Prepared by Team 6: Harold Mendoza Nathan Ksiazek Dawn Beachy

Julie Premji

October 8, 2003

A Fundamental Country and Coffee Industry Analysis

Costa Rica

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Key Topics• Costa Rica: An overview of its social, economic, and

political environments

• The Global Market: Costa Rica is not the only one with troubles! A fundamental overview of the forces affecting the global markets: saturated market, low prices and corresponding profits, global unemployment, and the importance of industry to specific countries

• A Detailed Analysis of Costa Rica’s Coffee Industry: The current conditions of the industry and the economic and social impacts surfacing from the economic tribulations the industry faces

• Future Trends and Economic Outlook: The emergence of the sustainable coffee industry and Costa Rica’s participation in this niche

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Geographic Location

Approximately the size of West Virginia

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Demographics• Population: 3.9 M • Ethnic Group: White (including

mestizo) 94%, Black 3%, Amerindian 1%, Chinese 1%, other 1%

• Majority Religion: Roman Catholic 76%

• Literacy Rate: 95%

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Government• Capital: San Jose

– Seven Administrative Provinces• Government Type: Democratic Republic

– The most democratic-stable country in Central America• President: Abel Pacheco (since May 2002)• Political Parties: 10 Recognized• No regular indigenous military forces

– Military abolished in 1949• Currency: Costa Rican Colon

– Exchange Rate: ~405 colons/$– Managed Floating Exchange Rate Regime (2003 Devaluation

rate is 11%)

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Economic Overview• Economy depends on tourism, agriculture, and electronics exports

(i.e., Intel, Motorola) – 85 Fortune 500 companies operate in Costa Rica– Tourism: The nation’s largest foreign exchange earner

• Poverty rate = 20%– Significantly reduced in the past 15 years

• Main industries: Microprocessors food processing, textiles and clothing, construction materials, fertilizer, plastic products

• Agricultural Products: Coffee, pineapples, bananas, sugar, corn, rice, beans, potatoes, beef, timber

• Traditional exports in crisis: Low coffee prices and an overabundance of bananas have hurt the agricultural sector

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Economic Overview: Exports and Imports

• Export Commodities: Coffee, bananas, sugar, pineapples, textiles, electronic components, medical equipment

– $5.1 Billion • World Rank = 78th

• Export Partners: US 49.7%, Netherlands 5.5%, Guatemala 4.2%, Nicaragua 3.2%, Puerto Rico 3.1%

• Import Commodities: Raw materials, consumer goods, capital equipment, petroleum

– $6.4 Billion• World Rank = 73rd

• Import Partners: US 53.5%, Mexico 5.8%, Venezuela 4.6%, Japan 3.5%, Colombia 2.4%

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Economic Overview: Macroeconomic Indicators

•GDP (Purchasing Power Parity) = $32.3 billion (2.4% growth rate)

– C.R. coffee exports comprise 1.3% of its GDP–World Rank = 84th

•GDP Composition by Sector: agriculture: 9%, industry: 30%, services: 61%

–Shift from industry and agriculture to service-oriented economy

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Economic Overview (cont’d)• Inflation Rate = 9.1%

– World Rank = 181st (Historically in double-digits)

• Labor Force: 1.9 Million People• Unemployment Rate: 6.3%

– World Rank = 54th• External Debt = $4.8 Billion (15% of

GDP)– World Rank = 91st

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Coffee Grown In More Than 50 Countries

• The Americas– North America

• Puerto Rico• Mexico• Hawaiian Islands

– Central America• Costa Rica• Guatemala

– South America• Brazil• Columbia

• Africa & The Middle East– East Africa

• Ethiopia• Kenya

– West Africa• Ivory Coast

– Arabian Peninsula• Yemen

• Asia– Indonesia– Vietnam

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Largest Coffee Producers(in millions of 60-kilo bags)

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Central & South America– Coffee from Mexico is not highly valued,

situated on the dry pacific side, boasts the perfect growing conditions and produces a superb coffee. 

