Can Coffee Save Brazil’s Economy?

Brazil, the largest coffee producer in the world by far, is in dismal economic straits. The Great Recession followed by slowing of the Chinese economy has greatly reduced exports of raw materials. The Brazilian economy is in recession and the Brazilian currency, the real, has fallen sixty percent versus the US dollar in the last year. Nevertheless, Brazil is the world’s leading exporter of soy beans, sugar and beef as well as coffee. Because the dollar has risen versus the real there is more profit to be made (in reales) from exporting soybeans, sugar, beef and coffee. Nevertheless, according to Bloomberg Business Brazil should not count on coffee to save it from the recession.

The hope was that the real’s 31 percent drop against the dollar this year would make Brazilian companies more competitive and deter the consumption of imports. Brazil is the world’s largest exporter of commodities including soy, beef, sugar and coffee, and also manufactures airplanes and cars.

But exports’ share of the economy is little changed since 2011 and they account for just 11.5 percent of Brazil’s gross domestic product.

While coffee growers, processors and exporters do well (in reales) while the dollar is strong the Brazilian economy is very large and exports only count for eleven and half percent of the GDP.

Good for Brazilian Coffee Growers

Coffee is traded on the international market and the price is always quoted in dollars. According to a report by Research and Markets the coffee market in Brazil will increase slightly by volume and more by revenue over the next four years.

The analysts forecast the coffee market in Brazil to grow at a CAGR of 4.92% by revenue and 1.19% by volume during 2015-2019.

The volume increase has to do with the weather and the world market. The larger revenue increase has to do with the weak real and the strong dollar. Although coffee exports will not save Brazil’s economy they will be good for the local coffee industry.

Coffee in Brazil

Brazil produces a third of all the coffee grown in the world. As of 2011 its total production was 2.6 million tons. Exports in that year from Brazil were as follows:

Arabica Green Coffee         1.8 million tons
Robusta Green Coffee       160 thousand tons
Processed Coffee                200 thousand tons

Coffee accounted for 3.5% of total Brazilian exports in 2011.

If Brazil Recovers from Its Recession

If Brazil recovers from its recession, that will have little effect on coffee exports and the price of coffee. On the other hand a stronger real will mean lower profits for Brazilian coffee farmers. The one effect that currency has on coffee from Brazil is that coffee that has been stored can be kept in storage or sold. When the dollar is strong there is an incentive to sell stores of coffee and pocket the short term profit. This temporarily drives prices down as it floods the market with coffee. And by decreasing stores of coffee this sets the coffee market up for higher prices in the future.

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