan to Papua New Guinea, which is also a coffee producer in need of substantial investment, and even closer to our shores than Timor-Leste.
There is nothing wrong with nations seeking to export agricultural commodities as long as the producers get fair prices on world markets and the production process doesn’t destroy traditional practices and undermine the quality of the local environment.
The coffee plan for Timor-Leste would be a win-win for both Australia and Timor-Leste.
Of course, it won’t happen given the lack of generosity and foresight of our political class.
But it should.
That is enough for today!
(c) Copyright 2022 William Mitchell. All Rights Reserved.