– For environmental reasons, the Costa Rican grows a major amount of their coffee under natural canopies.  Most Costa Rican coffee is considered to be highly acidic (in the coffee industry this is not necessarily a bad characteristic).

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Caribbean Region– Home of the Jamaican coffee.  Known as the

crème de le crème of coffee, Jamaica Blue Mountain Coffee has been prized beyond all other coffees for hundreds of years. 

• Retails for nearly $40/pound, and is so valued that the Jamaican government has appointed a 'Coffee Industry Board' to monitor the production of the coffee which it exports in wooden barrels rather than burlap sacks. 

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Africa– The birth place of coffee, and still a major contender

in the world coffee market.  The size of this country provides drastically different coffee to be produced.  •Ethiopia, which creates a winey coffee with spicy

after tones. •Kenya, a sharp and vibrant coffee.

– Coffee is the main source of foreign exchange for several nations, accounting for over half of export earnings in countries like Burundi and Uganda

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Asia– Coffee production in Java has faced several setbacks

including complete devastation by a virus which destroys coffee plants, and even destruction from World War II. 

– Other notable coffees from Indonesia include Sumatra and Celebes.

– India : several growing regions mostly around the coastline in the southern part of the country.

– Vietnam : economic conditions often influence growers to focus on quantity rather than quality of this coffee.

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Pacific Region– Kona Coffee of Hawaii : prized as the second

most exquisite coffee in the world - second only to Jamaica’s Blue Mountain.

– The islands of Kaui and Maui have also joined in on coffee production by producing excellent beans, but not as prized as Kona.

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The Crisis– Specialty coffee, which retails for about $10 a pound, has

recently taken a serious dive in world market prices from around $0.50 to $1.00 a pound – below costs of production. Farmers generally receive less than half the world price. This has caused a giant upheaval for 20 million farmers around the world who depend on coffee for their livelihoods. There are no signs of the market turning around.

– “Unemployment in the coffee sector, combined with lower wages, affected some 1.6 million people from the population strata suffering the worst poverty levels,” according to the authors of the report. “Losses to the coffee industry in 2001 affected the general economy by the equivalent of 257,000 jobs per year, of which 181,000 were jobs directly within the coffee sector.”

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The Crisis– The ACPC, a production quota treaty among the main

coffee producers, failed because the poorer coffee-producing countries continued to kick up production to keep their economies afloat, leading the few countries that were complying with the ACPC request to stop withholding their output.

– The Central American countries lost $713 million in 2001 alone in coffee revenues, representing 1.2 percent of the region's GDP for that year, according to the report by ECLAC experts at the agency's sub-regional office in Mexico.

– In Colombia, more than 500,000 families depend on coffee production for their livelihood, but have suffered an intensification of impoverishment during the last decade.

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The Crisis– Reports say 300,000 Mexican coffee farmers have fled

their fields in search of incomes to feed their families. •El Salvador recently acknowledged that over 30,000

jobs have been destroyed because of the price slump.

•Many of the 60,000 coffee producers in Nicaragua are facing the loss of their land because of mass indebtedness.

– Political unrest is ‘brewing.’ The cause: “free trade” in the coffee market.

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The Crisis Up until 1989, the International Coffee Agreement (ICA)

helped stabilize prices by regulating world supply.

– The US worked to abolish the ICA in 1989 – in favor of a “free market” in the coffee trade. Many countries have since then worked to expand their coffee exports to generate foreign revenues to help finance debt.

– Ethiopia, the birthplace of coffee, faces losing one third of its export revenues due to the price slump. In addition, trade liberalization has forced many countries to de-regulate their coffee sectors, removing the state as a buffer between the farmers and the world market.

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Coffee in Costa Rica– Arabica coffee beans originated in Ethiopia. They were

brought to Europe in the 15th century and eventually reached the Caribbean in the 1720s. Costa Ricans first started cultivating coffee in 1790.

– In 1821,the government encouraged coffee exports by providing any family that wanted them, 25 coffee plants.

– As an incentive for growing coffee, the government offered the whole family a life free of taxes.

– As a result, coffee cultivation became a part of the lives of many local families. Unlike in other coffee producing countries, individuals and families started coffee plantations.

