Coffee Prices Could Rise as Fungus Destroys Crops in Latin America

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Guatemala may be facing a national emergency and consumers may see an up-tick in coffee prices as a Tree Fungus is threatening to destroy 70 percent or more of Guatemala’s coffee crop and plantations spread across Latin America. While coffee may be viewed as a luxury for many Western consumers, for many countries coffee is a key pillar of the economy. Coffee is a valuable cash crop and is a vital source of foreign exchange for many Latin American and African countries.

( Related: Coffee prices hit 19 month low 02/09/2013)

Coffee Prices Could Rise as Fungus Destroys Crops in Latin America

Guatemala now finds itself at the epicenter of a Rust Leaf outbreak that is threatening Latin America’s coffee crops. Guatemalan coffees are reknown around the world for their distinct full flavors and is a favorite of luxury coffee brands, such as Starbucks Corporation (NASDAQ:SBUX). While Western consumers may not see dramatic effects, except perhaps a shortage of their favorite flavors and the possibility of price increases, the effects on the Guatemalan  and other Central American economies could be absolutely devastating. Guatemala is declaring a national emergency and the government estimates that without a proper response up to 40% of the countries coffee production could be lost.

Guatemala’s economy is still highly dependent on agriculture with 13% of the GDP coming from agricultural products. Further, nearly 40 percent of Guatemala’s labor force is employed in the agricultural sector. If entire crops are lost, everyone from small-scale family farmers to large agro-companies will feel the impact. Coffee is so important to Guatemala and renowned around the world that the country is often considered Central America’s “Coffee King.”

The disease is being caused by the ‘Roya Fungus’ which destroys the leaves on coffee plants, thus stunting the growth of coffee plants. The Roya fungus can cause the disease “leaf rust,” one of the deadliest and most potent diseases that can inflict coffee plants. Should the infection be severe it can potentially kill the coffee plants and require entire crops to be destroyed.

Guatemala also neighbors Honduras, another major coffee producer. The fungus has spread to Honduras, but the country has yet to declare a national emergency. Costa Rica has declared an emergency and the government fears that it could lose up to 12% of its crop. Other regional producers, such as Nicaragua are also being affected.

The fungus has been detected on the leaves of coffee plants in Mexico, but so far the effects have been minimal. A dry spell, however, could fan the flames and spread the disease throughout Mexico. The Mexican government is now stepping up the battle against leaf rust and hoping to prevent a pandemic.

Coffee is an essential export crop, with the vast majority of production in Central American countries being shipped overseas to markets in North America and Europe. Coffee is especially important for securing foreign exchange, which is vital for the health of any globalized economy. Coffee production relies largely on local supplies and labor, allowing producers to produce most of their coffee crops with local exchange. Sales overseas then draw in foreign currency, which is essential for Latin American countries to maintain global trade and fiscal health.

In total, Central America is home to approximately 1/5 of the world’s Arabica coffee production. Should the fungus spread to South America and major producers such as Columbia and Brazil, the effects on world markets could be devastating. Still, the Roya Fungus has been able to spread due to depleted rain falls and South America’s wetter climate should impede the spread of the disease. If the disease does continue to spread, however, and governments and planters are not able to effectively respond, global coffee prices could rise dramatically.

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