Vulnerability of coffee production: an analysis of economic profitability

Given the economic importance of domestic coffee production, it is essential to Brazilian coffee farmers to ensure a financially profitable activity. This study used a coffee farm in the Espírito Santo state as a proxy to investigated how coffee profitability respond to four variables: Brazilian coffee price, international coffee prices, oil price and exchange rate.This research implies the evaluation of the economic viability of coffee production in function of market conditions. Economic viability was then measured by conventional techniques such as the Internal Rate of Return (IRR) and the Net Present Value (NPV) in combination with other economic metrics. The study was developed in a baseline scenario, where demand elasticities were determined for each variable, using Granger causality and Johansen cointegration tests, as well as the Cholesky impulse response function. As a result, we found significant variables to determine the economic viability of coffee produced in the Espírito Santo state. Based on the results of the sensitivities, shocks were applied to the variants to simulate different alternative scenarios that allowed us to analyze in which market conditions coffee production was more profitable. It was observed through the elasticities of variables that the international price of coffee does not affect the price of domestic coffee. Approximately 70% of the simulated scenarios presented economic viability.