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Coffee Today– The government passed a law in early 20th century

that states that only Arabica coffee can be grown in Costa Rica. This differentiates Costa Rica from every other coffee producing country in the world.

– Arabica is a coffee plant that produces the highest quality of coffee.

– Today, coffee trees are grown on mountains on steep terraced hillsides. The coffee bean that these precious trees produce is called “the Golden Bean”.

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Coffee as an Export– Exports with Panama began in late 1820’s

– 1843, coffee was sent to Britain and they became the principal purchaser until after WWII

– For much of the 19th and 20th century, coffee has been Costa Rica’s #1 export. Recently it has fallen to 4th behind microprocessors, bananas and textiles.

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Price Trouble– 1983 the World coffee prices plunged 40%.

– In 1989, Costa Rica, Honduras, Guatemala, Nicaragua, and El Salvador joined together to create a coffee retention plan: the Central American Common Market.

– Under this plan coffee is sold in installments to help keep the price stable.

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World Coffee Prices (’81-’01)

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Falling Prices– The countries hardest hit by the plunging international

coffee prices are Colombia, Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua, according to ECLAC, a regional agency of the United Nations, based in Santiago.

– The reference price of coffee on the New York exchange in 2002 did not surpass 50 cents on the dollar per pound, its lowest real-term price in the last 50 years.

– Affects commerce, transportation, storage, and the financial system

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Coffee Statistics in Today’s Market

– Costa Rica exports 90% of the coffee it produces.– Coffee sales account for 15% of total exports.– The coffee industry accounts for 1.3% of GDP in

Costa Rica – More than 85% of the country’s 70,000 growers

are small land owners– Harvests 5.7 million pounds of Arabica coffee

annually– In 2002, Costa Rica earned $166 million in

revenues from coffee exports

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Coffee Statistics in Today’s Market (Online)

– José Antonio Vega, a 42-year-old coffee farmer and manager of El Patalillo, recently discovered that his crop can fetch excellent prices over the worldwide web. “Some people in Japan paid us $4.08 a pound. What do you think of that? That's more than 400 percent higher than what we can earn on the conventional market!''

– Coffee exports can get higher prices online than in the market. El Patalillo was able to sell 20 sacks of its best coffee to Starbucks for $7.35 a pound

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Largest Coffee Producers(in millions of 60-kilo bags)

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Sustainable Coffee Market NicheTo be considered a sustainable coffee, two basic tests must be

passed: protection of the environment and social fairness.

• Organic– Produced with methods that preserve the soil and prohibits

use of synthetic chemicals

• Shade Grown– Grown in shaded forest settings

• Fair Trade– Purchased from cooperatives of small farmers that are

guaranteed a minimum contract price

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Sustainable Coffee Market Niche– GROWTH

• Increasing sales and higher prices from product differentiation, improved quality

• Costa Rica – one of the leading suppliers in all three types of sustainable coffee – only Guatemala has more

• QUALITY is most important aspect in this sector of the overall coffee industry

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Sustainable Coffee Market Niche– We will not succeed in quantity of coffee…we simply

can not keep up. We focus on quality. That is where we expect to differentiate ourselves on an international level.”

» Pablo Vargas, GM of Café Britt

– According to the most recent Coffee Survey conducted by this industry, “this relatively new market appears to have considerable room for growth but consumer trends are difficult to capture since most data collection has only started in the last 1-2 years.”

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Sustainable Coffee Market NicheFUTURE TRENDS

• The North American specialty coffee industry has grown considerably in the last 20 years

• Approximately half of respondents in Sustainable Coffee Industry survey expect increases over the next few years, led by Organic Coffee

• Organic Coffee has already experienced steady 20% annual growth rates

• “Various studies show that consumers are indeed interested in at least one or another of these sustainable coffees and are willing to pay a modest premium”

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Sources• www.cafebritt.com• www.intl.pdx.edu/latin/economy/

costa_ec.html• www.insidecostarica.com• www.icafe.go.cr• www.infocostarica.com/business/

eco_coffee.html• www.scaa.org

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