A Wall Street Journal article from December 2018 explores the difficult situation that has emerged in many Latin American countries due to low coffee prices. In it, the authors make a number of claims about the coffee industry that I agree with at varying levels.

First, the authors of the article make a good point about the weakening of the Brazilian real (BRL) against the US dollar (USD) as at least part of the reason for sustained low coffee prices. Since coffee contracts are traded in US dollars, the weakening of the BRL has increased the amount of local currency Brazilian farmers can exchange for their coffee. Brazil also accounts for one third of global coffee production annually, meaning changes in Brazilian coffee farmers’ incentives can drastically affect world markets – especially in countries where currency movements have not been as favorable.

Then the authors bring up a 2017 study conducted by Cornell University and Fair Trade USA where the researchers discovered that the breakeven price of coffee is $1.40/lb. The authors use this finding to support their overall claim – that coffee prices are well-below costs of production and have been for some time.

First, I must point out that the study referenced by the authors never concludes that it costs $1.40/lb. to grow coffee in Latin America. Instead, the study covers 4 distinct regions of the coffee world – Mexico, Colombia, Honduras and Peru – and finds 4 very different costs for all 4 regions (below). Second, the study uses surveys to come up with its estimates of costs. Despite the researchers being as rigorous as possible in their surveys of cooperative members in each of the 4 countries, coffee costs are highly variable and very poorly documented. Many farmers in the regions studied rely heavily on unpaid family labor, causing the researchers to estimate a labor cost using time spent by family members in combination with a wage assumption. As a result, I would encourage others to count them as directional figures. Third, the study converts 2015-2017 costs from local currencies into USD using the 2015-2017 exchange rates. The authors then compare these figures to modern coffee contracts without acknowledging that the strengthening of the USD (as mentioned in the first paragraph of the article) would lower these costs by ~5 percent. Finally, and perhaps most importantly, the researchers included an estimate of opportunity costs and depreciation in their total costs – both of which rely on assumptions. If we were to just look at break-even costs absent of these additions, the figures would be: