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International Coffee Price Rises
The chief executive officer of Ipanema Coffees, Washington Rodrigues, sees international price rises in the near future but worries that the dollar will cut into their coffee margins, already some of the best in Brazil.
Coffee prices rose on Wednesday to over $1.03 a pound for the September contract on the New York Board of Trade. That usually keeps producer-exporter companies like Ipanema happy.
"But there are two problems here. First we never know what the funds are going to do to the price of coffee. And two, everyone is saying that prices will rise over a dollar per pound and stay that way for some time after September because of tight supply," Rodrigues said in an interview.
"You know what happens when everyone moves to one side of the row boat. It sinks," he said.
Ipanema Coffees is one of Brazil's largest producer-exporter coffee companies, expected to ship some 134,000 60-kilogram bags of arabica coffee to 16 nations in 2006, 20% more in volume than Ipanema shipped in the 2004-05 season, Brazil's last bumper crop. Rodrigues said exports rose because of new markets in Greece, Australia and Japan, where Mitsubishi International Corp, or MIC, is Ipanema's biggest client. MIC is a major world supplier of coffee beans and coffee products to international coffee roasters.
Ipanema has their own internal inflation controls, and they show an increase of 11% this year in expenses from labor to agrochemical costs, while the dollar has gone from BRL2.34 on Jan. 2 to BRL2.17 as of July 3, and as low as BRL2.05 on May 5. That means margins are shrinking at Ipanema.
"We have been able to avoid some of the dollar fall by closing long-term contracts," Rodrigues said. Roughly 35% of Ipanema's sales volume comes from five-year contracts, "so it doesn't matter what New York is doing and I guarantee some margin for us going forward. As it is, the dollar is putting the squeeze on us."
Yet the company has its benefits that other coffee producers do not. For starters, its one of four companies in Brazil that sells certified coffee, giving international roasters guarantees that the beans they are buying come from Ipanema's properties in south Minas Gerais and not from coffee plantations in the Amazon state of Rondonia.
"Clients are willing to pay more for that guarantee. While most of our colleagues are selling below New York, our average price is over New York mostly because of certification and quality," Rodrigues said. Certified coffee is growing in Brazil, but only about 2% of Brazil's coffee comes with a guarantee of origin. Origin certificates vary, but in Ipanema's case they guarantee buyers that coffee was produced on their south Minas Gerais farms and was not produced in the rain forest. Buyers and ultimately consumers are willing to pay a premium for those guarantees.
Some heavyweight investors believe in the Ipanema model and in Ipanema's future now that Starbucks (SBUX) has committed to opening a coffee house here later this year. Gavea Investments, run by Brazil's former Central Banker Arminio Fraga, owns 25% of the company's private shares. Coffee investment firm, Astro-Lambari owns another 25%.
Ipanema counts Starbucks (SBUX) and Kaffenhuset Friele in Norway as two of its biggest clients. Ipanema is the only Brazilian coffee grower selling coffee to Starbucks.
"Their arrival here will only increase demand for our coffee, and you know they're not going to open just one unit. They will grow very fast," Rodrigues said, adding that the same duo that brought McDonald's and Outback Steakhouse to Brazil is in charge of easing Starbucks into the Brazilian retail coffee market.
Ipanema sells roughly 20,000 bags a year to Starbucks.
Ipanema farms some 5,000 hectares of coffee trees on flat land in southern Minas Gerais. Their crops are both mechanized and harvested the traditional way, by hand. Day laborers work during business hours during the week, and tractors shake the trees loose of their cherries by night, Rodrigues said.
Roughly 44% of the company's 2006-07 crop has been harvested, Rodrigues said, compared to a national average of roughly 33%, according to numbers by consulting firm Safras & Mercado.
Then there's the national issue of Brazil importing coffee beans in the near future, to cut costs for local roasters looking to export. For Rodrigues, though, the recent proposals to import Colombian and Central America coffee to Brazilian roasters will unlikely pass Congress due to political pressure from coffee farmers.
Local roasters in Brazil have been trying to persuade the government to change a law that prohibits imports of coffee from other countries. Roasters here say that if they were allowed to import from other origins they could buy cheaper coffee beans and blend their own products for sale overseas.
"Besides, our clients don't expect us to blend Colombian coffee with our product," he said, adding that Colombian coffee was acidic and Brazilian coffee was more sweet.
"Once we tried to mix our coffee with a Kenyan coffee, an arabica of very high quality, but that didn't go too well in the market," Rodrigues said.
"We thought it would be something new, something special, but at the end of the day the roasters want to buy from the origins and blend it themselves," he said.
The Ipanema brand owes some of its success to the large retailers like Starbucks. Ipanema Coffees are sold in New York and was being sold in Germany during the World Cup.
"When they created this company, no one was thinking of export branding at the time. But to sell a product called Ipanema overseas is pretty easy. Everyone has heard of Ipanema," Rodrigues said, citing the popular bossa nova song, The Girl from Ipanema.
Brazil is the world's No. 1 coffee exporter and producer.
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