Colombia is renowned for its high quality coffee exports which have been flooding into the EU and the US markets since the recent free trade agreements. This combined with the post-FARC peace treaties – which have increased accessible agricultural land and provided long term safety – makes the coffee industry a fruitful and stable investment. The “why” to invest is clear and the “how” to invest will be clarified in this article. With the help of a very productive interview with Karl Wienhold, an American Thunderbird alumni who has been in the coffee industry for 5 years, we can provide a better understanding of the Colombian coffee industry.
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Different Ways to Invest in Colombian Coffee
First, you need to decide how many steps of the supply chain you want to get involved in. Deciding whether you want to be a producer (owning and managing a farm), a coffee trader (buying and selling), an exporter or all of the above.
How to Invest in a Coffee Farm in Colombia
The price of land in Colombia varies greatly. The closer to larger cities you are, the more expensive the land is. This however offers much better infrastructure (roads, access to equipment), provides a safer environment as well as a higher availability of labour. The prices of this premium and easy accessible real estate will range between 10 and 15 million Colombian Pesos (3-5 thousand USD) per hectare. However, you can also risk buying cheaper isolated land which was previously controlled by the FARC with prices ranging from 5-10 million pesos per hectare.
Most farms are family owned and don´t surpass 2 hectares; only 5% of farms are bigger than 5 hectares and some of the biggest can be up to 1000 hectares. The larger ones tend to benefit from economies of scale which makes them more competitive, however, from a quality perspective they clearly suffer from managerial diseconomies of scale. This creates a lack of incentive from the picker to carefully choose the ripe cherries. The ideal farm size is thought to be of approximately 5 to 7 hectares which is small enough for quality to be carefully monitored while being large enough to stay competitive. The minimum investment you should consider is around 100 million Colombian Pesos ($34,000 USD as of April 13th, 2017)
Colombian Coffee Investment Risks
Especially in an area previously controlled by the FARC, the seller of the land could potentially be untrustworthy. It is important to keep in mind that a lot of land was taken away from their original owners and Colombia is still undergoing the restitution of farms to their original landlords. Therefore, you need to make sure when buying property that the seller is the actualy the owner of the land. For this, local authorities need to be consulted, Biz Latin Hub has a team of lawyers which can be put on the task.
Geographical Factors Influencing Coffee Quality
The majority of Colombian farmers are producing quantity not quality. They sell their coffee at market price which makes them vulnerable to volatile market prices. Large corporations such as the Colombian Coffee Growers Federation encourage low quality, high quantity and efficiency. If you are aiming to achieve higher profit margins you should direct your attention to speciality beans (Geisha, Moka, Bourbon, Maragogipe, Typica, San Bernardo…).
The lower the altitude, the bigger the cherries (fruit), which sacrifices the quality of the cup of coffee for greater quantities. On the other hand, high altitudes offer a better quality with smaller quantities produced.
Colombia has both equatorial and continental regions. The equatorial ones can produce two picking per annum and the continental areas (Sierra Nevada), limited by their seasons, only offer one.
The Price Quality of Land
Colombia has become famous for its coffee. The most famous provenance is the coffee triangle which has become a World UNESCO Site. This means tourism, infrastructure and good levels of security. Recently GMO’s have been created which make the coffee plant much more resistant to the sun.
Traditionally, coffee is grown in forested areas which offer shade for the coffee leaves. The tree roots also retain humidity for longer which encourages a better biodiversity (bird droppings are a great natural fertiliser). The roots in turn retain the humus which keeps the soil fertile. Therefore, when searching for your perfect farmland you should take into account that trees take a long time to grow and if you want to use the traditional method you will need tall shade bearing trees. Sadly, places like the Coffee Triangle have been partly ruined by the apparition of GMO’s. This means that the best quality land is often in isolated high risk areas.
Potential Profit to be Made in the Coffee Business
Most small farms currently operating barely cover their costs. Sadly, the farmers tend to be poorly educated and have very short term vision in their ways of production. Inefficiency is high due to the lack of access to fertilisers and modern equipment. This makes many suffer but also facilitates market entry for foreigners due to many farmers wanting to sell.
Potential Legal Barriers to Entry
When interviewing Karl Wienhold he told us that the difficulties are countless and that patience is often a necessity. His export license took him 3 years to obtain- hence the importance of a legal team. Although he has now gained a good reputation and respect in the trade he also mentioned that dealing with farmers can be tiresome. Due to the patriarchal society many will dedicate more importance to their ego rather than the potential to earn higher profits. Although it is unclear just how much red tape there is, the potential investor should expect to face difficulties especially when establishing a company in Colombia.
Although exporting the coffee yourself will give you higher profit margins, exporting can be a bureaucratic mess. That being said, there are many companies which offer their services for $0.30USD/pound which can make things much easier. However, this affects your profit margins.
The potential in exporting is full of opportunity as world markets show a continous rise in the demand for coffee. Mexico has nearly doubled its demand in the recent years and prices have rocketed. This shows you don’t even need to send your cargo to Europe or the US.
The table below shows the current importers of Colombian coffee bags (60kg):
|Exportations||(% total)||Exportations||(% total)|
|Total||54 795||100||Total||35 691||100|
|1.United States||14 200||25,91||1.United States||9 853||27,6|
|2. China||5 755||10,5||2. Panamá||2 394||6,71|
|3. Panamá||3 616||6,6||3. China||2 264||6,34|
|4. Spain||3 263||5,96||4. Spain||1 581||4,43|
|5. India||2 739||5||5. Holland||1 490||4,17|
|6. Holland||2 117||3,86||6. Ecuador||1 433||4,01|
The roasting process is one of the most influential factors of the final cup quality and requires modern equipment which is why it is usually done abroad. However the roasters in many cases are the ones making the most money because they are the final sellers. The need to set up your own roasting facility is especially relevant when producing single origin, speciality coffee. It is a very good way of differentiating your product and reaching higher profit margins.
Potential Problems for Investors
There is a clear lack of infrastructure in Colombian rural areas, the quality of roads (close to nonexistent in most places) means that it is hard to get labour to the farm. This means you should carefully choose your implacement in a zone with a high availability of rural workers.
It is also a common struggle to find people who are ready to work on a farm due to the Colombian dream creating an exode to the cities rather than the rural areas.
The recent climate change raises concerns for Colombian agriculture: El Niño (draught) and La Niña (floods) have made it harder to grow coffee at lower altitudes, especially when the coffee plants are genetically modified and have no protection from either the sun or the rain. This however does not tend to be much of a problem when you are growing at higher altitudes with the traditional tree protection.
The reason for the high volatility of coffee prices is partly due to the fact that Brasil produces close to a third of the world’s coffee production. Occasionally the frost will ruin the coffee cherries which can take a huge amount of the world’s beans off the market, in turn creating a steep rise in Colombian Coffee prices. This however, as a Colombian producer, is a downside if you are producing low quality and high quantity coffee which offers another reason to grow speciality coffee.
Best Ways to Invest in Colombian Coffee
If you are clever, rather than bringing large sums of money in as FDI you can “disguise” the investment as a loan. With a European bank loan you can get the money into the country and since the money is tied to an overseas bank you can retract it in case of rapid political change. It is a safer and legal way of action which can be easily done with the help of a team of financial advisors, lawyers and accountants.
If you want to learn more about investing in Colombian Coffee, the Biz Latin Hub team can help.
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